Saga Partners, a fundamental, long-term, value investment management firm, published its fourth-quarter 2020 Investor Letter – a copy of which can be seen here. A net return of 24.5% was recorded by the fund for the Q4 of 2020, outperforming its S&P 500 benchmark that delivered a 12.1% return. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.
Saga Partners, in their Q4 2020 Investor Letter, said that Teladoc Health, Inc. (NYSE: TDOC) is one of the most attractive opportunities they currently own. Teladoc Health, Inc. is a global telemedicine and virtual healthcare company that currently has a $12.6 billion market cap. For the past 3 months, TDOC delivered a -2.30% return and settled at $113.11 per share at the closing of February 16th.
Here is what Saga Partners has to say about Teladoc Health, Inc.(formerly Livongo) in their Q4 2020 investor letter:
“Our Livongo holding was acquired by Teladoc in October, which has since become our largest position. While the acquisition originally caught me by surprise, I do what happens whenever faced with unexpected new information: approach the investment with fresh eyes and weigh the revised long-term outlook relative to its current price. After digging into what a combined Teladoc and Livongo entity would look like, I believed it was one of the most attractive opportunities available and not only kept our existing shares but added to the position.
It is no secret that the U.S. healthcare system has been resistant to disruption. Healthcare costs have grown out of control over the last few decades and are expected to be ~18% of 2020 GDP. It is quickly approaching $4 trillion in total spend while patient outcomes have not improved to the same magnitude. There are several reasons why this is occurring, most notably misaligned incentives between healthcare providers who are paid on fee for service basis. Middlemen insurance payers benefit from a system of blanket contracts between providers and employers that depend on opaque pricing and funneling patients to the highest-cost business models such as the general hospital. No single entity has had the ability or scope to reconfigure the pieces of the value chain in order to align interests with the patient, whose primary goal is to simply stay healthy, i.e. prevent the need for healthcare in the first place while guiding them to the best, most effective care when required.
Teladoc, with its telemedicine platform, remote patient monitoring via the Livongo acquisitions, and its InTouch health system platform, has put together the pieces to create a scalable vertically integrated healthcare company that will be able to bend the cost curve of healthcare.Many, myself included, consider telemedicine as a commodity-like service which is why the Saga Portfolio never owned Teladoc historically. There is little differentiation or switching costs between any HIPAA compliant video-enabled application that connects providers to patients. After regulatory easing during the COVID stay-at-home orders, healthcare providers utilized any available off-the-shelf products such as Zoom, Microsoft Teams/Skype, FaceTime, or Twilio in reaction to the skyrocketing demand for remote consultations and care.Despite little differentiation, Teladoc was historically successful in growing its userbase by selling into self-insured employers and health plans. It competed on providing scale and access to its network of contracted providers, not necessarily on its technological capabilities.
Livongo, on the other hand, was the industry leader in remote patient monitoring (RPM). It helped people, notably diabetics, manage their chronic condition through its connected devices, data analytics, and health nudges. Customer switching costs were higher as Livongo collected data on each of its members and provided personalized assistance based on each individual’s specific situation and needs. Continuous remote patient monitoring for people with chronic conditions is a significant improvement from what was previously available. Each individual had to self-manage a condition that requires 24/7 monitoring and if something went wrong at an inconvenient time, would then go to an emergency room. Chronic conditions in aggregate are expensive, estimated to be ~90% of healthcare system costs. With remote monitoring, it is now possible to not only manage and improve chronic conditions, but to even prevent them in the first place.
Remote patient monitoring and the data it can collect opens up the ability to enable entire populations to better manage their health, predict who will need care, and prescribe the right care from a clinical, lifestyle, and cost standpoint for each specific individual. Historically, the body’s ongoing vitals and general day-to-day health have been unknown. RPM provides a way to learn how patterns of behavior affect health and can provide personalized context-aware information in real time to prevent unnecessary and expensive trips to the emergency room or hospital. There is a powerful positive feedback loop from lifetime-accumulated data, owning the patient’s health journey, and giving providers the ability to make value-adding insights.
With the acquisition of Livongo, Teladoc combined its ability to provide acute episodic care through its virtual telehealth platform (access to care when it is needed) and the ability to continuously monitor members (provide prevention, screenings, and chronic condition support). Together these pieces provide a more comprehensive offering that enables Teladoc to be the virtual healthcare access point and more importantly, the ability to align payer and provider incentives with those of the patient.
There are many other telemedicine offerings that offer similar virtual connections with healthcare providers. Amwell, Doctor on Demand, MDLive, and Teladoc round out the big four. Smaller ones such as Hims & Hers, Ro, Babylon Health, K Health, 98Point6, etc. each have a certain focus and slightly different go-to-market strategy. These telemedicine offerings are largely competing on price and access to care which looks more like a race to the bottom. I could be wrong in this view especially since telemedicine is such a significant opportunity, but Teladoc is in a much more competitively advantageous position as a “one-stop shop of virtual healthcare” platform instead of a one-off virtual point solution.
