Following Siemens Healthineers AG’s announcement that it was picking up Varian Medical Systems Inc. for $16.4 billion, another multibillion-dollar deal has emerged. This time, Teladoc Health Inc. and Livongo Health Inc. have inked a definitive merger agreement with a value of $18.5 billion.

The transaction is expected to close by the end of the fourth quarter, subject to shareholder approvals and other customary closing conditions. The newly combined company will be called Teladoc Health and will be headquartered in Purchase, N.Y.

Cowen analyst Charles Rhyee saw the deal as making strategic sense. "First and foremost, the deal is another step forward in [Teladoc Health’s] expansion beyond its roots in urgent care, that included acquisitions of Best Doctors, Advance Medical and recently Intouch Health.” In addition, he views it has having the ability to deliver care in both chronic and acute settings.

“[Teladoc Health] has been building out capabilities in behavioral health and specialist care for several years, and this transaction accelerates [its] strategy to deliver whole-person care and further cements [its] position as the leader in virtual care.”

He also viewed the deal as “highly synergistic from a financial and distribution standpoint,” strengthening Teladoc Health’s foothold in the employer market and adding another entry point into payer and provider client for Livongo solutions, “given only 25% overlap in client base.”

Other terms

Under the terms of the agreement, which the board of both companies unanimously approved, each share of Livongo will be exchanged for 0.5920x shares of Teladoc Health plus cash consideration of $11.33 for each Livongo share. Upon the merger’s conclusion, existing Teladoc Health shareholders will own approximately 58% and existing Livongo shareholders will own about 42% of the combined company.

In addition, Jason Gorevic, current CEO of Teladoc Health, will take the helm of the combined company. Teladoc Health Chairman David Snow will lead the board, which will include eight members from the Teladoc Health board and five members from Livongo.

“This highly strategic combination will create the leader in consumer-centered virtual care and provides a unique opportunity to further accelerate the growth of our data-driven member platform and experience,” said Glen Tullman, Mountain View, Calif.-based Livongo’s founder and executive chairman. “By expanding the reach of Livongo’s pioneering Applied Health Signals platform and building on Teladoc Health’s end-to-end virtual care platform, we’ll empower more people to live better and healthier lives.”

In a note ahead of the deal, Morningstar highlighted Teladoc Health’s scale, as it is much bigger than competitors, which cannot offer on-demand physician visits. "Conversely, Teladoc's global infrastructure leveraging 50,000 credentialed providers is equipped to match patients within 10 minutes,” noted Soo Romanoff. “This rapid response time is the crux in avoiding costly visits to the emergency room.”

She added that payers previously have lagged in terms of telehealth adoptions vs. Self-funded employers, but recently pilots have shined a light on cost savings, “which will likely improve traction and the ability to further sell into existing customers (75 million lives).”

Livongo also brings a lot to the table, as was revealed its second-quarter results unveiled Aug. 5. Total revenue for the quarter was $91.9 million, up 125% year-over-year, which the company said was driven by the continued adoption of its Applied Health Signals platform.

In addition, it achieved certain performance milestones and service performance obligations that resulted in about $2.5 million of revenue. Excluding that nonrecurring revenue, second-quarter revenue increased 119% year-over-year.

During a call on the results, CEO Zane Burke noted that the company added more than 80,000 new Livongo for Diabetes members on a net basis during the second quarter.

“On a year-over-year basis, enrolled diabetes members grew by 113% for the first time, exceeding the $100 million level for quarterly EVA [estimated value of agreements], which came in at $109 million; signing new and expanded footprints with four Fortune 100 companies; we delivered adjusted EBITDA of $13.3 million in the second quarter and achieved our target of adjusted EBITDA profitability one year sooner than our plan; and we have captured approximately 750 million data points, which increased by more than 150 million data points during the quarter.”

Stakeholder benefits

During a call to discuss the deal, Gorevic highlighted the benefits for stakeholders, including consumers, payers and employers. “Enabled by technology and analytics and by the combination of fully digital interactions with virtual connections to physicians, together we will establish a deeper and more complete level of personalized care relationships, all fully integrated into the physical delivery system,” he explained. “The combined company's unique capabilities are a step change forward in our collective commitment to generating better health outcomes and delivering cost savings.”

He went on to highlight the achievements of the companies as standalone entities. For example, his company provides a broad platform of virtual care solutions through its physician and medical expert network. He emphasized the reach the company has both in the U.S. and internationally.

Livongo, for its part, aims to help people living with chronic conditions, including diabetes and hypertension. "[Its] approach has delivered meaningful improvement in clinical outcomes and cost savings for Livongo's clients, which include more than 30% of the Fortune 500 and a number of large health plans, while creating differentiated experiences and better quality of life for the people living with chronic conditions.”

Daniel Grosslight with Citi asked about how the combined company would further monetize the rich trove of data it would have. He further asked about data access and the interaction between Livongo's health coaches, Teladoc Health's doctors and the doctors that use Teladoc's provider software.

Gorevic replied that in bringing the two companies together, there was a shared vision in improving the consumer experience. "And so we're united in our view that the real purpose of the data is to drive better health for people,” Turning to providers, he envisioned the Livongo health coaches and Teladoc physicians working together seamlessly.

M&A came up during Teladoc Health’s July 29 second-quarter earnings call, when Jailendra Singh with Crédit Suisse asked about the company’s focus and potential opportunities. "I think our focus continues to be on expanding the markets that we serve and the clinical breadth of our product portfolio,” replied Gorevic. He added that the company is looking to expand its geographic footprint. "And we will continue to look to expand our clinical scope and the impact that we can have across the entire spectrum of clinical use cases and clinical needs.”

Along those lines, the duo hopes this deal will help meet this goal using “Teladoc Health's existing distribution channels to expand Livongo's solutions to an underpenetrated international marketplace,” Gorevic explained, highlighting his company’s success in broadening the reach of the Intouch Health platform.

In January, Teladoc Health reported an agreement to pick up Santa Barbara, Calif.-based Intouch Health, a provider of enterprise telehealth solutions for hospitals and health systems. The price tag was $600 million, consisting in about $150 million in cash and $450 million of Teladoc Health common stock. Teladoc Health reported the close of that buy July 1.

Also during the earnings call, Gorevic called out his company’s impressive revenue for the quarter, which grew 85% vs. the previous year to $241 million. “As a result of the increased demand for our services from clients and consumers as well as including the results of Intouch Health second half of the year, we are significantly raising forward guidance, including full year revenue guidance of $980 million to $995 million. This represents an increase of $170 million to $180 million over our prior range, including an organic increase of over $100 million,” he added.

Investors did not appear enthusiastic after word of the deal came out. By market close Wednesday, Teladoc (NYSE:TDOC) had fallen to $202.22 after closing $249.42 Aug. 4, a decline of almost 19%. Meanwhile, Livongo (NASDAQ:LVGO) reached a daily high of $150.00 after previously closing at $144.53. It ended up closing down at $127.72.

Still, digital health is doing well, even during the pandemic. The space reeled in $6.3 billion in funding in the first half of 2020, according to a new report from Mercom Capital Group. The record-setting, global haul was 24% higher than last year’s first-half raise of $5.1 billion.

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