Telehealth is More Than Just Virtual Doctor Visits

This past spring we wrote about “The Only Telehealth Stock for Telemedicine Investors,” an article with a misleading title. That’s because there soon may be two pure-play stocks to consider in this space. In that article, we noted that none of the other major players in telehealth are publicly traded, but “that could change now that the window of interest in telehealth has opened.” It did change, as we may soon have another telehealth stock to consider.

Is Telehealth a Temporary Thesis?

We’re always quite cautious about investing in temporary trends. Whenever new viruses emerge in faraway places, you’ll see certain stocks react accordingly. Anyone remember Ebola stocks?

A temporary investment thesis – Credit: Google search results

We want nothing to do with a temporary investing thesis in much the same way we want nothing to do with speculating. That’s why we’ve largely steered clear of the whole coronavirus vaccine thesis. Similarly, we’re a bit concerned that telehealth is only heated at the moment because of “the rona.” Look no further than yesterday’s article by StatNews titled “Telehealth grew wildly popular amid Covid-19. Now visits are plunging, forcing providers to recalibrate.”

On the other hand, you could argue that the strong increase in demand for telehealth services will help spur adoption of the inevitable. Do you really need the doctor to feign interest while he gives you a physical examination, something that tells him very little but makes you feel a whole lot better?

The New York Times wrote an interesting piece on the importance of a doctor’s touch, arguing that patient-to-doctor physical contact is a crucial part of the healing process. That may be changing, but not because of social distancing. A doctor’s time costs a lot of money. So does the receptionist who welcomes the patient, leasing the building and running the lights, janitorial services, and of course all the extra process that comes with a pandemic.

Any solution that helps cuts costs in the bloated healthcare system will be an easy sell, albeit a slow one. There’s also more to the telehealth thesis than meets the eye.

The Telehealth Investment Thesis

Recent corporate events imply that there is much more to telehealth than just virtual doctor visits. In our last piece on Teladoc (TDOC), we talked about how “telehealth is different from telemedicine in that it refers to a broader scope of remote health care services than telemedicine.” It’s about the connected world of IoT in healthcare where medical devices and wearables talk to the cloud, and machine learning algorithms help healthcare professionals administer precision medicine which caters to each patient’s unique situations.

A privately held telehealth company called Amwell recently filed for an initial public offering (IPO). A slide in the S-1 filing shows how telehealth involves much more than just telemedicine.

Credit: Amwell S-1

The “any-to-any connectivity” column seen above is telemedicine. The entire slide is telehealth. Amwell understands this. They’ve filed for an IPO to raise money to fund growth, and they’ve also gotten into bed with a partner that just might help them get there faster.

About Amwell

Founded in 2006, Bahstun startup Amwell has taken in $811 million in disclosed funding from investors that included Philips, Takeda, and Google Cloud which announced a partnership last week with Amwell along with a $100 million investment. The announcement talked about how the two companies will collaborate on technology development including “Google Cloud artificial-intelligence and machine-learning technologies to assist patients and front-line workers with intake, inquiries, and triage,” along with “natural language and translation services for non-native speakers.”

Amwell provides digital care programs for 55 health plans which support over 36,000 employers and collectively represent more than 80 million covered patients. The company also provides services to 150 of the nation’s largest health systems, encompassing more than 2,000 hospitals.

Total revenues for Amwell in 2019 were $148.8 million, an increase of just over +30%. (Contrast this to Teladoc which had 2019 revenues of $553.3 million and a five-year compound annual growth rate of +60% over the past four years.) There’s also some concern around Amwell’s concentration of revenues with a single client:

For the years ended December 31, 2018 and 2019, our largest client, Anthem, accounted for 21% and 23% of our revenue, respectively. For the years ended December 31, 2018 and 2019, our top ten clients by revenue accounted for 48% and 44% of our total revenue, respectively.

Amwell S-1 Filing

A simple comparison of 2019 revenues for Amwell and Teladoc shows that Teladoc is generating nearly 5X as much revenue. That multiplier may even get larger based on some recent news that shows Teladoc is looking way beyond virtual doctor visits.

Teladoc’s Acquisition of Livongo

Earlier, we talked about how the telehealth thesis isn’t just about virtual doctor visits, but about ongoing care for patients with chronic illnesses. Look no further than the recently announced merger between Teladoc and Livongo (LVGO), a company that’s building a platform to help manage chronic diseases, of which there are many.

