We had a great discussion a couple months ago when I released my initial take on the TDOC/LVGO merger and my thoughts on the bear thesis.
Here’s my full Teladoc thesis where I do an in-depth analysis of the combined company and explore its potential to improve our healthcare system.
Happy to discuss further.
https://richardchu97.substack.com/p/teladoc-health-reshaping…
Richard
Richard,
This is an excellent and thorough write-up. I owned both LVGO and TDOC before the merger announcement and stayed with them post-announcement and bought more on price dips.
One reason is what you discussed in your conclusion:
Many of the most successful companies in the world began in niches and leveraged their competitive advantages to expand into adjacent markets: Amazon with books, . . . and Teladoc and Livongo are no exception, initially tackling urgent care and diabetes respectively with an unwavering commitment to delivering a superior consumer experience.
From what I had read earlier, including the TDOC Investor Presentation, I thought that the merger would allow the companies to expand in ways that would improve health care, including preventative care for patients, while keeping costs down.
Your presentation explains that aspect well and demonstrates the company’s potential beyond what the two separate companies currently do.
One highlight is the significance of the feedback loop and data. Amazon, Facebook, and Google have shown how valuable data can become, especially in allowing companies to expand.
On the patient side, having an end-to-end virtual care experience brings increased convenience from a single access point, seamless escalation to a Teladoc physician for acute care, and creates a powerful feedback loop when they leverage the continuous, rich data stream that Livongo provides to deliver personalized care. Data from Teladoc’s 10 million annual visits (in 2020) can also be combined with Livongo’s existing 750 million digital interactions to further fuel the machine learning algorithms powering its recommendation engine. As AI continues to play a larger role in healthcare, such a massive dataset is becoming increasingly valuable.
Another highlight is that the data has the potential to improve the level of care for patients by allowing providers to allocate resources more efficiently and reduce waste, thus lowering costs.
In the past, there were a number of times I sat for an hour or more waiting to see my doctor when I knew what I had and what the prescription would be. Many patients were in similar circumstances, and we could have been treated by a physician’s assistant or nurse practitioner, but the small practice didn’t have them. With strong tele-health networks, PA’s and NP’s as well as additional doctors can be available for both small and large practices.
However, the continuous monitoring that Livongo provides enables providers to identify and dedicate their precious resources to the patients that need it the most. This is especially relevant as the US is projected to face a shortage of between 54,100 and 139,000 physicians by 2033.
Another highlight is the potential to reduce costs. The U.S. has one of the most expensive health care systems in the world, but our health care outcomes are not the best. Your report notes that tele-health can lead to a focus on patient outcomes rather than focusing on the number of services. Part of this is due to the monitoring that LVGO brings to the company’s service. A doctor might advise a patient to make certain changes, but when the patient fails to do that, the doctor might order more tests and prescribe a drug to deal with the increased symptoms. However, LVGO offers feedback that can help the patient make those changes, thus avoiding the need for additional tests and expensive drugs.
About a quarter of health care spending, or a staggering $760 to $935 billion, can be considered waste, according to a 2019 report by JAMA. Further, it quantifies potential savings between $191 to $286 billion. A significant cause of waste comes from traditional fee-for-service payment models, where providers are incentivized to provide as many services to as many patients as possible, and not measured based on the quality of patient outcomes.
What’s especially exciting is the ability to provided multidisciplinary care practically anywhere. Until recently, this was only available in larger (or more progressive) cities. In my 50’s I dealt with two issues that were treated ineffectively because they were outside local doctors’ and several specialists’ areas of expertise. A friend in a large city told me about a clinic that used a multidisciplinary approach and with some internet search, I found a practice that successfully treated one condition, but I had to travel across the country. The second was resolved by a free video from a physical therapist’s clinic.
Not everyone can afford to travel as I did, so being able to offer more people access to teams that can share data and recognize a problem and solution that a single provider might not see is a benefit to patients.
