Newtopia - Livongo 2.0?

A hyper-growth disease prevention nano-cap with big ambitions and a cheap valuation

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One of the biggest problems we face today is Metabolic Syndrome (MetS), a set of conditions including high blood pressure, high blood sugar, excess body fat around the waist, and abnormal cholesterol or triglyceride levels. People who have at least three of these risk factors are 5x more likely to develop diabetes, 2x more likely to develop heart disease, and 3x more likely to have a stroke, among the leading causes of death in the US. Today, over 37% of US adults have 3 or more of these risk factors, up from 23% in 1990.

What if there was a miracle drug that could result in 10% weight loss after 24 months and save $1,464 per user per year for 90% of users? Well, unfortunately, there isn’t a miracle drug but what works is sustained habit change. Little things like a better diet, a good exercise routine, and a supportive environment go a long way as they start to compound.

Source: Investor Presentation

We know there are platforms like Livongo which focus on chronic condition management. But that’s after the fact when you’ve already been diagnosed with type 2 diabetes. What if we could prevent the onset in the first place?

Enter Newtopia (NEWU.V), a Toronto-based company that is fighting this silent epidemic through its habit change platform. It's trading at 4x LTM EV/S while maintaining a >100% revenue CAGR since 2016 and targeting to be cash flow positive by EOY 2021. It is a May 2020 IPO currently trading at a $55.5M CAD fully diluted market cap and $7M in cash with no debt. Its client base includes blue-chip names like JP Morgan Chase, CVS, and Accenture.

Source

Platform

Chronic disease management platforms like Livongo or Omada focus on the highest cost populations, the people who already are diagnosed with a chronic condition. However, Newtopia focuses on the people with two or more risk factors and ensures they don’t progress in the first place.

Source: Investor Presentation

Newtopia’s tech-enabled habit change platform leverages connected devices (smart scale and activity tracker), a mobile app, a genetic test, a social community, and inspirators (health coaches) that are tailored to each user’s personality-type who build one-size-fits-one programs focused on driving sustainable habit change.

Source: Investor Presentation

Newtopia first identifies individuals who have two or more out-of-range MetS risk factors and are the most open and motivated to make lifestyle changes. Once they register, they are invited to create a personal profile through a survey built to assess the participant’s social determinants of health, personality type, motivation, and readiness to change. Data from these responses is used to match the participant with an appropriate inspirator (health coach) based on similar personality traits.

Participants are then eligible to take an optional saliva-based genetic test which helps inspirators evaluate the extent to which hereditary factors may impact a participant’s ability to lose or gain weight. Specifically, they study the following genes that are particularly relevant to food choices: MC4R (the Appetite Gene), FTO (the Body Fat Gene), and DRD2 (the Cravings Gene). Research suggests that genes can account for just 25% of the predisposition to be overweight for some individuals and as high as 70% to 80% for others.

Source: Company Prospectus

These tests also serve to help shift responsibility so participants can stop blaming themselves and develop a renewed motivation to change. Using their genetic and personal profiles, inspirators create personalized programs which are tailored specifically to a participant’s needs and motivations. For example, a person with the appetite gene that might not feel satiated after eating might be suggested portion-control strategies or recommended to drink more water.

Newtopia’s program is comprised of two phases called “Achieve”, where the goal is to reduce at minimum 5% of baseline body weight in 12 months, and “Elevate” where the goal is to reach a 10% reduction after 24 months. Like Livongo or Omada, Newtopia has a B2B2C business model, meaning they sell into self-insured employers that are seeing skyrocketing claims and then market to their at-risk employee bases. Unlike Livongo, they have a performance-based pricing model which only charges if members stay engaged with a success fee if members achieve 5% weight loss. The average revenue per user is $1600 over 3 years. While this is lower than the $900 per member per year fee that Livongo earns, this aligns incentives and ensures that employers are likely to see strong ROI.

Source: Investor Presentation

Participants schedule one coaching session with their inspirator per week in the first 6 months, one every two weeks in the second half of the first year, and once a month thereafter. Inspirators are also available outside of designated 1-on-1 sessions through the social community, texting, or email. There is no expiration date on the program and participants can stay engaged for as long as they would like.

Newtopia also offers a mobile app which participants use to track their meals and body weight (using the smart scale), explore recipes, watch educational videos, schedule coaching sessions, and receive daily goals to work towards like walking 5000 steps wearing their activity tracker. The app also integrates with Apple Health and Google Fit as well as other wearables. Inspirators also help participants build a social support network that will increase their accountability and provide emotional support.

During each coaching session, which can take place over text, email, video, or telephone, the inspirator evaluates participants’ bodyweight readings, activity, mental well-being, nutrition, and sets weekly goals. Inspirators aim to deliver on the following nine wellness dimensions: (1) healthy eating, (2) logging meals, (3) tracking calories, (4) increasing physical activity, (5) mindfulness and managing stress, (6) controlling negative thoughts, (7) improving sleep, (8) learning from setbacks, and (9) setting goals.