CDC statistics on chronic diseases.
Credit: CDC

The merger announcement brought about mixed reactions from the market. Shares of both companies dipped sharply on the news, signaling disapproval of the deal. However, pundits have been making compelling arguments for and against the merger.

Teladoc and Livongo = Good

FierceHealthcare published a piece praising the merger stating that, “Teladoc’s blockbuster deal could impact the entire virtual care landscape.” The combined companies would be worth around $37 billion with 2020 revenues expected to be around $1.3 billion.

“I’d expect this to become a single point of access for virtual care in the next five years with one app to control them all. This makes it very hard for a standalone telemedicine payer to compete with someone like a Teladoc.”

SVB Leerink health technology analyst Stephanie Davis – Credit: FierceHealthcare

While Teladoc offers one-to-one care, Livongo offers one-to-many care, and the combination of the two companies not only made perfect sense but was inevitable.

Teladoc and Livongo = Bad

Contrast this outlook to an article on Forbes by an equities pundit who thinks both Teladoc and Livongo should be avoided because growth may slow, the “2 + 2 = 5” synergies may not be realized, Teladoc overpaid, and the two companies may have trouble integrating their operations. In other words, the merger wasn’t a good idea, and the resulting entity should be avoided.

Putting the pros and cons of the merger aside, let’s go back to the comment made by FierceHealthcare about the “inevitability” of the Teladoc-Livongo merger. Maybe it’s also inevitable that Amwell looks to add chronic disease management capabilities to their offering?

Amwell and Verily

Becker IT published a piece titled “What the new Google, Verily deals mean for healthcare.” The title of the article refers to Google’s investment in Amwell and Verily – a subsidiary of Google – recently establishing its own subsidiary that will apply technology and data-driven solutions to the insurance industry. While these two announcements appear to be unrelated, perhaps they’re not.

In our recent article on Verily Life Sciences, we talked about how diabetes management has been a cornerstone for Verily over the years, culminating in the creation of a subsidiary called Onduo.

Onduo is a virtual diabetes management clinic that uses data collected from wearables and other connected devices, as well as other sources such as electronic health records, to provide insights and recommendations. 

Credit: Nanalyze

Onduo is also in bed with Dexcom (DXCM), a company that’s absolutely dominating the diabetes market with their wearable glucose monitors. It’s not far-fetched to think that Verily may be to Amwell what Livongo is to Teladoc.

  • Teladoc (Telemedicine) + Livongo = (Telehealth)
  • Amwell (Telemedicine) + Onduo = (Telehealth)

Perhaps short-sighted investors see a telemedicine thesis driven by “the rona” while the real story here is a telehealth platform that disrupts the entire healthcare industry.

Amwell vs. Teladoc

We’re strong proponents of the KISS principle, so we’re not going to start babbling on about comparables and P/E ratios. Let’s just assume that the merger is finalized and Amwell has their IPO. Pro-forma revenues for Teladoc in 2019 would have been nearly 5X larger than Amwell’s. ($723.5 million vs. $148.8 million). As risk-averse investors, we’ll always lean towards the biggest lion in the herd.

Going back to the four points of contention raised in the Forbes article, three of them pertained to the merger – Teladoc paid too much, there are no synergies, and the two companies will have integration problems. It’s true that most large corporate mergers don’t add as much value as expected. The MBAs over at McKinsey have studied this topic extensively, noting that almost 70% of mergers don’t create the value they’re expected to. All mergers present these risks, the Teladoc/Livongo merger being no different.

Then there’s Amwell, which also needs to make the transition from telemedicine to telehealth. Perhaps they’ll work with Onduo, perhaps they’ll work with someone else, perhaps they’ll make an acquisition. Whatever Amwell decides to do, Teladoc is one step ahead of them in transitioning from telemedicine to telehealth.

If we had to pick between these two stocks, we’d stick with Teladoc. They’ve made a big move that may have growing pains but could potentially reap dividends down the road. Of course you could also hold both companies. Just expect lots of volatility when Amwell begins trading, especially if the Robinhood speculator types catch wind of it.

Conclusion

A telemedicine platform that treats chronic diseases for 6 out of 10 American adults sounds like a huge total addressable market that’s just waiting to be captured. Still, there’s a great deal of uncertainty as we don’t know what shape telemedicine will take in the end or how successful it will be.

The industry is undergoing some consolidation, and investors may consider waiting for the dust to settle before taking a position in either of these two companies. While we consider Teladoc the more desirable of the two, we’re sitting on the sidelines for now.

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