The Madoff of Digital Health: How Lies and the SEC’s Code of Silence Killed Babylon and Cost Investors $1.5 Billion

Or, as Dr. David Watkins suggested, “Babylon Health, the Morally Bankrupt Unicorn - How Matt Hancock, the NHS, CQC, MHRA [and the SEC] Enabled a Billion Dollar Fraud”.

Disclaimer: All opinions expressed in this article are my own. My attempt was to be objective and to lay out the facts to the best of my knowledge. Any opinions and implications about Babylon Health and other characters in this article are just that—opinions and implications. I believe it's ultimately up to regulators and the court system to decide on the degree of irregularities in the Babylon Health case. Although I draw parallels with notable criminal cases, it's crucial to underscore the principle of presumed innocence until guilt is proven in court. This concept seems inverted in the United States, where prosecutors often present vivid narratives against accused individuals, which the media avidly disseminates to engage readers and viewers. Nevertheless, I’d like to remind you that judgments should be reserved until trial conclusions. In this article, I reference Sam Bankman-Fried and Charlie Javice—though it's pertinent to note that Bankman-Fried's trial commenced just two days ago, while Javice’ trial is yet to begin.

This research is my contribution to the literature on the lessons learned from business failures and bankruptcies, particularly lessons for founders, investors, and customers in the digital health industry, and more broadly.

Babylon Health was valued at $4.2 billion on its IPO debut at the New York Stock Exchange on October 21, 2021. Less than two years later, Babylon’s total assets are estimated at $35.2 million (£28.4 million), while its liabilities total more than $378.4 million (£305.3 million). Even this asset value may be inflated, as the recent Babylon’s 'GP at Hand' fire sale showed. What was once valued at approximately $50 million was sold to eMed for $620,000.

Babylon Health experienced one of the fastest IPO collapses in stock market history. It took only 19 months, from its IPO in October 2021 to its bankruptcy filing in May 2023. I could only find three companies that folded faster than Babylon Health, all three due to the dot-com bubble burst: Pets.com, Webvan, and Kozmo.com. Babylon may have been the first public company to die so quickly on its own, without a market-wide shock, such as a crash, recession, economic depression, or economic stagnation.

Not only did Babylon investors lose every dollar, but dedicated liquidity providers did as well. Babylon’s business was based on three key aspects: lies, lies, and lies.

I’ve had the privilege of working in the digital health industry for four years, deeply immersing myself in its nuances, learning its intricacies, and analyzing its competitors. With an extensive Wall Street background, my quantitative skills enable me to delve deeply into a company’s financials and fundamentals. Among the many companies I’ve researched, Babylon Health stands out as particularly intriguing. This might be the most comprehensive overview of Babylon Health you’ll encounter. I delve into its fundamentals and financials, and I’ve reviewed numerous articles, studies, videos, and conference presentations related to Babylon. With my intimate knowledge of U.S. regulators, such as the U.S. Securities and Exchange Commission (SEC), I explain why they turned a blind eye to irregularities and potential fraud at Babylon.

It took me only an hour to learn that Babylon’s AI was a lie. It took me a few more hours to conclude that Babylon was a potential scam.

I’d like to acknowledge Dr. David Watkins, who raised concerns about Babylon Health much earlier than I did, mainly through his Twitter account @DrMurphy11. I wish I had come across his findings sooner, as there are clear parallels in our research.

In this article, I offer two versions: one for my free subscribers, where I outline the main points and insights, and a full version for my paid subscribers, with all 64 pages (32,804 words and 10 charts) of the details and analyses. If you’re keen on a thorough breakdown of my Babylon Health analysis, I encourage you to opt for the paid version. Your support drives me to produce rigorous analyses, and whether you’re a free or paid subscriber, I’m grateful for your backing. I eagerly look forward to our discussions and hope that the lessons learned from Babylon Health’s downfall can positively influence the digital health sector and the broader American healthcare system. Thank you.

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In a tale imbued with intrigue, promise, and ultimate failure, Babylon Health emerges as a stark example of the volatile nature of the tech startup world. It serves as a cautionary tale for both innovators and investors, narrating a seemingly promising beginning that becomes marred by deception, lies, alleged fraud, and a hard fall.

My introduction to Babylon Health occurred in the fall of 2019 when I entered the digital health industry. With a finance background, I naturally began by analyzing the market, aiming to identify key players and understand their strategies. Babylon Health, often heralded as an industry leader, was one of the first companies recommended to me. However, my enthusiasm dwindled within an hour of research.