Such a model would encourage the creation of integrated, multidisciplinary care teams that work together to improve cost efficiency at each step of the care journey and provide personalized care that creates better patient-level outcomes.
Furthermore, without traditional barriers like geographic distance or separate institutional affiliations, Teladoc’s provider network covering 450 sub-specialties can seamlessly refer patients and consult each other on treatment plans. Multidisciplinary care teams composed of primary care providers, Livongo health coaches, therapists, nutritionists, etc. can all collaborate on the same call for complex cases, informed by data, to get a holistic view of the patient’s health and thereby improve outcomes.
I recently watched a pod-cast with Beth Kindig, who discussed how she looked for trends where budgets and money are going. She mentioned that venture capitalists are allocating money into a private company that is trying to compete with TDOC, which tells her that TDOC “is probably a good stock right now.”
Your research sets forth a compelling case about why the TDOC/LVGO merger will create a company that is worth investing in both from the standpoint of increasing investors’ returns and of improving our health care.
All the best,
Raymond
I would like to add one optionality I have not seen discussed by the company, TDOC, which I find odd. The Expat addressable market. As an expat and getting very affordable care overseas we still consider US medicine a notch above the current country. Once air traffic is back enforce and people are traveling more TDOC should push harder to capture US overseas travelers who may not trust a local physician or want a second opinion from a US doctor. I know many expats that are weary of getting sick while traveling or living overseas.
Lets turn it into another revenue stream.
Puff
I finally had time to read Richard’s document, and it was very good. It got 75 recommendations, so I think others agreed.
One item that stood out to me was the following:
“as I mentioned before, there are significant barriers to entry in remote monitoring. Before buying Livongo, Teladoc evaluated building it in-house as well as acquiring three smaller RPM start-ups. But they didn’t because they were concerned about missing the market. If Teladoc couldn’t do it and paid such a premium for Livongo, despite having a massive 51 million-member base to distribute into, then there aren’t many other companies that I think can come close.”
I know we’ve talked about this before when the news first broke about the merger. It would take years (IMO) at this point for anyone to build a serious competitive offering to the complete package that is LVGO. TDOC acquiring them, in addition to all the other offerings TDOC already has, creates a major force in virtual care.
Long LVGO - excited for the future
“as I mentioned before, there are significant barriers to entry in remote monitoring. Before buying Livongo, Teladoc evaluated building it in-house as well as acquiring three smaller RPM start-ups. But they didn’t because they were concerned about missing the market. If Teladoc couldn’t do it and paid such a premium for Livongo, despite having a massive 51 million-member base to distribute into, then there aren’t many other companies that I think can come close.”
The highlighted snippet above is either a lie, a damn lie, or the writing of a person that doesn’t know what they are talking about. The fact is that Livongo and Teledoc advertised an 18% premium on the acquisition but the shares of Livongo fell like a lead ballon on the announcement of the merger.
My point is not to reflect on the future of Teledoc. My point is that Livongo management, which had a machine spinning off 100% quarter-over-quarter growth, sold the company at a discount, not a premium. For Livongo shareholders that have no interest in Teledoc, this merger is a travesty.
Lee
Lee,
Teladoc bought out Livongo at 29x next year’s sales. That’s what I was referring to. If you read the merger filing, Tullman negotiated hard with Gorevic to get that 10% premium as the stock price doubled over the course of negotiations after they pre-announced earnings. That Gorevic was willing to pay such a hefty price certainly warrants mention and is a big part of why shares “fell like a lead balloon”.
And instead of asking why Livongo management wanted to sell out with such a bright future (check Livongo’s stand-alone projections in the filing), maybe we should be asking what kind of future they thought Teladoc could offer them. That’s why it’s important to reflect on the future of Teladoc and why I wrote the article. This is an even better investment than stand-alone Livongo in my opinion.
And instead of asking why Livongo management wanted to sell out with such a bright future (check Livongo’s stand-alone projections in the filing), maybe we should be asking what kind of future they thought Teladoc could offer them. That’s why it’s important to reflect on the future of Teladoc and why I wrote the article. This is an even better investment than stand-alone Livongo in my opinion.