It would not be surprising to see one of the larger telemedicine companies make a significant acquisition in the remote patient monitoring space in an attempt to better compete with Teladoc. There have been rumors of Amwell approaching Omada, a remote patient monitoring firm and one of Livongo’s largest competitors. In this scenario Amwell and Omada would definitely be the number two player but would still be a distant second and far from being able to match Teladoc’s scale and comprehensive offering.
The combination of Teladoc and Livongo leads to the massive greenfield opportunity of virtual primary care. About 65 million out of the 250 million adults in the U.S. have no or inadequate access to primary care. More than half of millennials do not have a primary care physician. Absent convenient access to a primary care physician, individuals will most likely either not seek care at all or visit emergency rooms – the most expensive, and often inefficient settings for their primary care needs that ultimately leads to greater healthcare complications and expenses. Additionally, virtual primary care can improve the experience of those who already have a primary care physician by offering both the physician and patient a virtual hub for patient data and analytics to make better informed decisions. It will also provide a network of other sub-specialty providers, therapists, nutritionists, and coaches, to help guide the patient through the healthcare system based on their specific needs, and generally provide a holistic view of the patient over their entire life.
Teladoc piloted its virtual primary care model (Primary360) in 2019 which has shown early signs of success with a 90+ net promoter score and detection of 70 distinct diagnoses that will help patients improve health and presumably lower long-term health care costs assuming diagnoses were left untreated. At the beginning of 2021, Teladoc has launched more pilots domestically and internationally into more commercial populations and currently has over 100 additional opportunities in its pipeline.
Virtual primary care is what will be the disruptive innovation to the healthcare system that truly realigns the incentives of the value chain with those of the patient. Initially management believes the payment structure for virtual primary care will vary, but ultimately Teladoc will be able to take on population risk in a value-based primary care capitation model since they will have the scope and breadth of services, both within and outside its contracted providers. By linking patient outcomes with provider profitability, value-based care will allow market forces to reward more efficient providers and penalize wasteful spending with lower income and a loss of patients. Providers and healthcare systems will increasingly partner with Teladoc as these more effective payment models gain traction which will provide better outcomes and truly lower healthcare costs both in providing care and preventing the need for it.
Employers and consumers are demanding that insurers find a solution to lower costs. Consumers, whose share of total health costs continues to rise, and businesses are unable to afford the ever-growing costs and are demanding a solution. Health plans will increasingly find their members asking for a solution to remove wasteful spending and implement preventative care such as Teladoc’s virtual primary care model. Health plans such as United Health have attempted to provide their own telemedicine services and remote patient monitoring, but there is a benefit to being insurance neutral. The average insured member stays with the same health insurer for less than four years so members will eventually be able to move from employer to employer and still have the same virtual ecosystem/hub that contains their historic data.
COVID was a watershed event that accelerated the adoption of virtual healthcare. Regulators and states, who had been slow to ease regulation and reimburse telehealth services, quickly adopted more supportive stances which are largely expected to remain in place going forward. Consumers who previously never thought of telehealth as an option now consider which in-person care can now be done just as effectively, if not better, from their home. Healthcare providers are now expected to have telehealth capabilities. During a time of increased uncertainty, Teladoc was able to support its essential services to address the pandemic for its members, healthcare providers, and hospital systems. While in-person visits will eventually return to more normal levels, digital health will only become an increasingly important part of how care is delivered going forward.
It is difficult to quantify the giant addressable healthcare market that could not only be virtualized but also generally improved upon. Teladoc has previously stated its total addressable market (TAM) is $121 billion. McKinsey states telehealth alone is a $250 billion opportunity. Virtual primary care is a significant greenfield opportunity to say the least. Teladoc and Livongo’s proforma 2020 revenue was $1.3 billion. Management has guided 40-45% pre-synergy revenue growth in 2021, 30-40% compounded annual growth through 2023 and an adjusted EBITDA margin of 15-18% by 2023. Consensus estimates expect $2.0 billion for 2021 revenue or ~15x the company’s $29 billion market cap at the end of 2020. This valuation/multiple appears extremely attractive considering Teladoc’s leading virtual platform and remote patient monitoring capabilities, scalability of the platform/capabilities, and significant demand for these solutions, combined with the opportunity to commercially launch virtual primary care over the next few years. As Teladoc continues to execute overtime, I expect it will be valued at multiples of its current market valuation.
Consumers are demanding increased transparency, convenience, and an overall better experience to help manage their health throughout their lives. There will likely be many innovative companies to help fix a healthcare system that is in desperate need of improvement. As we sit today, Teladoc is positioned to be the dominant vertically integrated platform that will be able to provide a comprehensive value-based capitation model and finally be able to bend the cost curve of healthcare.“
Last December, we published an article telling that Teladoc Health, Inc. (NYSE: TDOC) was in 47 hedge fund portfolios, its all time high statistics. TDOC delivered an impressive 137.61% return in the past 12 months.
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