On Wednesday, August 6th, Teladoc (TDOC) announced the company's intention to acquire Livongo (LVGO) in a stock and cash translation.
The combination certainly makes for a compelling growth platform going forward.
More importantly, the deal highlights the most important driver in digital healthcare valuations: simple counting metrics that exhibit an outsized growth rate. For Livongo the metric is membership growth, for Teladoc the metric is visit growth, and for Tabula Rasa Healthcare the metric is PACE growth.
Going back to the original exemplar of driving outsized valuation in a no growth industry, Healthcare IT (HCIT), look no further than athenahealth. The key to the athenahealth story revolved around allowing the investment community to track the growth of physicians and providers on the athenahealth platform. The investor community knew that the 3Q print always represented the height of physician/provider growth for the year. Investors knew the story was going to decline once the 3Q peak was lower than the previous year's peak.
Back to Livongo and Teladoc. These stocks have outsized valuations because they are great at getting investors to focus on key simple counting metrics that exhibit high growth. These metrics are of primary importance! The SaaS Rule of 40 represents another key metric of focus.
If you are a HCIT company and do not like your valuation, do not like your positioning with the street, or are considering an IPO, then work on changing the narrative or setting the narrative correctly. If your narrative fails to provide investors with an ability to track member growth or lives growth or something simple with high growth then gaining or justifying that outsized valuation may be a bridge too far.
