Livongo Health Will Be a Buy As It Merges With Teladoc

Shares of Livongo Health NASDAQ: LVGO are up 6% in early trading as investors are celebrating the company’s stellar earnings report. Livongo shattered earnings expectations by posting earnings of 11 cents per share. Analysts were forecasting negative earnings of 6 cents per share. Revenue came in equally strong as the company posted $91.9 million, easily outpacing expectations for $86.8 million.  

But the strong report was still overshadowed as investors continue to digest the announcement of its merger with Teladoc Health NYSE: TDOC. Shares had initially tumbled on August 5 as some analysts felt that the $18.5 billion price tag that Teladoc is paying may be too much for a stock that is already up 434% in 2020.

However, conventional wisdom is turning bullish. And with good reason. According to Grand View Research, the global digital health market grew from $95.8 billion in 2018 to $114.5 billion in 2019. And this year that number is expected to reach $144.4 billion.

The Covid-19 pandemic is a catalyst for telehealth

The need and or desire to stay at home has expanded the use of e-commerce. And this has rewarded the companies that had a strong e-commerce presence before the pandemic.

The same dynamic is working out in telehealth. Some patients were reluctant to use telehealth for a variety of reasons. However, with many doctors offices closed, telehealth services have become not only a viable option but, in some cases, the only option.

In an interview with CNBC, Brian Cuneo, global co-chair of the life sciences and health care group at the law firm Latham & Watkins made these remarks, “What we’ve seen with COVID is its been the catalyst in many ways for people to rethink lots of different areas of life, and access to and delivery of health care is one of the first and foremost.”

By itself, Livongo isn’t a perfect fit for the doctor-patient virtual visit model. The company comes at telehealth a little differently from Teladoc. Livongo sells personalized coaching services to employers and health systems. Those customers then offer Livongo’s services to their employees and/or members. At the end of March, Livongo had expanded its client base to 1,328 clients – a 6% sequential increase.

The company’s popular product, which was also its proof of concept, is diabetes management. And it currently has 410,000 members, a 113% year-over-year increase. Livongo is expanding into other areas including hypertension/high blood pressure, weight management, and mental/behavioral health.

A perfect fit

It’s rare when a merger is considered a perfect fit, but that’s the early commentary on Livongo’s merger with Teladoc Health. Analysts look at it, I believe correctly, as the merger of a lock and a key.

Teladoc Health and Livongo Health announced an agreement to merge. The deal is valued at $18.5 billion and will create a company that will leverage the strengths of both companies in providing virtual care.

“Livongo is a world-class innovator we deeply admire and has demonstrated success in improving the lives of people living with chronic conditions,” Teladoc Chief Executive Jason Gorevic said in a statement. “Together, we will further transform the health care experience from preventive care to the most complex cases, bringing ‘whole person’ health to consumers and greater value to our clients and shareholders as a result.”

Analysts see the merger as a major step forward in advancing digital health care at a time when the novel coronavirus is expanding the adoption of digital and remote health care services.

David Larsen of Verity Research describes what the synergy between the two companies may look like. “When a Livongo member communicates with a health coach, we suspect that many times this health coach would in theory like to be able to refer the member to a physician, and they would like to be able to provide more in-depth care and services for other ailments that members may have.”

“By combining with Teladoc, Livongo members will have access to expert physician communications, their own primary care physician, they will have the ability to get prescriptions written for them, and this combined platform truly gives the entire world a digital health care solution,” Larsen wrote in a note to clients.

Analysts project he combined company will have $1.3 billion in revenue for 2020. The deal is expected to close in the fourth quarter.