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Teladoc: Serial Acquirer Strikes Again

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About: Teladoc Health, Inc. (TDOC)
by: SKK Investments
SKK Investments
Long/short equity, Growth, momentum, event-driven
Summary

Teladoc is acquiring InTouch Health for $600mm.

We believe this is an accretive acquisition that opens up more opportunities for Teladoc to serve even more healthcare providers.

Positive news continues to flow with Teladoc smashing Q4 revenue forecasts, and we see this momentum continuing into the future.

Teladoc (NYSE:TDOC) made an announcement over the weekend that it had entered into a definitive agreement to acquire InTouch Health, a telehealth enterprise solution company. We believe there are significant synergistic possibilities between the two entities and expect Teladoc to become even more attractive as the go-to-provider of telehealth solutions for healthcare providers. This will likely open up new business channels for the company as well, leading to a potential boost in topline growth. Teladoc's stock price shot up almost 13% on the news of the acquisition and management's update on Q4 2019 results. We believe the run-up in the stock price presents a tough spot for investors to enter into a position right now. Instead, we advise investors to watch the tape closely and look for a pullback in the next month or so before the earnings release, or take up a position leading up to the Q1 2020 earnings release, when the implementation of InTouch Health becomes more apparent.

(Source: hitconsultant.net)

Overview

We first learned about InTouch Health when we were scouting for potential competitors of Teladoc. Although InTouch wasn't a direct competitor of Teladoc, we thought there was potential for it to become a threat due to its acquisition of TruClinic. Through this deal, InTouch became a comprehensive telehealth solution provider that allowed hospitals to seamlessly integrate telehealth into their offerings through a web-based application. Essentially, if you were a hospital that wanted to provide telehealth services to your patients, you could reach out to InTouch to provide that solution. Additionally, with its telehealth devices and Solo by InTouch software platform (where doctors can coordinate appointments, speak to patients, and see medical information all in one platform), we thought the company could enter into the consumer-facing telehealth market by simply acquiring a customer base through a strategic acquisition.

Our fear proved to be unnecessary in the end, but Teladoc's management team seemed to have had similar ideas as us in the strategic potential of a company like InTouch Health under Teladoc.

InTouch VITA, Telehealth Device

(Source: intouchhealth.com)

Dissecting the Deal

In mid-2017, Teladoc acquired Best Doctors for $440mm at an EV to revenue multiple of 4.4x based on Best Doctors' estimated revenue of +$100mm for the year. In contrast, Teladoc acquired InTouch Health for consideration of $600mm (consisting of $150mm of cash and $450mm in Teladoc shares) at 7.5x revenue based on InTouch Health's 2019 revenue of $80mm. We believe the higher valuation is justified due to two factors: Potential for additional B2B business and the red-hot telehealth market.

Type of Business: B2C vs. B2B

Best Doctors was a patient-facing healthcare company that allowed patients to get a second opinion on their diagnosis and treatment plan. The company also allowed patients to get a better understanding of their current condition and treatment plan. The acquisition diversified the offerings of Teladoc and opened up a rather niche business for the company. However, we believe the primary reason for the deal and the premium paid was to increase the number of global customers served.

On the other hand, InTouch Health opens up the company's business to more B2B transactions and healthcare providers. We believe this could be an indication of the company's interest in working closer with the enterprise solution-side of telehealth since InTouch Health provides an all-in-one solution for hospitals seeking to offer telehealth service to their patients. Healthcare providers may be more inclined to incorporate telehealth if the back-end solution proves to be simple.

Furthermore, in addition to the software side of the business, the deal comes with six different telehealth devices. Teladoc has the potential to offer these devices as a package deal to hospitals looking to incorporate telehealth. The company could also sell this part of the company to generate more cash for future acquisitions.

Timing: Greater Evidence of Telehealth's Potential

Telehealth has continued experiencing explosive growth since Teladoc acquired Best Doctors in mid-2017. A 2019 study by A FAIR Health showed that utilization (and subsequent insurance claims) of telehealth increased by 53% from 2016 to 2017.

(Source: A FAIR Health: Healthcare Indicators and Medical Price Index, April 2019, Author presentation)

At the same time, telehealth accounted for only 0.11% of all medical claim lines in 2017, with a significant upward trend continuing into the year.

(Source: A FAIR Health: Healthcare Indicators and Medical Price Index, April 2019, Author presentation)

Considering the 1.12bn total addressable market for general medical consultations, the 370mm serviceable addressable market for telehealth consultations indicates a 33% market penetration potential. Yet, only a fraction of this market has been addressed. We urge investors to read our first article on Teladoc to get a better idea of this potential.

(Sources: Centers for Disease Control, Teladoc's presentation for 36th Annual J.P. Morgan Healthcare Conference, Author estimates)

This growing popularity and the disconnect between market potential and the current state of the healthcare system present a significant opportunity for healthcare providers to become involved in telehealth. In a time when convenience and cost play significant roles in healthcare access, healthcare providers must also provide telehealth service as part of their comprehensive care in order to stay competitive. Accordingly, the favorable tailwind of the industry comes with a premium that we believe is justified. The 7.5x multiple could prove to be a steal in a few years as the market matures.

Notes from the 38th Annual J.P. Morgan Healthcare Conference: Smashing Forecasts and Insight into InTouch Health

CEO Jason Gorevic had a chance to discuss Teladoc's Q4 topline financial results and recent acquisition on Monday's J.P. Morgan Healthcare Conference. He explained that Q4 revenue is expected to be between $155mm and $156mm vs. forecast of $149mm and $153mm. The beat was the result of increased visit revenue from higher-than-expected visit volume, primarily attributed to one of the biggest flu seasons for the company. The other part of the equation was due to strong subscription revenue from D2C channels.

Teladoc saw strong demand from all of its customers, with booking up 30% YoY and average and median deal size up YoY as well. Visit volume was above the high end of guidance at over 1.2mm visits for the quarter. For the full year, Teladoc saw over 4.1mm visits. Teladoc is also expanding services for Aetna.

Regarding the acquisition, InTouch Health has similar margins as Teladoc in the mid-60s. About 70% of its revenue is recurring, with ~30% of revenue coming from hardware and devices sold/leased to healthcare providers and ~70% of revenue coming from software. InTouch also generates a small part of the revenue from outsourcing neurologists and psychiatrists to 4 hospitals.

Gorevic sees growth opportunities not only from increasing utilization but from existing clients with growth opportunities of over 75mm people. Just within the US, Teladoc has 190mm people available outside of existing clients to convert to the Teladoc platform.

Regarding new products, Teladoc saw positive results from their incorporation. Adding new products into the mix for existing customers led to a 30% increase in PEPM. Utilization also grew as well.

Final Thoughts

Overall, we view the acquisition as a net positive for both companies, and the timing makes sense when looking at the explosive growth of telehealth. We currently see InTouch customers benefiting from the existing network of doctors Teladoc brings to the table. On the other hand, Teladoc's business could thrive as more healthcare providers start providing telehealth due to the seamless back-end integration that the combined entities could provide. Additionally, the telehealth devices of InTouch Health could prove to be either an accretive solution that grows topline growth or a potential source of cash through a sale. At the same time, we see a potential short-term risk in the integration of InTouch Health into Teladoc's existing system of care. The problem will likely be minor but may need some time to be fully ironed out. As mentioned earlier, the run-up in the stock price has been significant in the past year, and we urge investors to proceed with caution when deciding an entry point.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.