Introduction
Last week, the Teladoc (TDOC) and Livongo (LVGO) merger was completed. That means that Livongo doesn't trade anymore. If you still had your Livongo shares, you got (or will get if your broker is a bit slower) 0.5920 per share of Livongo in Teladoc shares plus cash of $11.33, paid with a special dividend of $7.09 on October 29th, and the rest when your shares were changed to Teladoc shares.
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As a former shareholder of Livongo, you may not be completely familiar with how Teladoc is positioned now. If there is a buy-out or a merger, that always generates mixed feelings, or at least it should. If it doesn't, it means that you had a bad stock in your portfolio.
With Potential Multibaggers, my marketplace service here on Seeking Alpha, I try to find multibaggers early on. I picked Livongo as a Potential Multibagger on December 26, 2019. The stock then traded at $24.86 and had a market cap of just $2.5B. The stock returned 462.2%, so it's more than a fivebagger in less than a year. But still, quite a few shareholders, from both companies, didn't feel great about the merger.
I think Teladoc could still be a multibagger at this point for patient investors. I think most investors underestimate that this combined company could represent the future of our healthcare system. In this article, written from a bird's eye perspective, I will try to explain why.
What's wrong with the healthcare system
I think a lot of people know that the American healthcare system (and that of most Western countries) is unsustainable. It's too expensive but nobody seems to find a way out to cut costs.
The problem is that our healthcare is one of the last sectors that has not been disrupted by tech yet. The system originates from a time when bigger was better because it was more affordable to have standard procedures. Long ago, there was a family doctor and he knew you and you knew him and you had a personal relationship with that man (female doctors almost didn't exist back then).
After the Second World War, two evolutions emerged that made this system unsustainable: people reached a higher and higher age and the Baby Boomers were born. That put pressure on both ends of the healthcare system and the solutions were more scale and introducing standard procedures, so the productivity of healthcare workers became higher. Specialized care also contributed to more efficiency. And it worked.
But there was a side effect. People don't feel connected to the people that should care for them. They often feel treated like numbers, like patients at best, but mostly not like individual people. I'm not throwing a stone here at doctors, nurses and other healthcare workers. They often share that feeling. They don't have the time to deeply care about people. Their time is limited, they have to reach the quota. A doctor is not paid for listening to you. He's paid per patient that he handles. In other words, the less he or she listens, the more the doctor is incentivized. And that wears out a lot of healthcare workers.
Normally, such a market would correct itself. If you are not properly served in Lowe's (LOW), you go to Home Depot (HD) or the other way around. If one is really not giving enough attention to its clients, the company will go bankrupt eventually. That's where the efficiency of the market plays its role.
But in healthcare, the patients are not the customers. They are the goods, as it were. Customers are the paying party. And who pays for healthcare costs? Exactly, the insurance companies. Their only objective is as little costs as possible and that's why they pay per visit, for example.
But this creates the strange effect that a doctor that treats you very well is only paid once, while a bad doctor, who follows the wrong procedure and has to repair the damage or gives the wrong diagnosis, is rewarded each time he or she treats you and so earns more money than the good doctor.
How we can fix healthcare
To fix the healthcare system, a little reparation here and there won't help. We saw in the last decades that tech has entered almost every industry and has disrupted industries completely. Think of how Amazon (AMZN) made Sears obsolete. The same thing should (and probably will) happen in healthcare.
Disruption comes from the Latin verb 'disrumpere', which means to break apart and that is what healthcare needs: breaking things apart to build them up again. The bottom line of every healthcare reform should be to use tech and turn the system upside down. Health should be rewarded and paid for, not sickness.
All insurance is meant for emergency cases, except for healthcare insurance. Doctors are incentivized to do as many consults and tests as possible because someone makes money on that: the doctor himself or the hospital, mostly both. A hospital, for example, makes 10 or 20 times more money if you go to the emergency room than if you use an online platform to talk to a telehealth doctor.
As a patient, if you see a doctor, most of that little time you spend with him or her is dedicated to tests, collecting data. But suppose the doctor already would have all the data when you come in and he or she has already been able to look into your case, your history, and tens of up-to-date data points before you came in, that doctor could have time for that which we all crave when we visit a doctor: talking about what you exactly have and what it means, what we can do to get better, a discussion about what the underlying cause could be, talking about the psychological effects that your condition brings with it, what the best plan of action would be for you, etc. In other words, the doctor could become some kind of health coach, a professional that, with the help of precise data, could prescribe a trajectory to better health, hold you accountable, help you when sticking to the plan is tough etc. A doctor could partly become a real healthcare worker, not just a sickcare worker.
That would mean that you wouldn't have to visit a doctor as often. If you have a chronic condition, you could be monitored 24/7 by sensors, assisted by AI, as Livongo does for diabetes. You are not only monitored but you also get health nudges. That means that you would know exactly what is the right path for you. And that path is much more individualized than most people can imagine.
