Yesterday we woke up to learn that Teladoc Health announced plans to acquire Livongo in a deal valued at $18.5B, throwing the healthcare community into a frenzy of discussion and speculation on the impact this megadeal will have on the industry.
Peeking under the hood let’s explore the deal’s structure, its context for the broader digital health funding landscape, and the strategic implications of a new Teladoc Health for the players involved and for the stand-alone telemedicine and chronic disease management sectors.
What is this deal really?
$18.5B is a really big number, especially for an industry that only recently started clocking unicorns. In fact, based on data sourced from Rock Health’s funding database $18.5B represents 41% of the total $45B in venture capital funding that has been invested in digital health since 2011.
This valuation is significantly higher than any other deal we have seen in digital health. For perspective here are those that come closest: Becton Dickonson’s acquisition of CareFusion for $12B in 2015; Dassault Systemes acquisition of Medidata Solutions for $5.8B in 2019; and Veritas Capital’s acquisition of athenahealth at $5.7B, also in 2019.
The $18.5B price tag eclipses past M&A activity between digital health companies—the average value of all disclosed deals since 2013 with a digital health company as the acquirer is $374M1. In addition, this follows the trend we’ve seen where 49% of all digital health acquisitions since 2013 have been by other digital health companies.
Taking a look at the fine print: Teladoc is buying 58% of Livongo (not a 100% stake) and paying almost entirely with shares (plus $11.33 per share in cash). The structure of this deal suggests that Teladoc is swimming with the tide of current public market conditions and, in particular, the “pandemic-aware” valuations telemedicine service providers are benefiting from. Some consider the deal to be overvalued given the growth in Teladoc’s standalone valuation in recent weeks.
A new type of first?
This deal is made particularly interesting by the fact that Teladoc and Livongo are industry veterans, each with a track record of making history, begging the question whether they are starting a new trend.
Both companies were among the first to be established in their respective sectors, both were in an early class of digital health IPOs, both are among the highest valued digital health companies, and both have completed a number of acquisitions in the past.
Teladoc was founded in 2002, before other prominent telemedicine companies (for example, Amwell in 2006, MDLIVE in 2009, Doctor on Demand in 20122). In the diabetes space, Livongo was one of the first, founded in 2008, with other chronic disease management companies established later on (for example, Omada in 2011 and Virta in 20143.)
Teladoc IPO’d in 2015, at a valuation of $758M after having raised $119M in venture capital funding. Shortly thereafter, the digital health market suffered a 3-year IPO drought. Livongo debuted on the public market in 2019 at a valuation of $2.5B having raised $237M in venture capital funding prior to that point.
Teladoc has completed a string of acquisitions over the years as it builds an increasingly comprehensive telemedicine platform: InTouch Health (Jan-2020), Advance Medical (May-2018), Best Doctors (Jun-2017), HealthiestYou (Jun-2016), Stat Health Services (Jun-2015), BetterHelp (Jan-2015), AmeriDoc, LLC (May-2014), and Consult a Doctor (Sep-2013).
Livongo, the acquiree this time, has also completed a number of acquisitions with MyStrength in 2019, Diabeto in 2017, and Retrofit in 2018.
At every turn in their histories, both companies have been market leaders. However, there have been successful market entries by competing digital health startups in the spaces Teladoc and Livongo initiated. It’s likely that others will also follow this strategic leap.
What does this mean for Teladoc Health’s strategy?
Other than the financial implications of the deal, what does the newly combined Teladoc Health achieve and how will it change the landscape of the digital health ecosystem?
For starters, the combined Teladoc Health creates a new class of platform, combining a technology company (Teladoc) that enables short MD interactions with a tech-enabled services company (Livongo) whose core strength is its ability to engage members, and keep them engaged, over time in personalized chronic disease management programs.
In addition, the new company offers a broad and growing set of virtual care services supporting needs from ad-hoc primary care, to curated long term chronic disease management, physical therapy, and mental health services, dubbed “‘whole person’ health” by Teladoc’s CEO.
There is also the possibility that one of Teladoc’s greatest returns from this deal could be untethering itself from an expensive physician employment staffing model. The combined entity’s employees will be a mix of legacy Teladoc physicians and Livongo’s lower cost health coaches. This multidisciplinary virtual care employee base, operating at the top of its collective licensure, could make for positive synergies around gross margins that becomes the real prize of the tie up.
Is the virtual care market changed forever?
If the deal goes through in the fourth quarter, the new Teladoc Health will be the biggest, but this announcement is merely the starter’s pistol for an inevitable virtual care platforms race. Teladoc Health and Livongo sell to self-insured employers and health plans but now they can deliver on those customers’ calls for “One Platform, Multiple Conditions.” For the time being, this sets them apart as the category leader for comprehensive virtual care platforms.
This has implications for the telemedicine and chronic disease management sectors. The combined company will put pressure on some of the pure play digital health companies operating in overlapping services. Given the proliferation of virtual care platforms over the last few months in the COVID-19 era, pure play telemedicine has become somewhat of a commodity. This deal indicates that telemedicine companies may be looking to services and disease expertise to differentiate.
This also raises a question of who will be next to offer the “One Platform, Multiple Conditions” virtual care platform. We anticipate a string of follow on mergers and acquisitions as other companies in this space also attempt to create comprehensive solutions.
A key question for Teladoc and all following competitors will be how health plans respond. Watch out for potential category killers: we are already seeing the large Medicare Advantage players like United Healthcare establishing their own home-grown chronic disease management solutions to supplant Teladoc and all comers entering into the space between them and the employers and members they serve.
The question we are already asking is where and how Teladoc Health will expand next. “Whole person health” isn’t quite complete while missing elements like at-home lab tests, high fidelity exam equipment, and medication delivery. Tuck-ins or partnerships in these arenas are definitely something to keep an eye on.
Is it worth the hype?
In summary, this deal’s mix of unique circumstances in the financial markets and the parties’ complementary operating models make it worthy of (almost) all the ink that will be spilled over the next few days. It legitimizes digital health business models that enable patients to manage their own chronic conditions, and it creates an interesting path to follow for other digital health companies (many of whom are currently eyeing IPOs). Congratulations to Livongo and Teladoc for making history again. Game on!
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1Rock Health Digital Health Venture Funding Database
2Rock Health is an investor in Doctor On Demand
3Rock Health is an investor in Omada and Virta