The country's first digital health megamerger — Telehealth giant Teladoc's snap-up of chronic care management company Livongo for $18.5 billion — hints at the untapped potential of the nascent market, but is fueling concerns about a potential virtual care bubble inflated by COVID-19.
The deal combines one of the largest telehealth platforms in the U.S. with one of the biggest names in chronic condition management. Consolidating the virtual care market may make sense for clients looking to get a broader variety of services from one vendor, and provides a single access point to digital care for consumers.
But skeptics pushed back, citing Livongo's inflated valuation relative to just a few weeks ago and the risk that the end of the COVID-19 pandemic could throw a wet towel on the mania over telehealth.
Reflecting those fears, investors sent shares in Teladoc down more than 19% and Livongo down more than 11% at Wednesday's close.
Some analysts chalked shareholder skepticism up to the deal's extraordinarily high valuation of Livongo: at $159 a share, Teladoc is valuing the company at $18.5 billion — more than 30 times Livongo's projected revenues for the 2021 fiscal year.
It's the largest digital health deal in U.S. history, by "many orders of magnitude," Forrester Senior Analyst Arielle Trzcinski said, eclipsing, for example, Google's not-yet-closed $2.1 billion acquisition of wearables manufacturer Fitbit.
The deal represents a 10% premium on Livongo compared to its close on Tuesday, and an almost 50% premium compared to its close July 27, a little over a week ago. Some skeptics saw the valuation as irrational exuberance on virtual care sparked by unprecedented adoption during the pandemic.
Investment advisor Stone Fox Capitol called the valuation "outrageous," noting a COVID-19 vaccine or treatment could deflate perceived hype on virtual care and send stocks flatlining as in-person treatment becomes a more attractive option for consumers.
"We need to spend a little more time with the market, articulating the value proposition," Livongo President Jennifer Schneider told Healthcare Dive.
The primary stock mix of the deal should ameliorate some concerns, analysts said, and could allow for a faster ramp toward profitability for Teladoc, which hasn't turned a profit for its shareholders since it went public in 2015.
Prior to the deal, shares of both Livongo and Teladoc reached record highs this week, with shares of Livongo almost six times higher and shares in Teladoc's three times higher than they were at 2020's start.
The pandemic kicked up the country's utilization of virtual care into lightspeed, cramming decades of growth into a few short months. But analysts also noted the timing on the deal was relatively quick.
"The timeline comes as a surprise — like everything else virtual care-related during this pandemic, the deal is coming 10 years earlier than we would have expected," SVB Leerink analyst Stephanie Davis wrote in a Wednesday note.
The deal is expected to close by the end of 2020, relatively fast for healthcare approvals, fueling concerns Teladoc may be becoming overly reliant on acquisitions to maintain growth. Teladoc could also run into problems digesting two large new businesses at once. The Purchase, New York-based vendor is fresh off closing what was its largest acquisition ever on July 1: $600 million for provider telehealth business InTouch Health.
But experts say integrating Livongo should drive considerable growth opportunities for Teladoc as vendors race to turn their toeholds in new markets to footholds, helped by tailwinds from COVID-19.
Talks between Teladoc and Livongo began within the last year, but the pandemic accelerated the pace of discussions. The deal structure came together in the middle of the pandemic and was finalized within a matter of months, Livongo's Schneider said.
Teladoc gets the majority of its revenue from subscription fees paid for by employers and insurers, and relies on a physician network of independent contractors to conduct on-demand visits for a range of services, including specialty and mental health needs.
Livongo, which went public in July last year, charges employers and insurers to manage the chronic conditions of their members, including diabetes, hypertension, weight management and mental health.
Teladoc CFO Mala Murthy told investors Wednesday morning the combined company would have 2020 revenue of $1.3 billion, an 85% growth compared to last year.
Teladoc expects annualized topline growth between 30% and 40% through 2023.
The two companies operate in entirely different markets, or in the same market with different clients, according to Schneider. The overlap in client base is estimated at just 25%, so the combined entity will be able to pitch Livongo offerings to the majority of its 70 million U.S. members.
Mental health is one area Teladoc and Livongo could be particularly strong, analysts said, as there's high overlap between patients with chronic conditions and those managing a behavioral health issue.
Livongo's behavioral health business MyStrength acquired last year offers a range of therapies, including cognitive behavioral therapy and coaching, which could complement Teladoc's virtual mental health capabilities, Forrester's Trzcinski said.
It's timely: Conditions like anxiety and depression have been exacerbated by months of lockdown and stress amid COVID-19, and many patients are using teletherapy as a result. Visit volumes for mental health have grown sequentially in every month this year, Teladoc CEO Jason Gorevic said on Teladoc's second quarter earnings call late July.
The massive deal could also be the starter pistol for bigger deals in the virtual care space, experts say, as telehealth vendors race to catch up with Teladoc, which now has a significant head start on scale.
Integrating Livongo will likely make Teladoc more attractive to potential payer and employer clients compared to rivals like Amwell and Doctor on Demand.
"Certain competitors to Teladoc have lighter weight capabilities" in areas like data analytics, coaching and remote patient monitoring, Trzcinski said. "There's an opportunity for them to look at some of the players in the market today that provide targeted solutions to those gaps. If they do not act quickly, they will fall behind."
"If they do not act quickly, they will fall behind."
Arielle Trzcinski
Forrester Senior Analyst
Chronic care management companies like Livongo's biggest competitor Omada Health, which recently acquired a virtual physical therapy company, could be attractive options for acquisition. The majority are private, but chronic condition management company DarioHealth saw its stock skyrocket almost 30% by early afternoon Wednesday following the Teladoc-Livongo announcement, signaling the market predicts continued activity in the space.
"This is a huge vote of confidence in the public markets in virtual care. For really the entire digital health sector," Julia Hu, CEO of 10-year-old chronic condition management company Lark Health, said. Omada Health CEO Sean Duffy called the acquisition a "massive validation of the virtual care approach to chronic disease," telling Healthcare Dive he also expects deals to ramp up down the line.
Experts also expect continued consolidation among chronic care management companies. Many started focused on just one condition, and may look to M&A to build out their suite of services.
And chronic care management players have only captured a small slice of the 133 million U.S. adults with chronic diseases. Livongo has scaled up to more than 328,000 members and Lark has 2 million between payer and provider clients.
"It's still early days," Hu said.
As for Teladoc and Livongo, executives have discussed future acquisitions for the combined entity at a high level with no set timeline. The combined company does plan to pursue both organic and inorganic growth, Schneider said. But "we've been focused on getting the deal done."
