Perhaps it’s Reflections in a Gimlet Eye, but this Editor remains bemused and slightly dyspeptic about the acquisition of ‘health signals’ remote patient monitoring management platform Livongo by telehealth giant Teladoc.
Here’s the latest, courtesy of Credit Suisse equity research analyst Jailendra Singh on deal rationale and the potential synergies, based on his Q&A with Teladoc and Livongo management (link here):
- Livongo: “The company was not for sale, and LVGO did not view the transaction with TDOC as a sale. Instead, management views the deal as a merger of the two leaders in virtual care.”
- It had nothing to do with pressure from CVS and UnitedHealth Group (UNH).
- There are major cross-selling opportunities, starting with an overlap of 25 percent of their clients. There are also opportunities with the InTouch Health client base in acute care, Aetna plus UNH on the health plan side, and employer administrative services only (ASO) plans. This is part of the calculation of synergies totaling $500 million in 2025 which they believe are conservative given the math.
- They are also seeking to approach their client base before the closing through a reseller agreement, as Teladoc was able to do with InTouch.
Mr. Singh’s analysis is conservative and sober from a strictly financial viewpoint. His two-page analysis is, as usual, worth the read.
But then we stumble across one particularly helium-charged claim. It’s projected that Teladoc and Livongo would have a combined company market cap of $38 bn, whereas the pre-pandemic value of the companies was $8 bn. (Steve Kraus, Partner at Bessemer Venture Partners, quoted in Forbes). That is optimistic, considering that patient primary care virtual visits have flattened down to about 7.4 percent of visits as of June (Commonwealth Fund/Harvard/Phreesia study). It’s assuming a great deal that people will continue to shy away from in-person care going forward. Perhaps to a degree this will, as in-person fear is only starting to flatten, but not everything can be done virtually, even RPM.
Livongo’s great asset, which was understandably compelling for Teladoc, is chronic condition management, RPM, and all that data, which can be broadened past their diabetes base (with a small one in behavioral health courtesy of their myStrength acquisition). But to be determined is how compelling this will be for Teladoc’s customer base and for new customers, particularly if the economic environment is constrained and health plans don’t get on board.
So why is Mr. Market not mad about this ‘merger’? TDOC has taken a spill since its close on 4 August at $249, and is trading below $200 at $193. LVGO took a lesser hit, from $144 to $121. Another Bessemer Venture Partners investor, Morgan Cheatham, stated in the Forbes article linked above that “the company had a real shot at becoming a $100 billion business by running the ‘digital hospital’ playbook. In some ways, the acquisition feels premature.” Teladoc’s COO David Sides also promised that the combined company will aid practices in the transition from hospital to home care and touts the consumer focus of both companies. (Have they consulted already burdened and strained providers how this can be made easier for them and fit into value-based care models as well as their financials?) But they may have to make more acquisitions to facilitate this. So $18.5 billion plus $1 bn for InTouch isn’t enough to get the job done?
Reminder: to date, neither company has been profitable.
So, what does this mean for other digital health companies? Initially, it’s quite positive that Teladoc could round up nearly $20bn in six months. John Halamka MD, a well-known digital health visionary now at Mayo Clinic, sees it as a bridge to the digital health ecosystem including other companies. A contrarian view was expressed by Mr. Cheatham. Teladoc-Livongo is a challenge for other digital health companies in that they won’t, and cannot, be Teladocs and Livongos–in other words, an unrealistically high bar for them. “Why can’t Telavongo build this?”
Finally, a personal and slightly jaundiced view from this Editor. Let’s take a good hard look at the Human Factors. This is an acquisition by Teladoc of smaller Livongo, despite the merger statements. Employees in both companies are wondering who will go, who will stay, who they will report to if they stay, and where they will be. They have about four to six months to mull this and plan their future at a tough time to do so. This will — not may, will–have an effect on operations and attitudes, especially at Livongo. There are some doubleplus ungood signs that question this assumption:
- Jennifer Schneider, MD, president of Livongo, has stated that both companies are currently hiring and don’t plan layoffs as a result of the merger (Becker’s Health IT). Anyone who has been through a merger knows there are overlapping areas such as HR, marketing, and financial. There are only so many chairs at the organizational table especially at the director and above level. And all the happy talk doesn’t change the reality that not everyone will be given the option to stay.
- Statements on similar cultures notwithstanding, the fact is that both companies have different cultures and experiences because they have radically different histories and personalities running them. This Editor would suspect that Livongo employees, having come up in a young and smaller company, have a great identification with Livongo and pride in their success.
- Not one Livongo senior executive was named publicly as taking a new operational role in the merged entity. (Board seats don’t count.)
- The HQ will be in Purchase. Most Livongo employees are in California.
- The company will be named Teladoc and will not be renamed.
One would hope that both companies make every effort to reorganize the company staffs in a way where layoffs are minimal, those who are packaged out are treated generously, but better, valued employees from both companies are retained in a fair and unbiased evaluative process in how they support their businesses presently and going forward. But this is not typically the case.
One would also hope that the clients and individuals who pay the bills were told, timed with the public announcement, that this was happening and what it means for them. Leaving them to read it online is usually what happens. It’s not automatic, and I’ve seen this treated as an afterthought in both large companies and small, with line of business folks scrambling to put together, and get approved, a statement. This is typically the case, as communications apparently cease to be a priority at the market/LOB level.