As a Livongo investor that has no interest in Teledoc, it matters not to me what the future brings in this merger. If you want to point out that Teledoc made a good purchase then I’m in agreement. Where I do not agree is that by any measure did Teledoc pay a premium to the market price Livongo was already fetching.
Lee
The highlighted snippet above is either a lie, a damn lie, or the writing of a person that doesn’t know what they are talking about.
Even if you are right that’s not a good reason to insult fellow Fools.
Denny Schlesinger
I had similar positions in both Teladoc and Livongo. If Teladoc overpaid for Livongo, I overpaid myself! 
Separately I liked Livongo better because even if everyone says it’s in the healthcare business, it’s really in the “saving money for healthcare payors” business which is a good reason for Teladoc to pay a premium. In any case, you can’t buy a company at market price by the simple law of supply and demand. A buyout creates lots of demand which pushes the price up. Often before a merger is initiated the buyer buys stock in the open market so as to get a better price. I don’t know if that was or not the case this merger.
Jointly I think Teladoc’s leading position is enhanced by the merger by synergies, economies of scale, and a wider moat.
Why the drop in price? Once the merger is announced the two stocks move in unison. The market seems to agree with me that Livongo on it’s own is a better investment than Teladoc or the merged company.
Denny Schlesinger
Even if you are right that’s not a good reason to insult fellow Fools.
I was unaware that a person on this board wrote that article, I thought it was an outsider. My apologies to the author.
Lee
The market seems to agree with me that Livongo on it’s own is a better investment than Teladoc or the merged company.
Besides the fact that I don’t think that statement could ever be proven conclusively or not, I trust that the management of Livongo knows the business much better than outside investors and unless one wants to make the argument that Livongo management only decided to merge out of personal gain, then I assume that they know their business much better than outside investors and they made the estimation that Livongo is better with Teladoc.
I have always felt that Livongo was the faster growing company but eventually Livongo was at risk of their growth petering out faster as a solo company because eventually we might see Apple, Google and maybe even Amazon jump into that game of monitoring chronic health conditions. Apple watch is just the start of Apple doing that: https://www.cnbc.com/2020/10/13/apple-could-win-big-in-healt…
Teladoc and Livongo together has much more of a chance of surviving battles with Apple (due to combined relationships with healthcare providers and insurance companies) and while the combined company will probably grow a bit slower, it will likely grow at a brisk pace for a lot longer.
Obviously, the grow for slower (but still fast growth) for longer appeals to longer term investors (Investors that wanted to invest for 5+ years) and the grow faster but possibly flame out faster in the face of competition appeals more to momentum investors and stock traders. At this point in time, whether a person likes the Livongo-Teladoc merger or not more reveals which type of investor a person is rather than the merits or lack thereof of the actual merger (which hasn’t even actually occurred yet).
Starrob
Besides the fact that I don’t think that statement could ever be proven conclusively or not, I trust that the management of Livongo knows the business much better than outside investors and unless one wants to make the argument that Livongo management only decided to merge out of personal gain, then I assume that they know their business much better than outside investors and they made the estimation that Livongo is better with Teladoc.
Just to be clear, I did not “make the argument that Livongo management only decided to merge out of personal gain.” What concerns me is only what the future holds and this is what I said about that, “Jointly I think Teladoc’s leading position is enhanced by the merger by synergies, economies of scale, and a wider moat.”
Obviously, the grow for slower (but still fast growth) for longer appeals to longer term investors (Investors that wanted to invest for 5+ years) and the grow faster but possibly flame out faster in the face of competition appeals more to momentum investors and stock traders. At this point in time, whether a person likes the Livongo-Teladoc merger or not more reveals which type of investor a person is rather than the merits or lack thereof of the actual merger (which hasn’t even actually occurred yet).
