Teladoc, Livongo, and the Promise of Digital Health (Part 2)
The growth of remote medicine, chronic care from home, and the implications of a mega-deal on the digital health ecosystem.
As we discussed in Part 1, a) employers are the most incentivized to reduce cost of care using the right methods, and b) more effective detection and ongoing management of chronic conditions has an outsize impact.
Decentralized medicine, remote monitoring, and the application of data science create new possibilities that can dramatically impact the economics and effectiveness of care at individual and aggregate levels.
And Livongo has emerged as the perfect poster child validating this thesis and the underlying opportunity.
#3: Livongo: A New Model for Treating Chronic Diseases
From Livongo’s S1 in 2019:
Our mission is to empower people with chronic conditions to live better and healthier lives. The advancement of technology and data science has transformed nearly every industry except healthcare to create new, consumer-first experiences that are both personalized and empowering. Livongo is pioneering a new category in healthcare, called Applied Health Signals, which is transforming the management of chronic conditions.
In 2014, 147 million adults in the United States had a chronic condition and over 40% had two or more chronic conditions. However, the current U.S. healthcare system is not designed to continually care for people with chronic conditions. People are left to manage these conditions on their own with limited guidance.
…..As a result of receiving ineffective care, many people are unhappy, feel alone and disconnected, and are not getting healthier, resulting in higher costs for employers, people with chronic conditions, and the people who pay for their care.
Enter Livongo. We started with diabetes, which impacts more than 30 million Americans and hundreds of millions of people worldwide. Many people with diabetes are asked to check their blood glucose regularly, and while they gather this information, they don’t have any context to interpret the data. They often receive minimal guidance, counseling, or affirmation of how they are doing. This is just one part of a process that makes having diabetes confusing, complex, and costly. With Livongo for Diabetes, the experience is wholly different. Members receive a smart, cellular-connected meter, automatically-delivered testing materials, real-time coaching, and monitoring 24 hours a day, seven days a week, 365 days a year (24x7x365). When they track their blood glucose, they receive a highly personalized message about what to do that very moment, which we call a Health Nudge. Today, we have created a unified platform that provides smart, cellular-connected devices, supplies, informed coaching, data science-enabled insights and facilitates access to medications to help our members live better and healthier lives.
There are 31+ M diabetes patients in the US alone. Livongo’s solution costs ~ $900 per person per year translating to an addressable market of >$28B. It has 328k paying members so far (Diabetes only) and 98% of the $303M in revenue projected for 2020 is recurring. Given the size of the diabetic population worldwide, you can argue that Livongo is at the very beginning of its journey. The company is also fast expanding to hypertension, obesity, and other chronic diseases.
There is a lot to like about Livongo’s business:
The diabetes use case is super-specific with great clarity on what success means
Livongo offers a “whole product” solution that includes: Hardware & supplies (glucose meter, finger sticks, test strips), software (glucose meter syncs to mobile app to cloud), human advice (certified coaches), and data-science driven recommendations. Hardware + Software + Human Advice + Machine Advice translates to provably better outcomes.
Their business model is the opposite of selling software and walking away. They work with the client as a long-term partner and keep score to prove the delta in outcomes vs. baseline state.
The product, solution, and business model are transferable to other chronic conditions (cardiovascular, hypertension, obesity, etc.) with modifications and extensions.
More on the underlying technology From Livongo’s S-1
Our platform, which leverages data science and technology, creates a new kind of personalized experience for people with chronic conditions (our members). It is powered by a proprietary engine (we call it AI+AI), which Aggregates data from multiple sources, Interprets that data to separate signal from noise, Applies it at just the right time on the right surface to our members and Iterates to build improvements based on what we learn. This empowers our members to make sustainable behavior changes that lead to better outcomes and lower costs.
Some of this is corporate tech talk and I doubt Livongo is using advanced deep learning techniques at this time, but healthcare is so terribly broken in some areas that even doing simple things well with coherence is a significant step-up from status quo.
The impact section is the most fascinating and points to Livongo’s biggest differentiator. Digital health is full of fancy sounding solutions that “analyze”, “orchestrate”, and “drive actions”, but very few vendors connect the dots all the way to better clinical outcomes, cost savings, or member satisfaction. Livongo goes deeper than most competitors in demonstrating accountability. This is a game changer in a fuzzy category where solutions have traditionally been too broad to be specific enough, or too software-only to deliver a whole product for a single use case, and attribution of outcomes to specific technologies is often contentious.
Livongo has been a popular M&A target for many suitors, but a) the price was prohibitive to most, and b) there was no rationale for Livongo to sell outright unless it was a merger of sorts that would accelerate long-term growth and value creation.
And this is where Teladoc, a fast-growing tele-health network, saw a unique possibility.
#4: Teladoc: The Original Uber for Doctors
Teladoc is a pioneer of tele-health solutions that originally started in 2002 but took a long-winded route with multiple pivots to an IPO in 2015. With a series of international acquisitions and product expansions, the company has catapulted itself as the leader in virtual care. As of June 2020, 70M members connect to a virtual network of 7000 medical practitioners across multiple disciplines. Teladoc is the largest telemedicine company in America and also operates in more than 175 countries.