Venturing into this industry, my goal was to be rigorous, scientific, and most crucially, honest about the viability of a product or business model. I found none of these qualities in my initial assessment of Babylon. Their claim to be an AI company raised my eyebrows when I couldn't find any concrete information about their AI model on their website, presentations, publications or filings, signaling a significant red flag.

While I did discover a white paper on their site, it felt more like marketing material than scientific content. The site boasted about their scientific team and affiliations, but I couldn't locate a single academic paper. On PubMed, I found three studies, two of which were essentially the same. These papers, sponsored by Babylon, seemed to lack academic rigor, were not peer-reviewed, and employed questionable methodology. Subsequent reports suggested that the company might have “cherry-picked” a sample of vignettes for better optics.

My skepticism about Babylon grew with their first study, which astonishingly claimed an accuracy rate of 88-90% for disease diagnoses using Babylon’s symptom checker. This suggested their technology surpassed average physician diagnoses, a bold claim they began touting. Their subsequent studies in 2018 and 2020 (the latter being an update of the former) reported a slightly reduced accuracy rate of 81%. However, these papers were ambiguous, lacking clear definitions of what "accuracy" entailed. It appeared to imply that given a set of symptoms, their system could correctly identify the top diagnosis 81% of the time—a phenomenal claim, if true.  (Of course, even that phenomenal claim pales in comparison to what Infermedica’s symptom checker can do - 97% accuracy! I’m yet to find a scientific study of how Infermedica has accomplished this historical feat.)

But the veracity of these claims was challenged. A more thorough study by ADA Health, which was also hardly unbiased, examined a broader spectrum of "symptom checkers." Unlike Babylon's narrow focus of comparing their system solely to doctors, ADA Health's study included multiple symptom checkers. Their sample size of 200 vignettes, though statistically small, was still more extensive than Babylon's. Rather than emphasizing a singular correct diagnosis, this study highlighted the accuracy rate of the top three diagnoses. Babylon's app only achieved a 32% accuracy in this metric, meaning that only 32% of the time, one of the top three diagnoses was accurate.

Moreover, I decided to personally test the app. To my dismay, it delivered unsatisfactory results for nearly every query. Its accuracy was simply not up to par. By 2021, I observed that the app had undergone changes. Instead of providing two or three potential diagnoses, it now offered a list of six or seven. This seemed like a tactic to cast a wider net, likely in response to mounting criticism from users and the general public.

Consequently, my poor experience with the Babylon app, the absence of peer-reviewed research, the lack of independent validation, and the inconsistencies in their claims led me to dismiss Babylon's products as unreliable.

Over the next couple of years, I tuned out news about Babylon, deeming them lacking in the scientific foundation essential to be a genuine contender in the market.

In July 2021, Babylon's SPAC IPO announcement prompted me to scrutinize the company more closely, leading to my article that highlighted numerous red flags. Beyond the company's own promotional content, I found no genuine positive or scientific coverage about them. The AI they claimed to utilize remained elusive and, as I discuss later in the article, appeared to be non-existent.

Numerous concerning signs emerged. Issues of data privacy breaches arose, and a dearth of clinicians on their executive board, except for the Chief Medical Officer who departed the company in March 2023, was alarming. A visit to Glassdoor’s website revealed a disconcerting number of negative reviews from both current and former employees.

CEO Ali Parsa's sales skills, combined with his connections at Goldman Sachs and ties to the UK's health secretary, Matt Hancock, made me skeptical. I firmly believe that a successful business should not rely solely on sales tactics, lobbying, and personal relationships. Their claim that millions had access to their app seemed exaggerated. Were they merely counting potential U.K. National Health Service (NHS) and U.S. Centers for Medicare & Medicaid Services (CMS) partnership users rather than actual ones?

The company's astonishingly high valuation, given its seeming lack of substantial technology, puzzled me. Even more perplexing was their backing by renowned investors like Peter Thiel and his Palantir Technologies.

Following Babylon's SPAC announcement, I delved into public sources to investigate the company. After examining regulatory filings, videos, and articles, I grew increasingly suspicious that Babylon might be fraudulent or, at the least, warranting regulatory investigation.

Given Babylon's impending New York Stock Exchange (NYSE) listing, it falls within the SEC's jurisdiction. As I detail later, I doubt Ali Parsa will face SEC action, and I'm equally skeptical about any action from UK regulators. The numerous inconsistencies and questionable practices I uncovered lead me to suspect that Parsa, along with other executives and board members, were aware of Babylon's internal issues.

