This Insight is part of your subscription to Signify Premium Insights – Medical Imaging. This content is only available to individuals with an active account for this paid-for service and is the copyright of Signify Research. Content cannot be shared or distributed to non-subscribers or other third parties without express written consent from Signify Research. To view other recent Premium Insights that are part of the service please click here.

IBM proved right well publicised industry rumours last week in announcing that it is selling its healthcare data and analytics assets, which currently fall under the Watson Health business.

The assets have been purchased by investment firm Francisco Partners, and include extensive data sets, products, and image software offerings, including the Merge product line and imaging AI products. Financial details of the deal have not been disclosed, although Bloomberg places the value of the sale at more than $1bn.

The deal is expected to close in the second half of 2022. Existing customers will continue to be served by the new independent company, while the current management team is also expected to remain in place.

The Signify View

The news that IBM is pulling out of healthcare might, at first, seem incongruous given that other recent stories have seen tech companies doing the opposite. Last April Microsoft acquired radiology transcription specialist Nuance for almost $20bn, while more recently Oracle announced it was buying up EHR vendor Cerner for close to $30bn. Other rumours, meanwhile, such as those suggesting that Amazon is looking to establish a presence in healthcare with an acquisition, potentially of M*Modal, also contribute to the overall sense that healthcare presents a significant opportunity for tech vendors.

IBM’s divestiture, however, brings its strategy more closely in alignment with its peers than news of a sale would suggest. What has changed is that, like Microsoft, Oracle and others, IBM is no longer trying to capitalise on departmental healthcare, and is seeking to derive revenues instead from the provision of cloud architecture and technical support for AI development, a path that promises a  larger return on investment. As highlighted in our previous Premium Insights, Microsoft’s move on Nuance, and Oracle’s move for Cerner, are deals which, in essence, give the technology firms an expanded customer base in which to sell their core cloud products. IBM will now be able to bring the same focus to the healthcare market as its cloud competitors, providing the architecture and environment for healthcare-specific vendors to develop cloud-based products, without developing and selling imaging IT products itself.

Solving Problems With Spending

This indirect approach to healthcare, which sees the industry simply become one of a number of potentially lucrative markets for IBM’s broader cloud offering, does however represent a marked shift in strategy. In 2015, when IBM launched Watson Health, it almost immediately began buying up companies, including Phytel, Explorsys, Merge Healthcare and finally, Truven Health Analytics, during its first year of operation. Overall, reports suggest IBM spent around $4bn in establishing the new unit, which is, at present, bringing in around $1bn in annual revenue. A figure that shows no significant change compared to the combined revenues of the constituent vendors when they were acquired.

When these vendors were acquired, IBM’s vision was to revolutionise healthcare, and utilise the power of data to solve some of the biggest challenges facing healthcare. These ambitions were never realised. While the vendor has released some innovative technology and enjoyed some small successes, it ultimately failed to live up to IBM’s own, considerable hype. New initiatives, such as Watson for Oncology, failed to live up to expectations and were mothballed.  Not only was healthcare not revolutionised, but IBM seemed, in many instances, to underperform in more established product sectors relative to its competitors. The legacy Merge imaging IT business has hung on to some key customers but has struggled to grow share or win new customers in core markets in the face of stiff competition from vendors such as Visage and Sectra. In emerging technology product sectors, IBM has also faltered. When it launched its AI marketplace, for example, not only was it behind several other imaging IT vendors, it featured algorithms from just five partners. Similarly, with its Imaging AI Orchestrator platform release; with just one confirmed partner and only a small number of other potential partners, the release was relatively underwhelming compared to IBM’s AI promise.

Resultantly, instead of heralding a revolutionary new era in healthcare, Watson Health started to become a disappointing distraction, diverting attention and resources away from IBM’s other interests, even potentially impacting IBM’s reputation. Despite all the original promise and potential, when viewed in such a light it is no surprise that IBM has sought to cut its losses and shed the unit. Although arguably on a more significant scale, IBM isn’t the only technology company to have failed to revolutionise healthcare, with Microsoft, Google and others also having to renege on earlier promises and pull back from well-publicised healthcare investments spectacularly.

Where Next?