Obviously? Because separately I like Livongo better than Teladoc I sold TDOC and bought more LVGO. If the merger fails I get to keep the company I like better, if it goes through, I get an improved Teladoc.
Denny Schlesinger
What concerns me is only what the future holds and this is what I said about that, “Jointly I think Teladoc’s leading position is enhanced by the merger by synergies, economies of scale, and a wider moat.” (captainccs)
Denny, I have learned a lot from your posts, and have the utmost respect for you. However, in this instance, I think your reply is not responsive to what Starrob wrote. Starrob was addressing a comment about whether Livongo on its own is better than Teladoc or the merged company. Your response quoted above appears to address whether Teladoc is better on its own or with the merger.
–SB
Denny, I have learned a lot from your posts, and have the utmost respect for you. However, in this instance, I think your reply is not responsive to what Starrob wrote. Starrob was addressing a comment about whether Livongo on its own is better than Teladoc or the merged company. Your response quoted above appears to address whether Teladoc is better on its own or with the merger.
First of all, thanks for the kind words! I’ve already said that I like Livongo better than Teladoc as an investment. That only leaves “is Livongo better than the merged company?” That’s a hypothetical question because they cannot coexist. Instead of answering the hypothetical I detailed my actions, “Because separately I like Livongo better than Teladoc I sold TDOC and bought more LVGO. If the merger fails I get to keep the company I like better, if it goes through, I get an improved Teladoc.”
GrowthConvert’s post No. 72747 asks for thoughts about Livongo’s upcoming earnings report. I considered a reply and decided not to. I would have replied that overthinking is not a good idea. The same applies to the Livongo/Teladoc merger proposal, the speculation about the “sellout” because Livongo is about to crash and “the rats are leaving the sinking ship.” That thought not only is incompatible with liking Livongo better than Teladoc but one could easily argue the opposite, that Livongo’s mission is better accomplished merged with TELADOC than on its own.
What is the purpose of all this overthinking? To formulate some plan of action. I already executed mine on September 30 with less speculation. KISS applies, keep it simple stu!
I hope that helps.
Denny Schlesinger
Just as a example of my contention that a Teladoc-Livongo combo probably could grow probably could grow at a relatively above average rate for far longer on its own, analyst Sean Wieland from Piper Sandler (Tipranks rating 4.9) said this commentary today:
It calls the telehealth solutions provider a “virtual care powerhouse” that can sustain a 28.5% compounded annual growth rate (CAGR) in revenue through 2040.
Read More: https://seekingalpha.com/news/3627201-piper-ultra-bullish-on…
Here is the same commentary on the Fly: https://thefly.com/landingPageNews.php?id=3183168&headli…
I don’t know if anyone else expected 28.5% CAGR from Livongo for 20 years but I certainly did not factor that type of growth into a stand alone Livongo. I always figured Livongo might have better growth than Teladoc as separate companies for maybe at most five years but eventually I thought Livongo was going to either flame out on growth or get acquired by some company like Google, Apple or Amazon or eventually have their growth stymied by Google, Apple or Amazon or eventually have to compete against Teladoc who probably would have created a competing product and Livongo had decent odds of being a loser in all those battles as a standalone company over the longer term. Livongo might have even had difficulties just solely competing against Teladoc (who had previous designs on entering Livongo’s space) as I believe Teladoc has a richer set of relationships with blue chip insurers.
Also, even Teladoc, solely on its own might have run into problems with the eventual entry of Google and Apple into healthcare. Even a Teladoc-Livongo combo will likely have stiff competition down the road from either Apple or Google or both and neither company would have likely survived that competition on its own but has a chance together. Give this full article titled Move Over, Teladoc: Are Google and Apple the Future of Telehealth? a good read: https://www.fool.com/investing/2020/10/04/move-over-teladoc-…
My contention is that both the Teladoc CEO and the Livongo CEO know the business better than outside investors and while outside investors are concerned with blazing growth in the near term, I believe both companies CEOs were concerned more with impactful viability over the long term.
Starrob