Newtopia takes Livongo’s “whole-person care” to the next level by taking into account holistic factors like social determinants of health, rather than solely focusing on short-term weight loss. Think Atomic Habits. Inspirators emphasize long-term improvements in nutrition, physical activity, resilience to stress, sleep, mental and behavioural health, and overall lifestyle management.

Competitive Advantage

Newtopia’s primary moat comes from its 3-year randomized control trial (RCT) done on Aetna employees who were at risk for MetS. Notably, Aetna conducted a comprehensive overview of multiple disease prevention companies beforehand and chose to partner with Newtopia. The first-year results were published in the peer-reviewed Journal of Occupational and Environmental Medicine in 2015.

Of the 2,835 participants in the RCT, 50% of enrollees remained engaged after 12 months and 40% after 24 months. 76% of participants saw an average weight loss of 4.3% after 12 months and 90% saw 10% weight loss after 24 months. Medical costs were reduced by $122 per participant per month or $1,464 per year, resulting in a 2x in-year ROI. These results have not only been replicated but improved upon in a commercial setting with 74% of participants seeing 5% weight loss (16 lbs) after 12 months with engagement levels being 70% (~3% monthly churn), 50%, and 45% after 12, 24, and 36 months respectively. I believe these will keep improving over the long term. These results are comparable with Livongo’s pre-diabetes program, which sees 5.1% weight loss after 12 months and a 78.5% 12-month member retention rate.

Source: Investor Presentation

Now, what is most intriguing is NEWU’s sustained year-two outcomes. For comparison, Omada sees 4.9% weight loss in year one and only 4.3% after year two, while Newtopia actually improves from 4.3% in year one to 10% in year two, going from 2x ROI up to 3.5-4x ROI. In a recent interview, Newtopia’s CEO mentioned that the 12-month trial Newtopia did on JP Morgan’s population as a part of Haven was their best work ever, and was very excited to share the outcomes later this year.

In terms of what is driving these sustained outcomes, Newtopia points to its focus on incremental, personalized habit change rather than the one-size-fits-all curriculum of other diabetes prevention programs. From Livongo’s research, they note that coaching was a significant driver of self-monitoring activities like food logging that drove weight loss. “Just one additional coach-participant message each week, for example, was associated with 1.4 more food logs per week, 1.6% increase in weeks with four or more weigh-ins, and a 2.7% increase in weeks with 150 minutes of activity.” It’s clear that the level of accountability and personalization championed by Newtopia’s program creates lasting change.

Competition

Newtopia’s competition comes in two dimensions: consumer weight loss programs like Weight Watchers or Noom and chronic condition management platforms like Omada, Lark, or Livongo.

Source: Investor Presentation

The former is less comprehensive, not offering the connected devices or the same level of coaching. I also believe that the greatest cost-burden lies with the employer so they are most willing to make the long-term investment in their employees to prevent the onset of chronic disease. Newtopia makes it a point that they are not your typical weight loss program, which only serves as a band-aid, but instead focused on sustainable habit change which compounds over the long-run.

The latter category however is most similar to Newtopia, selling into risk-bearing employers and offering connected scales, coaching, and similar outcomes. While they focus on patients who have already been diagnosed with chronic disease, they also offer pre-diabetes programs for earlier stage users. In addition, competitors have copied certain nuances like Lark partnering with 23andMe to offer genetic testing or Omada also adopting a performance-based pricing model. I think that Newtopia is differentiated through its focus on metabolic risk reduction rather than managing a specific disease, its highly personalized program with a focus on habit change and confidence-building rather than a short-term curriculum-based model, and a holistic approach based on the idea of “one health” that takes into account factors like behavioural and social data.

I also find it interesting that Newtopia co-exists with chronic condition management platforms in some companies. Activision Blizzard uses Virta for Type 2 Diabetes Reversal and Newtopia for Chronic Disease Prevention. This makes intuitive sense because these are two different segments of the population and best-of-breed platforms can beat one-stop-shops like Livongo.

In a May 2019 conference, Jeff Ruby had this to say (skip to 27:00 min):

“Because of that we are so highly differentiated there isn't anyone else doing it the way we do, and it gets us to every table, and we've never lost a competitive bid. If I get to the table with any of these companies, we win because it's just so much more elegant. We have the proof. We spent the time to put the evidence together and there isn't a company that's seen us that doesn't want to take that approach.”

If you asked me to point out a singular point of differentiation, something that Newtopia does that no one else does or can do, then I couldn’t tell you. However, I do believe that there is something unique about this company and that’s stemming from the combination of everything that Newtopia does, whether it be the mindset change (genetic test), constant coaching and goal setting, personalized activities based on personality traits, better food, tracking steps and weight daily, and a supportive social community that holds you accountable that all compound over time and result in some pretty incredible outcomes.