Hemant Taneja, a venture capitalist of General Catalyst who founded Livongo with Glen Tullman, calls this new space in healthcare 'health assurance'.
(Hemant Taneja, right, together with Livongo founder Glen Tullman, source)
Taneja is convinced that health assurance industry will see several $100B+ companies. I suspect that he was the great driving force behind the Livongo/Teladoc merger, together with Glen Tullman. They realized that Livongo can become so much more combined with Teladoc than on its own.
This is how health assurance is defined:
Health assurance is an emerging category of consumer-centric, data-driven healthcare services that are designed to bend the cost curve of care and help us stay well. Built on the principles of open technology standards, these services employ empathetic user design and responsible AI. This is the future of your health experience.
If you want to know more about this, you could read Taneja's interesting book Unhealthcare.
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Livongo's surplus to Teladoc
Now that you know the basics of the concept of health assurance, I think you can see the potential for Teladoc and Livongo in this market. There is no company that is as well-positioned as the combination of Teladoc and Livongo. Livongo brings measuring, data collection and especially AI to the table, Teladoc has a worldwide network of telehealth.
Investors who just see what there is now could get scared away from Teladoc. They look at the number of telehealth visits that could slow down after the peak of the coronavirus and they are afraid that Teladoc will just have been a COVID-19-induced fad. But if you look at the future, you see that this company could be in the sweet spot when healthcare will be disrupted over the next decade.
Insurance companies will help them with this. As we have already seen, they just want to pay as little as possible. Livongo saved insurance companies $88 per patient per month. The reason: the monitoring of diabetes patients, the fact that they have a diabetes coach that is always available and the health nudges reduce the medical costs dramatically. $88 per patient per month means more than $1,000 per year per patient. I think you see the potential.
Besides that, the patients also feel freer than before. Their diabetes doesn't control their lives as much. They need less medication and if they need it, the data will indicate it before the attack.
This is just for diabetes. That's already a big market. But Livongo doesn't just focus on diabetes but also on hypertension and obesity. Those are two huge markets as well. The hypertension market is estimated to be $23B in 2026 and the obesity treatment market is estimated to be around $20B in 2026. But suppose you add the weight loss market to this, which is worth about $70B in the US alone, and you can see the potential.
The obesity-related healthcare costs are estimated at around $147B annually, so this might mean big savings for healthcare spending.
There will certainly be other companies in this space than just Livongo and Teladoc, companies that will also focus on other domains, but so far, I don't see any competitor that is as advanced as Livongo/Teladoc is.
What Teladoc could become
When I pick a Potential Multibagger, I turn a company inside out and that means that I know Livongo, its founders Glen Tullman and Hemant Taneja and what the company exactly does really well.
I didn't know Teladoc as well before the merger was announced. I had it on my watchlist, but I had not done a really deep dive. When I did, I found a lot that I liked. This statement by Teladoc's CEO Jason Gorevic on the closing of the merger is worth reading word for word if you want to understand the combination of the companies:
Both Teladoc Health and Livongo were founded with the same mission: to create a new kind of healthcare experience, one that empowers people everywhere to live their healthiest life. Today's news (the merger, FGTV) dramatically accelerates our ability to make this a reality for the tens of millions of consumers and healthcare professionals we serve around the world. Together, our team will achieve the full promise of whole-person virtual care, leveraging our combined applied analytics, expert guidance and connected technology to deliver, enable and empower better health outcomes."
There are a few critical phrases here. Let's look at them one by one.
"a new kind of healthcare experience" This is the disruption that I mentioned. Not just fine-tuning the current system, but a completely fresh start.
"one that empowers people everywhere to live their healthiest life".
This is the health assurance that I was talking about. Helping people to live their healthiest life is the reverse of what the current healthcare system thrives on. Empowerment means that people will be able to decide for themselves and take their health into their own hands. The 'everywhere' in this phrase refers to the global footprint Teladoc has.
"whole-person virtual care"
This refers to everything from health assurance to data, treatment plans, health nudges, and specialized diagnosis and surgery. Teladoc/Livongo will be the only one-stop-shop for taking your healthcare into your own hands. Healthcare is one of the few paternalistic sectors left. Paternalistic here means: "We know everything, you don't. Your only function is to give us the money and shut up."
Again, that's not throwing a stone to healthcare workers. I have a really, really deep respect for the people working in healthcare and this pandemic has highlighted even more how crucial they are. Several of my friends work in the sector.
They actually often feel the same frustration as patients. They don't have enough time to really listen, which would help them to diagnose more accurately, they have to do too much administration, they lose precious time gathering simple data and there are no efficient follow-up programs. Most healthcare workers would love to have the time to establish a human connection with each of their patients and listen to every detail that could count. But there is just no time. That's why a lot of people seek help from all kinds of coaches.
