Gorevic, Chief Executive Officer of telehealth firm Teladoc, celebrates after ringing a ceremonial bell for the company's IPO on the floor of the New York Stock Exchange

  • The telehealth giant Teladoc is acquiring Livongo, a chronic-care company, in an $18.5 billion deal.
  • It's the biggest deal that digital health has ever seen, several analysts told Business Insider.
  • More importantly, it could change the future of healthcare by combining patients' coaching, physicians, prescriptions, and data under one umbrella for tens of millions of patients.
  • Visit Business Insider's homepage for more stories.

Two of the biggest digital health companies are combining in a record-breaking deal for the industry, in a transaction that one analyst said could prove to be more significant than the oft-touted ambitions of tech giants like Amazon.

Teladoc Health, a giant telehealth company, agreed on Wednesday to acquire Livongo Health in an $18.5 billion deal. Livongo delivers online care for chronic conditions, and helps more than 410,000 patients manage their diabetes.

The deal "truly transforms and digitizes healthcare," said David Larsen, an analyst at Verity Research. "While Amazon and other large entities in industry have talked about wanting to revolutionize healthcare, and lower its costs while improving value, this deal will actually deliver on that objective."

The deal eclipses previous digital health transactions, like Amazon's purchase of online pharmacy PillPack, and Google's $2.1 billion bid for FitBit, said Forrester's Arielle Trzcinski. In fact, the next-largest deal falls short by roughly $7.5 billion, according to Stephanie Davis, an analyst at SVB Leerink. That was last month, when MultiPlan went public in an $11 billion transaction with investment company Churchill Capital.

It's a testament to the many ways in which the coronavirus pandemic made healthcare more digital.

Clinical trials are being conducted over iPhones. Hospitals are doing more things online with help from Amazon, Microsoft, and Google. Roughly 43% of patients worldwide have tried telehealth, with most saying they want to keep using the technology in the future. 

Read more: We spoke to Amazon, Microsoft, Google, and 9 top healthcare leaders. They all said coronavirus is creating a new and permanent foothold for tech giants in the $3.6 trillion industry.

Coronavirus-related demand has boosted both Teladoc and Livongo, recent earnings reports show. Year over year, their quarterly revenues grew by 85% and 125%, respectively.

The deal announced on Wednesday is made up of cash and stock: for each Livongo share, Teladoc is paying $11.33 and 0.5920 Teladoc shares. The transaction is slated to close by the end of the year, the announcement said.

Teladoc, which works with 70 million patients in the US alone, didn't have much in the way of chronic care management. Instead, it typically does one-off visits to help patients who are sick or who want a skin condition examined, for example.

Through combining with Livongo, the idea is to create a single online source for almost any medical need, Jason Gorevic, the CEO of Teladoc, told Business Insider. Gorevic will be CEO of the combined firm after the deal closes.

The companies will also collect and analyze data based on technology developed by Livongo that can help the two companies chart out care plans for individuals and render bigger insights about healthcare, they told BI.

"The time is now for this combination," Gorevic said. "The adoption curve of virtual care and the maturity curve of virtual care have accelerated by several years during this pandemic."

Livongo, meanwhile, could help patients monitor their health and provide coaching, but generally didn't connect them with doctors, said Dr. Jennifer Scheider, Livongo's president.

"This allows us to give that step therapy through partnership at a scale that's very different from the other telehealth vendors, because of the tremendous number of lives the Teladoc has covered," she said. 

Some investors are wary of the sticker price

At $18.5 billion — and with Livongo's stock up more than 330% year to date as of Tuesday — Wall Street winced at the sticker price Teladoc is paying for a program it probably could have built internally for much less money, Jared Holz, a healthcare analyst at Jefferies, told Business Insider.

The telehealth giant's stock was down 15% on news of the merger as of Wednesday afternoon, likely for that reason, Holz said. While it's a good move for Teladoc, making it a global healthcare power player, valuations of both companies are likely inflated, he said. 

"To put capital to work with a stock at an all time high is probably not that surprising," Holz said. "I think what's surprising is they decided to buy another company with a similar, potentially stretched valuation to begin with."

Plus the deal price represents a 10% premium on Livongo's prior close, leading to market pushback, SVB Leerink's Davis wrote in a note to investors. 

However, she noted that consolidating these options for online care makes sense for all involved, from employers looking for holistic health plans to end-users who'd prefer one app instead of several. 

On the other hand, bigger can be better

The acquisition of Livongo makes Teladoc roughly nine times the size of its next closest competitor, Sean Dodge, a healthcare analyst at RBC Capital Markets, told Business Insider. 

That gives Teladoc more tools for what's still a growing opportunity in virtual health, he said. Despite the boost from the pandemic, only a small fraction of care is carried out online, even though up to half of it could be, per RBC's estimates. 

The merger also expands Teladoc's focus away from just urgent medical needs, he said. Some of the company's core business prior to this included working with health systems to help them care for patients, and treating mental health, hypertension, and lower back pain, Teladoc's Gorevic said.

But chronic conditions can cost the US $1.1 trillion each year, the equivalent of 6% of GDP, a 2016 report by the Milken Institute showed. That's a big part of the healthcare pie that's gone unaddressed by big telehealth vendors, but an area that Livongo specializes in.

"This lets them now address the people that are really sick and are big spenders of healthcare dollars," Dodge said. 

'This combined platform truly gives the entire world a digital healthcare solution'

The disjointed nature of the US healthcare system probably can't be overstated, and it extends to care that's delivered online. Patients can be using one app for their mental health, another for their diabetes, and another for urgent care needs, all with differing reimbursement from their health plans. 

In the new arrangement with Teladoc and Livongo, things could be different. Members could be passed from coaches to physicians as needed, get access to their own primary care physician, and have prescriptions written for them all in the same Teladoc-organized network, according to Larsen at Verity Research.

That's more disruptive than Amazon and other large entities that have only talked about revolutionizing healthcare, he wrote in a research note on Wednesday.

"And this combined platform truly gives the entire world a digital healthcare solution," Larsen said.

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