TDOC to Acquire InTouch Health

Teladoc Health (TDOC) https://teladochealth.com, the provider of telehealth solutions for hospitals and health systems, has entered into an agreement to acquire InTouch Health https://intouchhealth.com for $600 million ($150 million cash plus $450 million in TDOC shares) in order to expand their reach in virtual care.

Credit Suisse’s neutral view on TDOC shares was due to the fact that growth in the Business to Business to Consumer (B2B2C) telemedicine market where TDOC has a strong presence, has been moderating. However, the company’s presence in the provider-driven telemedicine market with a relatively bullish view, has been sub-optimal.

As a result, Credit Suisse did not have enough visibility in TDOC’s long term core revenue growth outlook of 20-30% beyond 2020. The transaction with InTouch Health will give TDOC access to a market likely to grow at a strong pace over the next few years.

Credit Suisse researchers in a brief conversation, with TDOC, management notes that the deal increases confidence in their long term revenue growth outlook and expects InTouch Health to also grow at a 20-30% annual revenue run-rate for the foreseeable future. Overall, Credit Suisse sees the deal favorably impacting their fundamental view on the stock.

TDOC management notes that revenue growth drivers behind the recent strong growth at InTouch Health includes, a) history for bringing a broader array of hardware solutions to the market to support different critical and complex solutions, b) rolling out a flexible software platform, and c) leveraging their technical network as well as their physician network to provide a unique value proposition for hospitals and health systems.

As a result, the revenue mix for InTouch Health has shifted to more than 70% being recurring and TDOC’s management notes that InTouch Health’s gross margins are in the mid-60% range, since software and network license fees are a very high gross margin business, while the devices/hardware business is a lower gross margin business.

A recent survey by Credit Suisse of Hospital Executives for Telemedicine asked survey respondents about their existing telehealth programs and their plans to initiate programs or expand in the future.

Some 58% of respondents currently use telehealth or have plans to expand their use of telehealth over the next 1-3 years. 34% of respondents said that they use proprietary in-house technology for their telehealth program. Another 23%  of respondents do not currently use telehealth but expect to add the capability over the next 1-3 years. Among named third party services, In Touch Health had the highest percentage of hospitals with 16% followed by a tie at 9% between American Well, Teladoc Health, and Specialists on Call.

With respect for service lines, 65% of respondents use telehealth for stroke care, while 54% use telehealth for behavioral health/psychiatry. Behavioral health and crisis care, non-emergency follow-up and cardiology were all about 20% as well.

As for the utilization of telemedicine, respondents said that of all potential cases that could have been handled via telemedicine within the past year, 10.6% were actually serviced via telemedicine on average.

Among respondents who use telehealth, only 14% said that telehealth is a direct source of revenue, 10% said that telehealth is a component of contracts with payers and as a result drives incremental reimbursement, 41% said that telehealth is more for cost management than a source of revenue, and 24% said that telehealth allows the hospital to accommodate more patients in the ER and thus indirectly drives revenue.

For more information or to provide feedback, email Jailendra Singh, Research Analyst at jailendra.singh@credit-suisse.com or call 212-325-8121.

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