The SPAC process itself, as I highlighted in a previous article is prone to fraudulent activities due to its lax regulation. If a major bank endorses the process, the SEC often seems to turn a blind eye, collecting fees while doing little oversight.

In the lead-up to the IPO on October 21st, 2021, Babylon's promotional efforts painted a rosy picture. The discrepancy between their public statements and apparent reality suggests multiple issues at play. I previously labeled SPACs as Ponzi schemes due to their tendency to inflate company valuations. Still, I hold Babylon responsible for feeding SPAC promoters potentially misleading information.

Goldman Sachs' absence as an underwriter, despite Parsa's connections, raised another red flag, reminiscent of Goldman's distance from the infamous Madoff Ponzi scheme.

I was recently made aware of Dr. David Watkins (@DrMurphy11 on Twitter), who has been exposing Babylon's questionable practices for years. I regret overlooking his insights earlier. For instance, he played a crucial role in a BBC Newsnight segment that brought some of Babylon's issues to light.

Despite Dr. Watkins’ thorough analyses, many details and financial data surrounding Babylon remained vague until 2021. However, with mandatory reporting by a public company, more revelations have emerged. One glaring concern is the valuation of Babylon's assets, particularly their intangible assets, suggesting potential overvaluation. The sale of GP at Hand, one of Babylon's flagship ventures, for a meager sum further underscores potential asset misvaluation by the company.

In the following weeks and months, we anticipate uncovering numerous undisclosed issues, and many secrets will be revealed. It’s going to be very interesting.

For any startup, there are three potential business strategies:

• Identify a problem and solve it. This is the ideal approach, but often the most challenging.

• Recognize your unique strengths and find applications for them. It's not perfect but can work if your solution is innovative and groundbreaking.

• Leverage connections, lobbying, and exaggerations to grow, which is what Babylon Health opted for. This approach lacks integrity and often leads to failure.

From Babylon's collapse, several crucial lessons emerge. I identify 22, which I delve into in Section 22 below. These 22 are in addition to the 10 lessons I identified in my previous research. Three stand out:

1. Lies can cause significant harm to unsuspecting individuals. In investing, lies can hurt a multitude of people you have never met and will never meet. If Ali Parsa had been truthful with investors and the medical community, Babylon might have collapsed earlier, but without causing so much collateral damage - over $1.5 billion in investor losses, and deceived patients and providers. The worst aspect of Parsa’s dishonesty, in my view, was that he wasn’t only deceiving his employees, partners, and customers. Just like in Madoff’s case, there were investment firms, funds of funds, and ‘feeder’ funds investing in Babylon. They had their own shareholders. By creating a faulty narrative, Parsa was enabling portfolio managers of those institutions to deliver the same faulty message to their own shareholders, perhaps violating their fiduciary duty, but, most importantly, encouraging their own shareholders to invest in Babylon. And they did. As I show in Section 14, using the example of VNV Global, one of the largest and most loyal Babylon investors, perhaps not coincidentally, VNV shareholders made enormous subscriptions (the size of half of the fund at the time) right before Babylon’s IPO and subsequent quick 100% value loss. In Section 21, I present to you 17 lies of Babylon.

2. The capitated (or reimbursement) model doesn’t work in digital health. And it’s not just because Babylon had an inferior product. I think it’s been challenging (if not impossible) to be profitable in digital health under a capitated model, and, in fact, under almost any model.

3. Regulators, the SEC in particular, did absolutely nothing to stop Babylon’s alleged fraud, in line with its real mission revealed during the Madoff scheme congressional hearings: “To protect big banks and other important members of the financial system from retail investors.”

In Section 14, I will also share 7 lessons of investing in Babylon - by VNV Global, one of the largest investors in Babylon - who lost all of its $163 million invested in Babylon.

Analyzing Babylon's strategy shows that their technology wasn't cost-effective, to say the least. They utilized a capitated (or reimbursement) model of value-based healthcare, where insurers such as Medicaid and Medicare paid a fixed fee (a monthly fee per member, also referred to as a PMPM fee), essentially offloading risk onto Babylon. But the data showed that Babylon's claims expenses closely mirrored its value-based revenues, suggesting inefficacy in their tech and business model. In other words, in 2022, for example, Babylon spent $1 billion dollars to make $1 billion, i.e., the app made zero difference in cost reduction. Ali Parsa claimed that the Babylon technology saves 70% of the cost of delivery. But in fact, and Parsa knew this as the CEO, Babylon had 0% improvements due to the technology. Plus, of course, there were overheads and expenses, that were dragging retained earnings into a negative $1 billion hole.

