Teladoc bets $18.5bn that Covid-19 will change the world for good

Telemedicine was on the upswing even before the Covid-19 pandemic hit; under the current circumstances it is a crucial means of providing healthcare without putting patients and doctors at unnecessary risk. So Teladoc’s $18.5bn cash-and-stock acquisition of chronic care management provider Livongo is very much of the moment. 

Both groups have enjoyed outstanding share price gains thanks to the pandemic – Teladoc’s value has tripled since the start of the year and Livongo’s is up nearly sixfold. But for the deal to prove successful the demand for app-mediated healthcare will have to be sustained even after the pandemic phase has passed.

On this point investors are sceptical: Teladoc and Livongo closed down 19% and 11%, respectively, after the merger was announced yesterday, although recovered some losses today.

There is no doubt that demand for telehealth services has soared. According to consultants at McKinsey, health systems and providers have moved fast to put remote health technologies in place and have seen between 50 and 175 times as many telehealth “visits” as in the pre-pandemic era. That said, investors should keep in mind McKinsey’s note that there is a disconnect between the 76% of consumers who say they are interested in telehealth and the 46% who actually use it.

A new customer base

Appetite for these services is likely to remain keen for the next 12-18 months – or however long it takes until a reliable vaccine is widely available. During this time telemedicine groups will work hard towards entrenching the technology within healthcare systems, hoping to persuade patients and payers of its benefits so they do not abandon the tech once it is safe to return to the doctor’s office. 

This will mean getting governments on side. Currently, Teladoc offers a subscription service to insurers and employers under which their customers and employees can have video calls with doctors; Livongo’s services allows patients to manage long-term conditions like diabetes and hypertension, and is mainly paid for by employers (Keeping corporations healthy is good business for Livongo, December 2, 2019).

Making inroads with government programmes like Medicare will thus be crucial. Medicare does offer some reimbursement for telemedicine services, and currently at the same rate as the comparable in-person medical service, based on the current Medicare physician fee schedule. With older patients more vulnerable to the coronavirus and thus relatively keen to self-isolate, as well as more prone to the kind of chronic illnesses Livongo is geared towards, retirees could be a real source of growth for the combined company.

But there could be changes to the way government programmes reimburse telehealth services. Seema Verma, administrator of the Centers for Medicare & Medicaid Services (CMS), has written that “telehealth is here to stay”, but also cautioned that Medicare payment rates for these services outside of a public health emergency will need to be reassessed. If rates are cut, Teladoc could suffer. 

Bigger and better?

Another concern about this deal is the small but significant chance that it could run into antitrust issues. Teladoc is the largest telemedicine company in the US, and last month closed its $600m acquisition of InTouch Health, another virtual healthcare provider. There are plenty of others – Heal, for example, or SnapMD – but Teladoc is highly acquisitive and could soon have the heft to corner a great deal of the market. Still, Livongo’s business is different from Teladoc’s, so the deal is far from a repeat of the Illumina-Pacbio situation. 

Beyond the regulatory questions there are financial ones. Teladoc’s offer works out at $159 a share, 10% higher than Livongo’s closing share price on Tuesday. Had Teladoc pounced in early March, when a state of emergency was declared in its home city of New York, it could have got Livongo for less than $28 per share.

Furthermore the multiple of 60 times Livongo’s forecast 2020 revenue, according to sellside consensus compiled by EvaluateMedTech, looks hefty. And neither company is yet profitable. Livongo has previously said that it expects to break even in 2021, but when Teladoc might do so is still unclear.