Customers and Opportunity

Newtopia has a blue-chip client base including Fortune 500 self-insured employers like JPM, Accenture, Aetna, and CVS. Of their current client base, they have access to 750k employees, of which half of whom are at-risk (two or more MetS symptoms, consistent with the general population) and they have an 18% conversion rate historically which leads to a potential participant pool of 67.5k members. They currently have over 15k active participants so there is room to 4-5x their revenues just with current clients. They’ve only marketed to 80k of the 375k potential participants as they implement in phases and are targeting over 20% conversion rates at scale.

Source: Investor Presentation

In terms of sizing the TAM, there are over 5,000 self-insured employers in the US that provide health insurance coverage to approximately 159M employees. If we apply their current conversion rates, their addressable market is 14.3M participants, of which they’ve captured just 0.5%. In 2017, the Workplace Health in America Survey reported that 46.1% of workplaces offered some type of health promotion or well-being program, however, the majority of these programs were offered at large employers which are likely to be the early-adopters.

In addition, there is a future opportunity to expand into private fully insured payers and public insurers such as Medicare, Medicaid, and Veterans Affairs. In the near term, they’ve talked about entering the Medicare/Medicare Advantage market, skip to 10:10 min in this recent WTF Health interview:

“We've actually seen a huge opportunity to apply what we've built in the habit change space to Medicare/Medicare Advantage. We've looked at all of our outcomes in the 65+ and we've outpaced our RCT outcomes so we commissioned an actuarial firm to do a completely independent third party study and they arrived at $1700 savings and…in this year we're looking for our first opportunities to prove that in real life with our first Medicare/Medicare Advantage pilot.”

Estimates from Prospectus

Jeff calls out the “tsunami” that is coming post-COVID with the number of unhealthy habits that have been allowed to fester. A survey of almost 8,000 adults across the globe by Pennington Biomedical Research Center found that decline of healthy habits was fairly common and individuals with obesity were affected the most.

People ate more junk food, were more sedentary, and worked out less. About 27% said they had gained weight after the initial lockdowns went into effect, including 33% of those that were obese compared to 24.7% of those that were considered normal weight. People also reported significantly higher anxiety levels. About 20% said that their symptoms were severe enough to interfere with their daily activities. Another 44% said that their sleep worsened during the pandemic. These second-order effects of COVID-19 are silent yet if not addressed could exacerbate the chronic disease epidemic in the US.

Financials

Newtopia IPO’d on the TSX Venture Exchange in Canada last May. It has doubled revenue every year since commercializing in 2016 and has steadily improved gross margins which were at 49% last quarter (Q3’20) compared to 35% in Q3’19. Newtopia currently has a participant to inspirator ratio of about 200:1 which has room to scale to over 350:1, driving gross margins to low 70s at scale. Payback period is under 12 months and it is targeting to be cash flow positive by EOY 2021. The CEO has mentioned there is an opportunity to monetize their genetic database similar to 23andMe in recent interviews and also the possibility of a NASDAQ uplisting in the future.

Source: Investor Presentation

As mentioned previously, Newtopia charges $65 per month per engaged participant. This is defined as either checking-in with the mobile web app, logging nutrition or activity, weighing in or participating in a gaming experience a certain number of times a month, or participating in at least one coaching session a month. The number of monthly engagements per quarter has steadily increased, demonstrating Newtopia’s ability to connect with its member base and drive outcomes. As of Q3’20, 90% of revenues came from engagement fees vs 85% in the prior year, bringing an attractive level of predictability to the business.

Source: Investor Presentation

It is currently trading at $0.435 CAD or a $55.5M CAD fully diluted market cap with 7M in cash and no debt. Newtopia does not provide guidance but LTM revenue was $10.5M (+103% YoY), resulting in a ridiculously cheap multiple of 4.6x EV/S. Livongo, by comparison, was taken out at ~53x EV/S. While I don’t believe this is the next Livongo, I also don’t believe that it deserves to be trading at such a low valuation.

Consensus estimates from Factset

Newtopia is not yet profitable, as would be expected with such an early-stage company, but is showing improving losses with an adjusted operating margin of -57% in Q3’20 vs -104% in Q3’19. Likewise, it was -36% in the nine months ended September 30, 2020 vs -64% in the same period in 2019. Cash burn is ~$300k per month, relative to their current cash balance of $7M and $5M bank revolver, and as previously mentioned, the company is targeting to turn cashflow positive by EOY 2021.

So why is it trading at such a cheap multiple? First of all, I believe there is a fundamental lack of understanding of Newtopia’s model with no direct Canadian comparables. Considering there have been no Seeking Alpha articles nor even a Stocktwits board for this company, it’s clear that this is an extremely under-the-radar stock. There has also been a lack of sell-side coverage (only 4 analysts) and investor communication, with fairly infrequent press releases.

