In one of the biggest ever digital health deals in history, Teladoc announced Wednesday it would acquire Livongo, valuing the company at $ 18.5 billion. Both have experienced growth likely beyond their wildest dreams in light of the Covid-19 pandemic, as patients and providers have rushed to adopt digital health, and as regulators have removed barriers to such adoption.
“The combination of these two companies was an inevitability,” Teladoc CEO Jason Gorevic, who will lead the combined company, said in an investor call. “When (Livongo Founder) Glen and I sat down together and talked for the first time, it became very clear that we were either going to team up to create the greatest virtual care platform in the market, or we were going to end up competing with each other.”
The two companies seem like natural partners; Livongo’s continued “nudges” for patients with diabetes, heart disease and other chronic conditions could pair well with Teladoc’s platform powering telehealth visits. But will they be able to sustain their high expectations for growth over the long term?
MedCity News spoke with Livongo’s leadership, investors and competitors to get their take on the deal:
Growth expectations are baked in
Valuing Livongo at a whopping $ 18.5 billion, Teladoc plans to pay $ 158.98 per share in cash and stock for the digital health startup, a little above its stock price of $ 149.90 at market open on Wednesday. It will also assume $ 550 million of the company’s debt that Livongo had issued at the beginning of June. The combined entity would be valued somewhere between $ 30 billion and $ 40 billion.
While both companies have seen their top line grow significantly, with Teladoc’s revenues up 90% in the second quarter and Livongo’s up 125% compared to 2019, they have continued to operate at a net loss. Their stocks — which have increased tremendously since the start of 2020 — both tumbled on news on the merger.
“Valuation is high, but then again, these two companies have captured the imagination of virtual care like no others and there is a premium to be paid for that market visibility. Investors may be a little hesitant today to support such a high valuation but in time, this will be seen as a good deal,” Chilmark Research Founder and Managing Partner John Moore wrote in an email.
Livongo’s second-largest shareholder, Kinnevik AB, indicated in a news release that it would support the deal. It currently holds 13% of Livongo’s outstanding shares and plans to keep a 4.5% stake in the combined company. Livongo’s largest investor, General Catalyst, hasn’t yet commented on the deal.
In an investor presentation, the companies shared their growth expectations. They expect to bring in a combined $ 1.3 billion in revenue at the end of 2020, and achieve $ 500 million in revenue synergies by 2025.
“For Teladoc to pay 36 times next year’s revenue, this transaction is a huge endorsement of exponential growth for the entire digital healthcare space,” Charles Jones, CEO and chairman of telehealth startup MDLIVE, wrote in an email. “This is not an exit for selling shareholders. In fact, the deal structure fortifies the expectation of growth, which we see at MDLIVE as well. Healthcare outcomes benefit from multiple sources of innovation and clinical wisdom. And payors know that multiple players in this space benefit healthcare costs.”
A combined strategy makes sense
It’s not difficult to imagine how Livongo and Teladoc would integrate their businesses.
For example, a patient with a headache might set up a visit with Teladoc. That physician could then pull in information from the patient’s connected glucometer through Livongo, and realize their blood glucose levels had been over 400 for the past few days. They could then use that opportunity to talk to the patient about getting their blood glucose under control, instead of simply taking Tylenol.
Another potential scenario: A patient using Livongo for hypertension might find that their blood pressure isn’t decreasing, in spite of taking their medication regularly. Through a telehealth visit, they could get a new prescription, Livongo President Jennifer Schneider explained in a phone interview.
“Both companies had a joint vision… that to get to this next stage for the healthcare ecosystem there was a combination of sorts,” she said.
It also helps that both companies primarily sell to large employers and health plans, though they have been gaining traction with insurers. Surprisingly, there’s not too much overlap — just 25% of their clients are shared.
This gives them both an opportunity to sell into each other’s customer bases.
“In terms of recruiting, Teladoc has done an amazing job of getting people at the front of the funnel, and we’ve done a very good job of retaining people through the health nudges, through the insights that we give…” Livongo Founder and Executive Chairman Glen Tullman said in an investor call. “We think we can be helpful there as well.”
What about the cultural fit?
It helps that both companies have a similar customer base. Some of their leaders have also worked together in the past; Teladoc COO David Sides and Livongo CEO Zane Burke both had long careers at Cerner. And Livongo CFO Lee Shapiro had previously worked on some deals with Teladoc’s senior vice president of corporate development, Andrew Turitz.
The companies haven’t yet shared many details about how the combined entity would be structured, beyond its CEO and its board.
“There will be some slight cultural differences. We’re two fast-paced growing organizations,” Schneider said. “But once you have a shared common vision, the ‘do you like sushi or do you like a peanut butter and jelly sandwich’ is not as important. We will figure those out.”
So far, that vision seems to be pretty clear. Gorevic said Teladoc would look to bring on healthcare providers on a full-time or part-time basis, in addition to keeping its network of independent contractors.
“Teladoc wants not just to be an episodic care provider. They want to own the end-end spectrum,” Dan Gebremedhin, a partner with Flare Capital, said in a phone interview. “Time will tell how that plays out.”
Expect more mergers in the future
The first half of 2020 has been a busy one for digital health mergers, and the Livongo deal is only expected to accelerate that. Experts forecast other mergers to come, both between chronic disease management platforms like Livongo, additional telehealth deals, and hints of IPOs through “blank check” companies.
“For me, it was just a sign, I think that we’re going to see some consolidation in this space. I think we’re going to see more consolidation where more digital health companies are integrating together or being acquired,” said Ezra Raphael, CEO of DarioHealth, a digital health company making glucometers that can plug directly into users’ smartphones.
Earlier this year, DarioHealth added mental health coaching to its platform after bringing on two executives from behavioral health startup Catasys. Omada Health, a digital health platform also covering multiple chronic conditions, recently snapped up virtual physical therapy startup Physera. And that’s just a small sampling from the first half of 2020.
“I think Teladoc is just one of a handful of potential acquirers for these types of solutions. I’m sure the Amwells, the MDLives, and Doctor on Demand too, are now looking to the market,” Gebremedhin said. “Not to mention other potential acquirers.”
Since Teladoc and Livongo have both made their fair share of deals, it’s only fair to expect more to come. Earlier this year, Teladoc acquired InTouch Health, building out its presence in hospitals and health systems. A year ago, Livongo acquired behavioral health startup myStrength.
Both companies have indicated that they’re interested in expanding into chronic kidney disease, congestive heart failure, musculoskeletal conditions and chronic obstructive pulmonary disease in the future.
For competitors and digital health startups, there’s still good news
Though the merger will certainly raise the stakes for competitors, it’s also expected to boost adoption of digital health tools, which also bodes well for them. And for companies that are just getting their start in the field, it could be a helpful benchmark for growth.
“In my perspective, that’s actually good for the industry. We’re investing in these early-stage companies that are trying to compete with larger players,” Gebremedhin said. “It helps with the adoption curve. It’s really hard to be first.”
Competitors also pointed to a large potential market and plenty of room for growth.
“My initial thought is that we’re seeing digital health growing in the last few years and billions of dollars are invested every year. We haven’t seen too many IPOs and Livongo was one of the successful ones,” DarioHealth’s Raphael said. “Adoption is just at the beginning of the beginning.”
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