Babylon’s AI Blues
UK healthtech hero stumbles
Every day this past fortnight I have been keeping a close eye on the share price of Babylon, once the UK’s smartest, brightest healthtech startup. And the price on the New York Stock Exchange, where Babylon arrived last year via one of those complex SPAC manoeuvres, says this is a company in deep trouble.
Babylon, best known for its ‘GP at hand’ video consultation service but touting itself as the future of AI in medicine, was valued at roughly $4 billion when its shares listed last summer and the price briefly popped as high as $18. But all this year the shares have been sinking and on Monday 8th August they closed below $1 and have sunk lower since, with the company valued at just over $300 million, a fall of over 90% on a year ago. There was a brief upwards blip on Monday, sparked by rumours that someone wanted to buy the business but when Babylon denied that it was in talks, the share price sank again.
So what’s going on? If you look at Babylon’s recent financial results you would think the company was knocking it out of the park. “Babylon Again Delivers Strong Performance With Record Margins” reads the headline on the 2nd quarter earnings release, which goes on to outline an almost fivefold increase in revenues on last year and a 220% increase in what it describes as “U.S. value-based care members. “Babylon has once again delivered very strong results that demonstrate our continued momentum,” said the CEO and Founder Ali Parsa.
But an organisation called Nanalyze has drilled down into those numbers and in a YouTube video explains why there is cause to be concerned about the company’s growth in the United States, rather than celebrating it.
The video explains that Babylon appears to be acting much like an insurance company, offering customers various health services at a fixed premium, and betting that when the bills came in they will stay well below the revenue generated by those premiums. The problem, says Nanalyze, is that it’s not clear that the premium income will exceed the costs of healthcare provision or at least not by the healthy margin Babylon needs if it is to prosper.
Ah, but surely the whole point is that Babylon’s various AI tools such as a chatbot that is as smart as a human doctor will soon drive down costs and the company will then begin to coin it? Nanalyze, which ends the video by telling investors to steer clear of the company, is sceptical about that narrative and so am I.
I was once a big fan of a company which seemed to prove that, in the medical field at least, the UK could compete with the American and Chinese AI powerhouses. I featured the company and its “AI doctor” in a 2017 report on the impact machine learning could have on all sorts of industries.
There was some concern that the ‘GP at Hand’ service, enthusiastically backed by the Health Secretary Matt Hancock, might cream off young, tech-savvy and mostly healthy people , leaving GP surgeries with older patients likely to need far more care. But at least innovation was coming to an area of health provision that had seemed resistant to change.
When in 2019 it raised $500 million at a valuation of $2 billion from backers including Saudi Arabia’s Public Investment Fund, it seemed to confirm that the UK was now an AI health pioneer. Sure, the company was still losing money, but so did all those Silicon Valley giants in their early years.
It was a call in 2020 in the early months of the Covid pandemic that set the alarm bells ringing. An angry Babylon employee told me that the company had applied to use the government’s furlough scheme, suggesting this was somehow a cynical way of getting rid of certain expensive staff on the cheap. While it did seem strange that what was supposed to be a fast growing health company needed to lay off people during a health crisis, it appeared that no rules had been broken, so I hadn’t got a story.
But it was what the whistleblower told me about why the company might need government support which set me thinking. He said of the GP at Hand service - “that doesn’t scale”. In many tech businesses there comes a point when each extra customer represents pure profit because the extra cost of servicing them is minimal. That is obviously not the case with a GP video consultation service - more customers means more GPs, a commodity both expensive and rare.
As for the AI tools that Babylon was selling in a major campaign to win American healthcare customers, the insider was again sceptical. He suggested that the Americans might buy into the somewhat fuzzy story about the wonders of Babylon’s technology at first, but get impatient when it did not generate instant results.
Then last week there was news of a setback for Babylon in its home market. The company announced that it was terminating two NHS contracts, including one with the Royal Wolverhampton Trust which had been trumpeted just two years earlier as a 10 year deal which would one day see an integrated health app delivered to all of Wolverhampton’s 300,000 citizens. Speaking to Techcrunch, Babylon’s Tim Rideout said this vision had proved to be economically unviable, appearing to blame tight NHS budgets: “The economics of the contract were really tight because of the funding pressures that the NHS is under. And those funding pressures have just grown since we entered into the partnership.”
He also said it was getting more expensive for Babylon to raise capital for development, a problem likely to be exacerbated by the plunging share price. If the shares stay below $1 for 30 consecutive days, they could be delisted under New York Stock Exchange rules. In any case, in the current nervous climate for tech stocks, investors are not going to be racing to buy new shares even at bargain basement prices and bankers will be equally shy about lending to the company.
So I had a few questions for Babylon and to be fair ,the company was swift in getting Chief Financial Officer Charlie Steel on the phone to answer them. First, he was keen to tell me that the company already had a plan to make sure it was not delisted - it is going to consolidate the shares, swapping 15 old ones for 1 new one. Of course, even if that pushes the share price up to $15, it won’t mean the company is worth more.
He said Nanalyze had the right idea by emphasising that the key number to watch was the medical claims expenses: “The whole point of Babylon’s business model is that effectively when we deliver highly affordable, accessible health care, we get the financial benefit of that.” He said that in the UK the ‘GP at hand’ service had delivered up to 35% cost savings - that had accrued to the NHS but in the US the money would come to Babylon’s bottom line. Steel said that since Nanalyze made that video, new figures had emerged from the United States showing that the savings were beginning to mount.
So why, I asked, was the market which had access to all that data, still so gloomy about the prospects for the business? Charlie explained that the market had really turned against SPACs, especially as this one had left Babylon short of some $300 million it had expected to raise. “We need a little bit, not that much, but a little bit more funding and I think the market is waiting, frankly, to see what's happening around that.” He pointed out that many of Babylon’s American peers had also seen big drops in their valuation.
And it’s fair to say that Babylon isn’t the only company struggling to turn exciting visions of AI-powered healthcare into a profitable reality. IBM offloaded its Watson Health AI division earlier this year, and in the UK two NHS Trusts which handed over patient data in exchange for shares in the Sensyne AI business saw the value of their investments collapse when the company was delisted from AIM. DeepMind has done some interesting work on automating the process of checking millions of eye scans but, as with other Google Health projects, there appear to be many more years of investment ahead before any revenue starts to flow.
But Babylon does not have the resources of Google. It is in a race to prove that its technology can deliver more cost effective healthcare before the money runs out. So I will keep watching that Babylon BBLN 0.00%↑ share price very closely.