Teladoc Health Just Acquired InTouch Health, and I Love the Move
Last week, there was a BIG development in telehealth with industry leader Teladoc Health (ticker: TDOC) acquiring InTouch Health for $600 million. InTouch Health is the largest provider of virtual care technology for hospitals and other in-office health systems. This differs from Teladoc, whose primary business is connecting patients to doctors through internet-connected devices.
Here are the details of the deal, and how it impacts Teladoc’s business:
The $600 million price includes $150 million in cash and $450 million in Teladoc stock
InTouch Health had $80 million in sales in 2019, growing 35% YoY
InTouch is partnered with more than 450 hospitals (there are over 5,500 total in the United States)
Teladoc has a current market cap of $7 billion, meaning that, if the deal closed today, there would be 6.4% dilution for Teladoc shareholders. This seems reasonable considering that InTouch Health would have made up almost 15% of the company’s 2019 revenue, assuming they meet their full-year revenue guidance.
I am a Teladoc shareholder and think it is a wise move to use their expensive share price (the sales ratio is 13.3) to bring another one of their competitors under its umbrella. And while I do have a nagging concern that Teladoc might be acquiring companies to boost inorganic sales growth, I believe InTouch Health will complement Teladoc’s in-home virtual care offerings.
So What is InTouch Health Again?
InTouch’s website goes into detail on the products they offer hospitals and other healthcare centers. Their slogan is “The practicality you need, and the power you deserve. That’s virtual care made easy,” which is very similar to Teladoc’s mission as a company.
InTouch’s product segments are as follows:
Direct-to-consumer (will likely get rolled-up into Teladoc platform post-acquisition)
As a probable shareholder of this company, I’m most interested in the last two business lines. According to InTouch’s site, their Emergent Care solutions include things like critical care in hospitals where “intensivists can remotely manage and triage their patients.” Specialty care with InTouch is, among other things, a management tool to optimize a hospital’s specialty care workers so they can see more of their patients.
From what I’ve read so far, I like InTouch’s business model. They have some of the indicators for a serial compounder, including recurring revenue, reliable consumers (in this case, doctors), and incompetent legacy providers. They also, when added to Teladoc, will become a part of a three-sided network of insurance companies, providers, and patients that should strengthen the company’s moat.
CEO Jason Gorevic’s Recent Presentation
I was delighted to see when I logged onto Atom Finance a transcript from a recent presentation by Teladoc’s CEO Jason Gorevic. In the presentation, he talks about InTouch Health, Teladoc’s broad plans, and previews the company’s fourth-quarter results. Here are some highlights from the transcript.
On the Acquisition of InTouch Health: “Fundamentally, our mission is to transform how people get health care and do that using technology to improve access, create a better experience and better outcomes. And with the addition of InTouch Health, we are by far the leader at every front door or entry point into the health care system.” That’s the one-sentence pitch for why they acquired InTouch Health. It gives them access to every part of the industry.
On Teladoc’s Scale: “We provide care in almost 130 countries and over 40 languages. Virtual care is a global need and Teladoc health provides the global solution.”
On Fourth Quarter Revenue: “Our revenue guidance for the quarter was $149 million to $153 million in top-line revenue for the quarter. We will exceed that and expect to come in between $155 million and $156 million for the quarter and $552 million to $553 million for the year.” This pre-announced beat was likely why shares of Teladoc rallied to all-time-highs this week.
On Aetna as a Client: “I’m happy to say that we have expanded and extended our relationship with Aetna on financial terms that we’re very happy with and we continue to look forward into expansion and bigger strategic opportunities in partnership with Aetna as a client.” Aetna is one of the largest health insurance companies in America, and one of Teladoc’s most important partners.
On Teladoc’s Strategy: “With our 4 key pillars for our growth strategies of expanding our footprint and our distribution, expanding our clinical services and innovation, accelerating consumer adoption over time and broadening the role that we play in the health care system. And InTouch Health helps us on every single 1 of these dimensions.”
Whenever I read a transcript of a conference call or some event that Gorevic spoke at, I almost always come away impressed. Yes, he is obviously going to talk up his own company, but the consistent way he speaks about their roadmap and plan keeps me calm as a long-term shareholder, even if the stock takes a crazy dip.
In the days following the announcement, Teladoc shares have traded at or near all-time highs. So one has to be asking themselves if the stock is getting too rich to provide market-beating returns over the long haul. Let’s take a look at the numbers.
Right now, Teladoc has an EV/sales of 13.2. They are also unprofitable, with an EBIT margin of -15%. So, the best proxy we can use for how profitable Teladoc could be is their gross margin. Last quarter, it was 69%. In that same quarter, Teladoc spent 34% of its revenue on sales and marketing. Using all these figures as rough inputs, one can conservatively assume that Teladoc will have 25% net margins at scale.
And, assuming (I know this is a lot of conjecture, just bear with me) they can sustain 25% YoY sales growth for the next 10 years as Gorevic claims, Teladoc will have $5.1 billion in annual revenue by 2030. With $1.28 billion in earnings (remember, 25% net margins), the company would have a $32.2 billion market cap in 10 years, assuming a P/E of 25. That’s 4.7 times the current valuation.
Now, 2030 is a long way out, and there’s no way the numbers will look exactly like I said above. But if Teladoc can keep growing into the gigantic world healthcare market, they have a chance to provide phenomenal returns for years to come.
Disclosure: The author is not a financial advisor, and may have an interest in the companies discussed.