This is Teladoc's representation of whole-person care:
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Let's look into this in a bit more detail.
The personalization of healthcare
As you see from the graph, and I think this is really important, the category Wellness and Prevention is included in that care too. It is explained as 'Complete regular screenings and improve nutrition, exercise and well-being'. That means planning your health.
No company flies blindly and every company has a clearly-defined goal for the future often with step-by-step roadmaps. But for health, the advice is often: "Eat well and exercise." That's like saying to a company: "Execute well and make money." In other words, although it's true, it's too general.
A personal note here to illustrate what I mean. For years, I was very tired and I had trouble staying awake after meals or after drinking coffee. The advice I got from my doctors? Eat healthily, do regular exercise.
I found out 5 years ago that I have a milk allergy but I had to find out all about what it meant for my life (dairy-free cooking, avoiding almost all cookies, but also potato chips etc.) on my own. It would have been great to have a specialist that could have coached me there.
The example of my own life is just to illustrate the truth about healthcare that we all intuitively know but that is not acknowledged enough under this system: we are all individuals, with our differences, our unique needs. In stock terms, we are as different as a steel producer stock and a SaaS stock. I'm a man of 6 feet and 5 inches and almost always, I get the same dose of medicine as a woman of barely 5 feet high.
We are on the brink of other breakthroughs in healthcare: stem cell therapy, gene therapy, cheap genome sequencing, CRISPR, and many more. All these trends point in one direction: individualized healthcare. Medicine will not be a mass-produced, mass-prescribed drug anymore. We will evolve to personalized medicine.
Initially, people will be split into different groups based on certain data points (age, weight, condition...) and later it will be really about you, the individual. Your genome, your microbiome, your allergies, your reactions to certain drugs, everything will be known and taken into account for your prescription. Lots of medicines contain milk, for example, as a filling agent. Each time again, I have to say this to a doctor and sometimes there are even no medicines on the market without milk. These will be produced in the individualized healthcare that will come, if only for me. Medicines will be prepared on who you are, not on who the masses are.
But it will be much more than just medicines. Which supplements should you take? What is the perfect exercise regimen for your type of body? How could you build up your condition for that marathon or triathlon you always dreamed of without the risk of an injury because of your specific body composition? What are the best shoes for your feet so they can be 3D-printed? What is the best diet for the specific microbes that you have in your gut? What are the diseases you are genetically susceptible to and what can you change in your lifestyle to prevent them?
Don't get me wrong, I'm not a pie-in-the sky thinker. This will not be for the first years, of course not. And at first, it could be unevenly distributed, as a lot has been throughout healthcare's history. The first individualized programs could come with a hefty price ticket. But probably that will democratize, as a lot of procedures have in healthcare. Or maybe it will democratize from the start but with different degrees of quality, a bit like smartwatches.
The medical know-how of Teladoc, its wide network of doctors and health specialists, combined with Livongo's AI, data gathering and processing capabilities, make that this company is, like no other that I know, prepared for the future of healthcare.
I haven't seen any other AI healthcare platform that even comes close to that of Livongo at this point. With its AI+AI approach (aggregate, interpret + apply, iterate) it has already learned a lot, both from the whole pool of patients as from individual patients. With more patients because of the merger, there will be more data and more data means more insights and new products over time.
And Livongo will double down on its AI and data analysis. Revealera.com is a website that looks at jobs, job openings and it tries to find relevant information from these data.
It showed that of all publicly-traded companies, Livongo had the highest percentage of job openings that require data science and machine learning. 16% of Livongo's jobs openings ask for experience in those fields.
This clearly shows to me that Teladoc/Livongo is skating where the puck will be, not just where it is.
Synergies between Livongo and Teladoc
If you look at the combination of the two companies that merged, you can see that they are very complementary. These are Teladoc's key growth strategies and in blue, Livongo could help to accelerate Teladoc's strategy:
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The companies estimate that there will be $500M in synergies.
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Now, I know that it's all too common in an acquisition or a merger to overestimate these synergies by a wide margin. But in this case, I think the synergy opportunities are actually very conservative. The companies even acknowledge that in their merger presentation:
There will be a lot of cross-selling, as there is only a 25% overlap in the customers of the companies. Even before the merger officially was closed, Livongo was cross-sold in two deals already by Teladoc.
The first deal was Fresenius Medical Care, a company specialized in working with patients that suffer from CKD (chronic kidney disease). Partnerships and distribution are quintessential in healthcare and in its field, Fresenius is a big player. It provides dialysis for 347,000 kidney patients. The press release of Fresenius explains:
This marks the first time Livongo will use its robust virtual care solutions to specifically support those with CKD and is a significant step forward in Fresenius Medical Care's efforts to provide a more coordinated care experience. With earlier intervention, Fresenius Health Partners also seeks to increase optimal dialysis starts, as well as offer earlier evaluation of transplantation and home dialysis options.