The company has not officially announced when it will release its Q4’20 results but it is estimated to be from late March to early April 2021. It is a recent IPO and they did a direct listing, they decided to go public this early because the CEO felt that taking VC money would dilute the company’s priorities. Moreover, they did a bought deal offering last October priced at $0.95.

Finally, there are investor fears of them losing their JP Morgan Chase contract after Haven disbanded in January; however, from recent management interviews, I believe these worries are largely unsubstantiated. While this is a penny stock, this is not a turnaround play as the company does not have a history of diluting shareholders and while the first few years had some failures, they have executed well since they started commercializing in 2016.

Management

Jeff Ruby originally set out to be a corporate lawyer and finished his JD before deciding to go into healthcare and founded three companies: Genetic Diagnostics, Life Screening Centers, and Cleveland Clinic Canada. The experience gained from all of these related ventures would eventually help him start Newtopia after his dad passed away due to cancer. He came to the realization that the current health care system focused on acute care does a poor job at keeping people healthy. So, he set out to champion a preventative approach to healthcare.

Glassdoor reviews are mostly positive with 3.9/5 stars across 35 reviews, noting that while compensation is low, that the environment is very supportive and mission-driven. The management team is also well-qualified and retention is high. His first employee, Rikki Bennie is still around and is now SVP Marketing.

Source: Investor Presentation

Newtopia was founded in 2008 but only commercialized in 2016 because of a series of challenges and failures that Jeff learned from. They tried selling both in Canada and through direct-to-consumer channels before which quickly failed and they learned from before doing the 3-year Aetna RCT and selling to self-insured employers in the US.

Risks

The primary risk is customer concentration with 80% of revenue coming from their top 3 customers. The contract with Newtopia’s largest client comes with a clause that allows the client to terminate on 30 days’ notice. Although this is to be expected for an early-stage company, losing any of these clients would significantly impact their growth. Client retention has not been disclosed but customer satisfaction is quite high, with this January 2019 interview mentioning an NPS of +83 and recent sell-side notes indicating positive feedback from Fortune 500 clients. Reviews on Google Play are average (3 stars across 107 reviews) but primarily related to technical issues with the app such as not connecting to Fitbit, etc. I’m not particularly concerned because of the small sample size and good customer feedback elsewhere.

Furthermore, although losses have improved, Newtopia is still quite unprofitable and is not expected to turn cashflow positive until year-end as it continues to reinvest significant amounts in the business. If Newtopia takes longer than expected to meet this goal, then it may need to do another offering and further dilute shareholders. The bought deal they did in October 2020 was priced at $0.95 CAD and the lockup expired on March 2nd, 2021, at less than half that price. This may affect their future ability to get financing.

Also, having a largely recurring revenue base makes Newtopia's business relatively insulated from macro-economic conditions, particularly as it boasts a high ROI and quick payback period. COVID-19 did not materially impact their growth. However, sales cycles usually range from 9-12 months though they enroll clients throughout the year as opposed to January 1st. If Newtopia fails to meet its historical conversion rate of 18%, this may impact its growth trajectory.

The wellness space is also highly competitive and Newtopia competes against much larger companies like Livongo and Omada that boast multiple bundled offerings, potentially encroaching on Newtopia’s single solution. In addition, while it certainly makes rational sense to target pre-chronic populations, it can be harder to sell because those populations don’t drive costs for risk-bearing employers.

Conclusion

Today, 90% of the $4 trillion spent on healthcare annually is dedicated to people with chronic and mental health conditions. Average annual healthcare costs rise from $3,400 per year for a healthy individual to $15,000-$20,000 per year for an individual with chronic disease. The current system focused on acute rather than continuous care has reached a tipping point and employers and patients are demanding change. Newtopia’s unique platform focused on incremental, impactful habit changes driving demonstrated cost savings and outcomes has never been more important.

Overall, while I’m not going to go as far as calling this the next Livongo, I do think Newtopia is a good company with a solid track record of growth and expanding margins, proven outcomes, and ROI, marquee clients, a mission-driven founder, operating in a massive, underpenetrated industry, and trading at an extremely low and, in my opinion, unwarranted valuation.


I have a position in $NEWU.V, but Saga Partners and Luca Capital do not. I have no plans to sell any shares within at least 5 days of this article with the intention of holding a position for months to years depending on execution and valuation. I am not an investment advisor and none of the content of this article is intended to be a recommendation to buy or sell any security. Please do your own DD first. $NEWU.V is extremely illiquid, so I am using limit orders only.

h/t @SebidsCap for helping with DD and @JessDaMassa for her wonderful CEO interview on WTF Health introducing me to this company.


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