Teladoc Moves Up The 'Acuity Food Chain' With Best Doctors Acquisition

Commenting on Teladoc Inc TDOC's acquisition of Best Doctors, Piper Jaffray said in a note on Tuesday the deal takes the former up the acuity food chain and beyond the borders. The firm also sees the deal as expanding Teladoc's addressable market into a new adjacent space.

Moving Up Acuity Food Chain

Analyst Sean Wieland said Teladoc's core service is a great benefit for employees, in being cheap, efficient and a great user experience for common low-acuity illnesses such as sinus infections and UTIs.

However, the company doesn't do anything to address the high-acuity types of care containing the highest medical costs, the analyst added.

Patient acuity, a term used by caregivers and health science literature, is used as a reference for estimating nurse staffing allocations and budget determination, according to Mediware. In other words, the intensity of care required for a patient accomplished by a registered nurse, with the degree of care ranging from minimal care to intensive care.

Meanwhile, Piper Jaffray noted that Best Doctors' complex cases involve multiple healthcare workers, including physicians, pathologists and care managers to review a patient's chart extensively before providing their professional opinion, providing an opportunity for Teladoc to move up the acuity chain.

Attractive Cross Selling Opportunity

The firm also clarified that merely 500,000 of Teladoc's 20 million members overlap with Best Doctors' base, suggesting a wide cross sell opportunity. Meanwhile, Best Doctors, with 40 percent of revenues from its international operations, would give Teladoc a global footprint with additional cross selling opportunities, the firm added.

Strategic Fit

Piper Jaffray believes Best Doctors is a good operational strategic fit for Teladoc. Additionally, the firm noted that both companies have a similar model, with the bulk of its revenue and margin generated from per-member-per-month payment model, accounting for 90 percent of revenues.

Elaborating on Best Doctors' business model, Piper Jaffray said it is a virtual network of over 50,000 medical specialists, who are on call for second opinions, while also holding day jobs.

Twin Benefits

Piper Jaffray believes the acquisition vests on Teladoc the twin benefits of expanded addressable market and higher margins. Though the current growth of Best Doctors appears lower, the firm is of the view that growth could accelerate from 2 percent in the first quarter to over 8 percent in 2017, exceeding 25 percent in 2018, given increased focus and scale on the business.

The firm noted that Teladoc said its core business remains on track.

"Although it's difficult to determine exactly how many people should be accessing a second opinion, 1.7 million new cancer cases expected to be diagnosed in 2017 (cancer.org) in the oncology market alone, for example, and a consult fee here may range $5,000–8,000," the firm said, explaining the prospects for second opinions.

The firm also said the margin profile for second opinion is 50 percent compared to Teladoc's 35-percent visit margin.

Piper Jaffray maintains its Overweight rating on the shares of Teladoc, while it has a $32 price target on the shares.

At time of writing, Teladoc shares were sliding 5.73 percent to $33.75.

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