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Teladoc capitalizes on telehealth boom with $18.5B Livongo buy

Teladoc Health Inc.'s $18.5 billion acquisition of Livongo Health Inc. marks the biggest healthcare deal yet in 2020 and extends the company's lead in the rapidly growing telehealth industry.

Purchase, N.Y.-based Teladoc announced the deal Aug. 5, just days after the telehealth provider reported some of the highest membership gains and visit growth ever seen by the company for the first half of 2020.

Merging the two companies was a "natural evolution for each organization," Teladoc CEO Jason Gorevic said during an Aug. 5 call with analysts. Gorevic will be the CEO of the combined company, which will be called Teladoc Health.

Livongo, a digital health company that specializes in remote patient monitoring for chronic conditions, adds an additional direct-to-consumer business line for Teladoc as well as extensive patient data, Gorevic said.

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"We see tremendous opportunity for revenue growth synergies including the ability to cross-sell Livongo's products and services across Teladoc's existing customers and channels and vice versa," he said. "This is particularly attractive with only an estimated 25% overlap in the combined client base."

Livongo will bring its hyperfocused approach to treating chronic conditions across Teladoc's wide-reaching platform, Glen Tullman, Livongo's executive chairman and founder, said on the call.

Telehealth, also called telemedicine, primarily involves the remote delivery of healthcare services, such as connecting specialists to patients sometimes hundreds of miles away via a live-video feed.

Pandemic drives patients to telehealth

Virtual care usage has exploded during the coronavirus pandemic, with both hospitals and telehealth companies like Teladoc and the privately held Amwell reporting the highest usage growth ever seen due to patients staying home and avoiding hospitals and the cancellation or delay of elective care.

The Trump administration has even warmed up to telehealth, temporarily enacting numerous Medicare regulatory changes to help manage the pandemic, which experts say fueled the dramatic increase in usage. The administration also directed the U.S. Department of Health and Human Services to work to make some temporary changes permanent in an Aug. 3 executive order.

More impactful regulations, such as across-the-board coverage of in-home care and reimbursing care provided in urban settings, not just rural settings, must be permanently made by Congress. Federal health officials called on the legislative branch Aug. 3 to make this happen. In a June hearing about telehealth's role in the pandemic, senators signaled that they would support some permanent changes.

While the broader U.S. markets have suffered from the pandemic with stock prices sinking beginning in late February, Teladoc's stock price has grown from $116.86 on Feb. 26 — shortly before the pandemic accelerated in the U.S. — to $249.42 on Aug. 4. Similarly, Livongo's stock price jumped from $25.45 on Feb. 26 to $144.53 as of Aug. 4.

However, shortly after the deal was announced, both companies' stock prices dropped. Teladoc's price fell by 14.06% to $214.34 as of 12:13 p.m. ET on Aug. 5, and Livongo's dropped by 6.31% to $135.41 as of the same time.

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The chronic care market

Teladoc's bid for Livongo comes just two days after the biggest healthcare deal of 2020 was announced, with Siemens Healthineers AG making a $16.4 billion pitch for medical imaging specialist Varian Medical Systems Inc.

The Livongo deal is Teladoc's largest acquisition going back to 2016, according to an S&P Global Market Intelligence analysis, and the second deal the company has struck in 2020. The company completed a $600 million acquisition of the telehealth provider InTouch Health on July 1. Market Intelligence values the Livongo deal at $15.33 billion considering equity plus the value of assumed current liabilities, net of current assets.

J.P. Morgan analysts called the deal a positive, as Livongo will bring in remote monitoring of chronic disease patients, which the company has been targeting for a while. The analysts noted in an Aug. 5 note that Teladoc's 70 million members have about a 25% overlap with Livongo, so the deal leaves plenty of room for cross-selling opportunities.

The market for chronic disease is growing, with nearly 147 million Americans or under half the population living with some sort of chronic condition, J.P. Morgan said.

"Because these patients are more expensive to treat, roughly 90% of healthcare dollars are spent on these conditions," J.P. Morgan's analysts said.

Livongo is projected to bring in pro forma revenue growth of 30% to 40% over the next three years, Teladoc CFO Mala Murthy said.

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