Ali Parsa's claims, such as achieving a 70% reduction in care delivery costs, were clearly exaggerated. If Parsa was correct, Babylon would've shown a significant margin, not a mere 0.9%. Despite scaling from $20 million to $1 billion in revenue, Babylon's bottom line remained very negative, which is puzzling. As a result, retained earnings were getting deeper and deeper into the red, creating a major risk on Babylon’s inability to pay debt.

On the bright side, the true potential of AI in healthcare remains largely untapped since Babylon wasn't genuinely AI-driven. However, this also serves as a cautionary tale. Even suboptimal technology should have demonstrated some profitability with over $1.5 billion invested in Babylon.

Engaging with insurance companies is also tricky. They've flourished for centuries due to their actuarial prowess. Partnerships with them aren't always mutually beneficial because insurance companies are looking out for themselves, not for their partners. Babylon's experience underscores this: Babylon’s capitated model failed miserably. Babylon’s lies about scaling didn’t work because there was no product - there was a lot of smoke and mirrors.

The good news, in my view, is that this enormous failure rate of digital health enterprises is akin to the 2001 tech crash. The tech bubble burst was a lot of pain. But once the dust settled, the 'get rich quick' and 'fly by night' schemes went bankrupt, but the ones with true value became successful. I hope that's what's going to happen with digital health.

Here is the synopsis of my analysis of Babylon Health:

1. The Beginnings: A Poster Child for Digital Health

1.1. Foundation and Vision

1.2. Relationship with the National Health Service (NHS)

1.3. Mismanagement of Circle Health

1.4. The Babylon App

1.5. Partnerships and Growth

1.6. Criticisms and Questions

2. No Independent Validation Or Real Patient Testing

3. CEO Ali Parsa: Navigating the Boys’ Club and “The Future of the NHS”

4. The Babylon App: A Disappointing and Unsafe Experience

5. The Emperor Has no Clothes

6. Babylon’s “Rational Pyramid of Care”

7. The Reality: An Empty Promise

7.1. The Alleged Technology

7.2. Misleading Studies

7.3. Employee Insight and Work Culture

7.4. Regulatory Concerns and Investigations

7.5. Data Breach

8. Widespread Criticism and Scrutiny

8.1. Professional Groups and Academic Criticism

8.2. Scrutiny by the NHS

8.3. Safety Concerns and Regulatory Issues

8.4. Investigation by Alberta's Privacy Commissioner

8.5. Questionable Marketing and Sale of COVID-19 Antibody Tests

8.6. Babylon App Data Breach

8.7. Legal Dispute with Care Quality Commission

8.8. Employee Reviews and Allegations

9. Employee Reactions: A Look Inside

9.1. Toxic Work Culture

9.2. Allegations of Misleading Conduct

9.3. Safety and Quality Concerns

9.4. Issues with Senior Leadership

9.5. Inflated Ratings and Manipulation

10. Controversies and Scandals

10.1. Unsupported Claims and Chatbot Safety

10.2. Whistleblower's Revelations on BBC Newsnight

10.3. Investigation by Alberta's Privacy Commissioner

10.4. Sales of COVID-19 Antibody Tests

10.5. Babylon App Data Breach

10.6. Legal Dispute with Care Quality Commission

10.7. Employee Reviews and Work Culture

11. Alleged Financial Manipulation and Bankruptcy

11.1. Artificial Valuation through SPAC and IPO

11.2. Babylon Stock, Short Sellers and Unusual Volatility

11.3. “De-Capitated” Business Model

11.4. Bankruptcy and Legal Implications

12. Notable Investors

13. FTX Analogy - Conflicts of Interest and Lack of Fiduciary Responsibility

14. The Ripple Effects of Babylon's Mess: The Case of VNV Global Shareholders

15. Wall Street Analysts Were in Bed With Babylon’s Management

16. Why Hasn't, and Why Won’t, the SEC Taken Action Against Ali Parsa and Babylon?

17. Conclusion: A Disturbing Legacy

17.1. A Broken Promise

17.2. The Impact on Investors and the Market

17.3. Regulatory Gaps and Legal Challenges

17.4. Ethical Considerations and Corporate Culture

17.5. Lessons for the Industry

18. My Personal Take

19. 6 Unanswered Questions About Babylon Health

20. 16 Signs of Potential Irregularities at Babylon Health

21. 17 Alleged Lies by Ali Parsa, CEO of Babylon Health

22. 22 Lessons from Babylon’s Alleged Scam for the Digital Health Industry.

So, let’s take a deep dive into what happened to Babylon…

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