This shows that the possibilities for Livongo to branch out are numerous.
The second deal was with Florida Blue, part of GuideWell Mutual Holding. Together with its merging partner Teladoc, Livongo will offer Florida Blue members with diabetes virtual care, including connected devices, advanced data science, and telehealth.
Being the only one-stop-shop for digital healthcare will provide Teladoc/Livongo with a competitive advantage that others simply don't have at the moment. The companies shared an example about Claire, an imaginary future client. You can see the different stages and situations in which she can be helped by Teladoc after the merger with Livongo:
As you can see, there is not a single moment in the whole process that Claire has to leave the platform. In this way, Teladoc and Livongo show that they are very complimentary. And the data component of Livongo, combined with preventive healthcare, gives Teladoc a lot of flexibility to introduce even more products, each one more and more targeted and eventually personalized.
Risks
There are risks to every investment, of course, although I generally believe that too many investors overemphasize risk. What is risk? Risk is not the same as volatility, no matter what some want you to believe. Volatility is risky if you are a short-term investor. If you need the money in 2 years, volatility is a risk. But if you need the money in, let's say, 20 years, why would it matter if a certain stock is up or down 50% this year or the next?
If you read the great book 100 baggers by Chris Mayer, you'll see that ALL (!) of the 100 baggers (stocks that turn your $10K into $1M) saw drops of 50% and more at least once. Most several times, and often they dropped substantially more than 50%.
Risk is the chance that you will lose your money permanently, not volatility. That also means that you should look at risks in their context. All companies make mistakes and if you sell because of a mistake, you'll never find multibaggers. Do I need to remind you of the Amazon Fire phone, the Netflix Quikster failure, the Windows phone, Google Plus and so many more mistakes? Don't let one failed product mislead you. The company as a whole is much more important.
Having said that, what will I keep my eyes on for Teladoc?
First, I want to see that Livongo really has an impact on Teladoc because health assurance is more a part of what Livongo does right now. There is a risk that Teladoc doesn't leverage Livongo's capacities enough.
The second element that I will watch is how the two companies work together when it comes to company culture. Teladoc has a good tracking record when it comes to acquisitions and giving them a place where they feel good inside of the company but this merger with Livongo is on a whole different level. I see some good signs because Teladoc CEO Jason Gorevic and Livongo's founder and executive chairman have already come out together several times and the two seem to share the same vision.
The third and final element of risk that I want to touch on is competition. At this moment, I don't see any competitor that is even close to Teladoc after the merger with Livongo but that can always change fast, of course. On the other hand, this market is so big that there will be several winners. And the size of the market, that's the next topic of this article.
A huge TAM
The market cap of the combined company is around $30B at this moment. For Potential Multibagger stocks, I want to see the possibility that the stock could be a tenbagger in the next 10 years. For Teladoc, I think this is still possible, despite its already substantial market cap. The company has everything it needs to start a new era in healthcare as I showed, and it's in a gigantic market. This is the title of recent research:
Global Digital Health Market was Valued at USD 111.4 billion in 2019 and is Expected to Reach USD 510.4 billion by 2025, Observing a CAGR of 29.0% during 2020-2025
Teladoc operates in a TAM (total addressable market) of $510B in 2025 and at this moment it is the only 360° digital health company. That's a great position to be in. For those who wouldn't know: TAM is the yearly total addressable market. The fact that Teladoc projects a CAGR (compound annual growth rate) of 30% to 40% seems conservative to me. If you would add the synergies, it will be at least to the higher end of that margin, in my opinion.
If Teladoc could just bring in 3% of that TAM of 2025, that would already mean $15.3B. If you slap a P/S ratio of 20 on that, you already have a company with a market cap of more than $300B. A P/S of 20 might seem aggressive but for a company growing at more than 30% per year and gross margins which will probably be in the mid-70s, I think it's very reasonable. You can tinker with the numbers but the conclusion to me is always that if Teladoc executes well, it has the potential to become a giant.
I'm not saying that the company will already have 3% of the global digital health market by 2025, mind you. I think revenue of 1% of the TAM, about $5.1B, is possible at that moment, though, and much more growth will be in the pipeline.
Conclusion
There are always a lot of ifs but when I look at Teladoc, I can see the potential to become really big, ten times or more bigger than today.
With a lot of healthcare disruption knocking at the door, such as cheap genome sequencing, CRISPR, personalized medicines and much more, data will become more and more important for healthcare. Livongo's AI will add that to Teladoc.
The combination of Teladoc and Livongo definitely has the first-mover advantage in a very important and big emerging market because it can provide a 360 degrees one-stop-shop for personalized digital healthcare.