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Teladoc's $18.5B deal with Livongo may spur more digital health M&A

Teladoc Health Inc.'s $18.5 billion merger with Livongo Health Inc. is likely to spark further M&A activity in virtual care and telemedicine as the coronavirus pandemic continues to push patients and providers online.

Larger players like health insurers Anthem Inc., Cigna Corp. and CVS Health Corp. will look at Teladoc's and Livongo's market value and want to bring in virtual care or telehealth companies of their own, George Hill, a managing director and senior equity research analyst with Deutsche Bank, said in an interview.

The merger of the major digital health players 2020's largest healthcare deal yet may incentivize smaller companies to make a move in order to remain competitive, Raj Prabhu, CEO and co-founder of Mercom Capital Group LLC, told S&P Global Market Intelligence.

"We expect to see more deals, maybe nothing close to the size of this deal, but we expect to see more private deals," Prabhu said.

Smaller telehealth providers like Amwell and Doctor on Demand Inc., both of which are privately held, should not feel pressure to mimic what Teladoc is doing just to catch up, Sean Wieland, a managing director and senior research analyst with Piper Sandler, said in an interview.

"If they're smart, they stick to their core principles of why they built the business and stay true to that, as opposed to just chasing what others are doing," he said.

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Before the merger was announced, venture capital funding of digital health companies varied from year to year. In the peak year of 2018, these companies raised about $9.5 billion, according to Mercom Capital Group's data. If the current trend holds, digital health funding may be as high as $13 billion this year, Prabhu said.

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However, Prabhu said the industry does not usually see these kinds of numbers when it comes to public digital health companies.

"Most companies after IPOs have struggled," Prabhu said. "The trend we've seen is Wall Street never really understood digital health or wasn't that excited compared to the VC world."

But telehealth and virtual care have taken off amidst the pandemic after years of slowed adoption and regulatory hurdles. Patients have stayed out of doctors' offices and hospitals due to stay-at-home orders and the cancellation of elective care, and providers have embraced the digital medium as well.

The Trump administration has also enacted temporary Medicare regulations to increase usage in response to the pandemic, which experts believe has fueled growth.

Livongo's added value

With the addition of Livongo, Teladoc is able to expand to include remote patient monitoring tools, which have been gaining popularity during the pandemic.

In a May 2020 note, Piper Sandler analysts stated that remote patient monitoring represented the largest opportunity for the virtual health industry.

Medicare will pay $50 to $100 per member per month to physicians who are monitoring the data that comes from these tools. Meanwhile, Teladoc is only getting paid roughly $1 per member per month plus $45 whenever a patient sees a doctor, according to Piper Sandler's Wieland.

"The dollars behind remote patient monitoring are significantly greater than the dollars behind telemedicine," Wieland said.

Teladoc is also gaining access to Livongo's large database of patients who require care for chronic conditions like diabetes.

A driving force behind the merger is that the combined companies could generate $100 million in revenue synergies, Wieland said, citing Teladoc. By his estimates, this means the combined company will get $100 million if just 1% of Teladoc's subscribers with diabetes adopt Livongo.

By acquiring Livongo, Teladoc is helping combat "vendor fatigue" by providing multiple services in one platform, Deutsche Bank's Hill noted.

"The way to remain relevant to the customer base is to build scale and be able to service more of that benefits wallet," Hill said. "A great way to do that is to either serve a big number of people or go after expensive disease states like diabetes."

Permanent change?

The recent increases seen in virtual care usage will soon be tested. Elective care is restarting across the U.S. for both doctors and hospitals, which could decrease virtual care volumes, and the temporary regulations made by the Trump administration expire with the declaration of the public health emergency.

While the administration is looking to make some regulations permanent, the more influential regulations like broadly covering in-home care and upping certain payments need to be made by Congress.

Both Teladoc's and Livongo's stock prices have soared over the duration of the crisis. However, they both also dropped sharply shortly after the deal was announced as analysts questioned the $18.5 billion valuation of Livongo.

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Both Wieland and Hill believe the coronavirus pandemic has permanently changed the healthcare landscape. Much like how Amazon.com Inc. changed consumer behavior, the pandemic will also change patients' and providers' behavior to rely on virtual care, the analysts said.

"I absolutely think it's permanent," Wieland said of the increase in virtual care and telehealth usage. And the short-term drop in the companies' stock prices is not reflective of the longer-term growth in the space, he said.

"We spend a few billion dollars on virtual care today in total, and I think that over the next five years, 10 years, that number is going to be in the hundreds of billions of dollars," Wieland said. "So, what the stock does today, tomorrow [or] the next day is not as much of a concern as relative to the greater opportunity over the next decade."

While Hill questioned if the usage spikes are sustainable over the longer-term, he believes they will settle above pre-pandemic levels.

"The telemedicine genie's kind of out of the bottle now, and I don't think there's any putting it back in," Hill said.