Their S-1 in 2015 provides the best context on what they do and why.
The Teladoc solution is transforming the access, cost and quality dynamics of healthcare delivery for all of our market participants. Our Members rely on Teladoc to remotely access affordable, on-demand healthcare whenever and wherever they choose. Employers, health plans and health systems, or our Clients, purchase our solution to reduce their healthcare spending while at the same time offering convenient, affordable, high-quality healthcare to their employees or beneficiaries. Our Providers have the ability to generate meaningful income and deliver their services more efficiently with no administrative burden.
Teladoc uses a B2B2C distribution strategy selling to employers, health plans, and providers to onboard members.
We generate revenue from our Clients on a contractually recurring, per-Member-per-month, subscription access fee basis, which provides us with significant revenue visibility. In addition, under the majority of our Client contracts, we generate additional revenue on a per-telehealth visit basis, through a visit fee. Subscription access fees are paid by our Clients on behalf of their employees, dependents and other beneficiaries, while visit fees are paid by either Clients or Members.
The pandemic has substantially accelerated the Teladoc flywheel. It is now expected to generate ~$950M in revenue for 2020 growing at ~40% from 2019. More than 80% is subscription based. Visit fees make up the remaining 20%.
But Teladoc had also realized for a while that there was a giant gap in its portfolio.
From the joint presentation on Aug 05, 2020:
Teladoc is primarily used by patients suffering from acute conditions who prefer the convenience of remote access from home. But new technologies like Livongo were making it possible for chronic conditions to be treated from home.
Acute and Chronic have porous boundaries. What seems acute might be a symptom of a chronic condition, and chronic patients often suffer from acute conditions as side effects. To be relevant to its members over the long-term, it was imperative for Teladoc to offer solutions in both acute and chronic areas. And the massive market for treating chronic conditions meant they were willing to do whatever it took to make it happen.
#5: Teladoc + Livongo: Implications for the Future of Digital Health
My concluding thoughts on the deal and its implications:
While it might appear that Teladoc is overpaying, Livongo has been growing like gangbusters the last few years. Given the size of spending in chronic condition management, some expected the company to reach a $100B valuation in 5 years. From that perspective, the current deal (54x multiple of 2020 revenue of $303M) would seem reasonable. As for Livongo shareholders, in addition to the partial cash-out, they hold 42% of the combined company, and Livongo gets access to Teladoc’s 70 million members and 7000 providers in 170 countries.
Mckinsey estimates that more than $250B of healthcare can become virtual (It is $3B currently), so this offers tremendous upside for the combined company. CMS (Center for Medicare and Medicaid) has reported a 11,000+% increase in the use of Telehealth by Medicare beneficiaries from March to April of 2020. Decades of inertia have been pulverized by Covid in a few months and we are not going back to the original status quo.
Every chronic condition —from obesity to cardiovascular to hypertension — is a multi-hundred billion $ market waiting to be disrupted. Affordable sensors integrated to mobile apps, closed-loop data science, and tech-assisted human judgement can result in a) earlier detection, b) reduced false positives and false negatives, and c) more effective ongoing management. This will drive superior clinical outcomes that directly impact cost of care, and quality of health metrics.
The combined company will be the first of many firms to focus on “whole person health” that is proactive, continuous, and mostly remote. See example below for a life-cycle view of a chronic hypertension patient. (Full merger presentation here)
Just like every large B2C industry, healthcare will eventually become personalized to the individual over her life-cycle and driven by data and intelligence. Not just at times when she is sick, but over the lifespan and across the full spectrum of health from wellness and prevention, mental health, and acute care to specialty care, chronic care, and complex treatments.
Rapid adoption of virtual care and chronic management solutions will also open up innovation in new frontiers like remote diagnostics, remote monitoring, and digital therapeutics.
In the US, the employer segment continues to evolve as the key buyer and partner of digital health initiatives, even more than payers and providers. While “corporate wellness” solutions have been around for a few years, and sold on a PMPM basis (Per user Per month), these initiatives have flattered to deceive, and have had no real effects on healthcare costs. Wellness ware is falling out of favor as clients seek tangible value; in contrast, there is more budget and interest in solutions that can directly impact cost, care, and quality. These include condition detection and management, benefits optimization, tele-health, etc. These new projects are expanding in size, scope, and impact, and the buying decisions are taken at the CFO or COO levels vs. HR (or) benefits managers.
For the reasons aforementioned, the deal makes a lot of sense on paper, notwithstanding the high price tag. The combined company can become the pioneer and leader of our personalized, digital healthcare future. But success is far from certain in this political and complicated industry and it remains to be seen if the theory of the case translates to practice in terms of growth and adoption.
Will this lead to further consolidation in digital health, and a surge in valuations? Maybe, but the real hope and promise here is for a new generation of solutions to accelerate the transformation of healthcare to a pro-active, continuous, remote-first, whole-person model that can improve patient outcomes at scale, and at lower cost of care.