Livongo’s (

Source: Teladoc Investor Day, March 2020

The presence of the pandemic has been a boon for both businesses with Teladoc utilization rates increasing due to members who still require medical consultations, and Livongo members benefiting from the ability to get ongoing monitoring of their chronic conditions in the absence of access to their existing medical provider or other specialist offices.

The Livongo-Teladoc deal was announced based on the identification of up to $500M in revenue synergies within a few years and close to $60M in annual cost synergies by the end of the 2nd year after close. Its typically been my experience that while cost synergies are far more frequently realized, revenue synergies sometimes tend to come unstuck as a result of execution challenges. For the Livongo Teladoc merger to make sense, there needs to be a good shot at these synergies being realized.

Cost Synergies

It’s fairly easy to make the case for shared cost savings between the two businesses. Livongo and Teladoc serve many of the same type of customers (self managed enterprises, health insurers). Thus they sell to and market to many of these customers in similar ways. Efficiency of operation in sales and marketing spend are low hanging fruit, and easy consolidation which can be made.

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New sales people that were slotted to cover additional territories can now be shelved, and planned marketing spend can be shared. Some consolidation of development expense should also be possible. Other than this, consolidation of IT infrastructure, administrative expenses and customer support are all things which can be easily justified.

Shareholders should feel some confidence in the entities attaining $60M in shared cost savings within a couple of years.

Revenue Synergies

While cost synergies are great, the bulk of the consolidation case is the “revenue synergy” component. $500M in new revenue creation is a massive number and almost represents what Teladoc did in 2019 full year revenue. Cross sale and solution co marketing makes a lot of sense given broadly the same base of customers.

Teladoc Upsell into Livongo Base

Livongo and Teladoc each have a robust base of managed health insurers and self managed enterprises between them. Interestingly, there is only a 25% overlap across the customer base of both companies. This should mean there is ample opportunity to cross sell solutions into each others customers in a way that will offer less friction than either of the company’s having to “break into” unpenetrated accounts without preexisting relationships.

This should greatly accelerate time to revenue and sales productivity providing both sales teams can be very quickly trained up on each company’s solution. Sales compensation plans will need to be properly aligned to create the right behavioral incentives, but I believe they should be able to get them with time.

The upsell of the Teladoc remote consultation to existing Livongo health insurers and self managed employers is a no brainer. Livongo already had in motion a partnership with Doctors on Demand and MD Live to do telemedicine consultations for behavioral health and diabetes medication management.

For insurers and self managed employers, this provides a way to not only get their patients quick consultations in a convenient way for sudden issues that may come up, but also allows these businesses to take out cost from the system, with these cheaper, virtual consultations at ~$45 per remote visit, vs more than double for an in person visit.

Having ease of scheduling and ease of access means that a patient is more likely to utilize a virtual consultation and not wait till they are in crisis or forced to go to Urgent Care, benefitting Teladoc’s revenue, the overall patients health and lowering ultimate treatment cost for the insurance company or employer.

The motion with this cross sell is clear, easily understood and likely to be effective. In fact, these regular check-in’s could even be prompted by the regular readings and data collection that the Livongo application collects providing another nudge or prompt for the Livongo user to schedule a telemedicine consultation with a Teledoc physician, creating a seamless revenue event for the new entity.

Greater Insurance Acceptance & Higher Reimbursement

For Teladoc, having a chronic health management solution makes the case that much strong for health insurers to now provide coverage. Chronic disease is a very high cost to insurers, and health insurers will now have a greater business case justification to reimburse Teladoc usage, beyond just the lower cost of a periodic telemedicine consultation. Teladoc will now provide a means to actually lower overall cost of long term patient care.

Source: Teladoc Investor Day, March 2020

With such a fully featured platform that delivers remote urgent care, medical second opinions, nutrition management, mental health care and chronic health management, Teladoc also decreases the likelihood of any competitive remote management platform displacing it.

In addition to greater coverage across more health plans, the combined Teladoc Livongo solution may also ultimately lead to a higher rate of insurance reimbursement to Teladoc, something that the company successfully has been able to achieve with each successive capability that it has added to the platform.

More Frequent Member Engagement

In the analyst briefing call, Glen Tillman, Livongo Chairman suggested having the Teladoc network of doctors cross market the Livongo monitoring solution to their ~70M plus patients was another revenue synergy that made a lot of sense.

The rationale for this is clear. Not only does this offer the allure of an immediate new source of revenue, but it solves one of the issues that Teladoc has struggled with which is rather low utilization and repeat engagement, which could slip post the pandemic if users look to return to live consultations with their doctors and relegate Teladoc to a “back up” service.

Livongo’s high daily engagement helps derisk Teladoc members abandoning telemedicine when the pandemic concludes. The Livongo solution provides Teladoc patients with a reason to have repeat consultations with their Teladoc doctors.

The user base of Teladoc users with chronic health conditions is likely to be substantial. Livongo estimates 140M US adults with a chronic health condition, and 40% of those adults with more than 1 condition. Thus Teladoc gets itself a more engaged user base and a substantially large addressable base overnight.

Source: Livongo Q1 2020 Investor Report

Also, because these consultations are not for the assessment of new conditions but largely for periodic condition monitoring, discussion of variance in patient metrics and general counseling, these are the perfect type of visits to be done with a convenient remote solution, rather than requiring an in person visit.

If there is any point of friction with this sales motion, it could be having a dependency on Teladoc doctors introducing new technology and systems for Livongo remote monitoring in a remote session.

My concern here is that the effective reliance on uncompensated doctors as “sales personnel” to advocate for a new technology in an online consultation could be challenging. The post consultation follow up to get patients comfortable with the technology and familiar with provisioning and set up needs to be thought through, otherwise the anticipated revenue synergies here could be a lot less than expected.

Acceleration of International Growth

Teladoc’s international presence could provide Livongo with a meaningful boost to international ambitions. While Livongo is yet to go international, Teladoc is deployed in over 175 countries, and provides a fixed base and springboard for Livongo to very quickly boost generate revenue globally. Europe and the Asia Pacific in particular could provide meaningful opportunities for Livongo to very rapidly grow its business, and the merger with Teladoc provides a path to accelerate this.

Concluding Thoughts

The merger of rapidly growing businesses is fraught with challenges including sales alignment, cultural fit and other operational execution. Teladoc and Livongo will have to be careful that they don’t end up a victim to these things. Nevertheless, the justification for business alignment is solid. Livongo helps derisk Teladoc being regulated back to “back up” status at the conclusion of the pandemic.

The value proposition of the combined entities gives health insurers and self managed employers a reason to not only cover but proactively push this platform to members. Teledoc and Livongo have a real opportunity to be the dominant digital health platform for the next decade.

Disclosure: I am/we are long LVGO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.