On the 5th of August 2020, one of the largest healthcare deals in 2020 was announced: multinational healthcare giant Teladoc’s 18.5 billion USD acquisition of digital health-management company Livongo, with American Investment Bank Piper Sandler valuing the joint firm at a reported 37 billion USD. Throughout the deal process, Teladoc and Livongo’s financial advisers were Lazard and Morgan Stanley respectively. In recent years, Teladoc has cemented itself as a leader of America’s Telehealth companies, delivering a practical business-to-business virtual healthcare platform. It thus makes sense that they should acquire Livongo, a similar platform that harnesses the potential to transform the experiences of hundreds of millions of people dealing with chronic health conditions. Under the terms of the merger, Livongo shareholders will receive 0.5920x shares of Teladoc Health plus cash of USD11.33 for each Livongo share including the special dividend declared by Livongo.
For Teladoc, the primary synergy arises in the form of an estimated 70 million new users given that there currently only exists a 25% overlap in existing customers between Teladoc and Livongo. This boost in engagement provides an invaluable opportunity for the company to capitalise on an entirely new client base, whilst also providing Teladoc with a promising platform to further expand. Additionally, due to the different strategies employed by both companies: Livongo focuses on offering services to patients with chronic conditions in the US, whereas Teladoc has an industry reputation for the scale of its operations in over 130 countries.
Livongo Health’s revenue grew by 68% year on year to 68.8 million USD in Q1 2020, and, perhaps more impressively, Livongo reported a sizeable leap in Q3 2020, earning a total of 106.1 million USD in revenue which equated to an annual increase of 126%. At the time of publication of its third quarterly report, the company was on track to surpass its target of 300 million USD in revenue for the fiscal year 2020 with break-even levels of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). Moreover, the company has no debt and 368.2 million USD in cash and investments, putting it in a robust financial position. Unlike the majority of companies that suffered the negative ramifications of the COVID-19 pandemic, Livongo saw an acceleration in its growth stemming from the increase in patients preferring to use apps to minimise the risk of contracting the virus from in-person consultations.
A deal of this magnitude possesses risks, and in this case, the risks revolve around future demand for virtual healthcare services. Despite a steady trend in the growth rates of telehealth companies in recent years (see graph below), it is apparent that the sector’s accelerated growth rate was catalysed by the pandemic and the impact it has had on driving customers to online consultations. A McKinsey report detailed the rise from 11% of US consumers using telehealth services in 2019 to 46% at the height of the pandemic in 2020. But whether this demand can be sustained or whether future growth can be guaranteed, especially in light of emerging coronavirus vaccines, remain undetermined. There is a lot of uncertainty regarding whether demand will be sustained after the pandemic, so existing market conditions should not be taken for granted and the firm should consider strategies to mitigate potential fluctuations in demand in the future.
Figure 1. Graph showing the percentage of hospitals using telehealth. AHA Annual Survey.
In retrospect, it is very fitting that these two companies, with the same long-term mission, should merge to create a new kind of healthcare experience. Regardless of questions over whether the demand can be prolonged, the convenience of the technologies Teladoc and Livongo cannot be overlooked. Another important matter that the newly-joint company has to evaluate and address to ensure sustained growth is to agree on a refined business model. Currently, Teladoc’s business model earns revenue on a transactional basis with a platform that helps clients identify concerns early whereas Livongo offers a subscription-based service with an emphasis on giving personalised health coaching and advice.
The deal has the potential to make the combined firm a front-runner in the virtual healthcare market due to the domain each firm specialises in and the ensuing synergies. One positive outlook that suggests there is further room for growth in this industry is that according to a J.D. Power report from August 2019, 74.3% of US citizens claimed that they didn’t have access or weren’t aware of telehealth options and this was most prominent in rural areas and the ageing demographic. Of rural inhabitants, 72% weren’t aware of telehealth services, and the utilisation rate was only 5.3% among those aged 65 or more. If the newly merged firm can find a way to exploit what seems to be an untapped market, there is little to indicate that demand for virtual healthcare cannot be sustained even after restrictions in the healthcare sector become more relaxed.
By Jesper Chin
By Venkat Rajasingham