As well as highlighting IBM’s strategy, the sale also raises questions as to the future of the divested assets. In this regard, Francisco Partners has several options. One scenario would see the new owner try to succeed where IBM hasn’t. This is unlikely, although Watson Health’s new-found distance from one of technology’s longest-established giants may offer it a new level of agility and freedom to focus, while Francisco Partners may be keen to invest into it. A second option could see Francisco Partners maintaining the vendor as essentially a managed asset. Watson Health’s constituent vendors were, after all, individually successful before they were combined, Francisco Partners may choose to streamline where possible, but otherwise allow its new acquisition to continue delivering revenues, safe in the knowledge that it is relatively secure investment in a stable and saturated market.

A third, more active option, would see Francisco Partners paring off the imaging IT part of the business, which was formerly Merge Healthcare. Not only does this segment sit apart from the rest of the divested assets, Watson Health’s imaging IT business could be an attractive proposition for the right buyer. As well as a market share of around 7% in the US radiology IT market in 2020 (and just under 4% globally), the unit brings a fully featured enterprise imaging solution to a new owner, with platforms to target acute care, outpatient imaging sites, a cardiology solution, the recently released workflow orchestration solution, AI capability and a large amount of valuable data.

Several vendors could be interested in such a package. Intelerad would be among the obvious candidates, with the additional market share taking the vendor straight into the top five of imaging IT vendors in the US. IBM’s technology would also strengthen Intelerad’s offering, creating an opportunity for Intelerad  to retire or replace its legacy PACS component and bolster its larger data management capability, one of Intelerad’s present omissions. Intelerad is also in the midst of a particularly aggressive acquisitive run, having recently purchased Ambra, Insignia Medical Systems, and Lumedx among others. Moreover, IBM has a substantial customer base in the large acute hospital market, an area for which Intelerad has been actively pursuing. With the might of its private equity owners HG Capital, and an obvious appetite for acquisition, Intelerad could be a good match.

The imaging IT market in the US is one which is well-established and saturated, providing very little in the way of organic growth opportunities for vendors. With this being the case, the prospect of an additional 7% market share in the US could also appeal to other vendors. There are a limited number of potential suitors that have both the available funds to make such an acquisition, and the business strategy to acquire and integrate rather than natively build. This still leaves some big names, such as Siemens Healthineers which has been losing share in the US market, or Fujifilm, which may be attracted with the prospect of an instantly increased footprint, or even a smaller vendor, such as Mach7 Technologies, looking to boost its presence and portfolio as possible buyers should Francisco Partners decide to sell. Ultimately, the imaging IT market in the US has long been on course for further consolidation, especially as deal volumes fall, deal sizes increase and contract terms lengthen. Assuming Francisco Partners have been robust in its due diligence and market analysis ahead of the deal, it will know the IBM Merge business line could be a tempting asset for a vendor with ambitions of playing at the top table of imaging IT.

Back to Reality

The sale of Watson Health is the long-expected end to one of the most ambitious projects in imaging IT and wider healthcare. This end was, however, somewhat ingrained in the start. IBM committed to healthcare, but, like some other large tech firms, did so with the boasts and bravado that may please investors but fail to acknowledge the complexity of the healthcare market. Instead of looking at the nuance, the finer detail and clinical intricacy of healthcare, IBM purchased capability and gave itself impossibly broad targets. Making progress in healthcare is hard, it is slow, and what’s more, it isn’t necessarily all that profitable. The humbled IBM will now have a much better appreciation of that.

For the divested imaging IT unit meanwhile, although the future is uncertain, it harbours a lot of value. It has a sizeable market share, competent technology, and continuing development as illustrated by its releases at RSNA 2021. Freed from Big Blue’s orbit, the business formerly known as Merge now has the chance to focus on the detail and the nuance. It may never revolutionise healthcare, but the chance to work on smaller, more tangible problems means that its future could be bright nonetheless.

About Signify Premium Insights

This Insight is part of your subscription to Signify Premium Insights – Medical Imaging. This content is only available to individuals with an active account for this paid-for service and is the copyright of Signify Research. Content cannot be shared or distributed to non-subscribers or other third parties without express written consent from Signify Research. To view other recent Premium Insights that are part of the service please click here