The global crisis caused by the Coronavirus has highlighted opportunities in virtual care-giving, AI, and ambient technology applied to healthcare. On the 12th of April, US tech behemoth Microsoft announced the acquisition of Nuance Communications, a pioneer and leader in those sectors. Starting from an overview of the AI industry, in this article you will discover more about the deal and AI applications to healthcare.
OVERVIEW OF THE ARTIFICIAL INTELLIGENCE INDUSTRY
With a market size value of $39.9 billion in 2020 and an expected compounded annual growth rate of 40% from 2020 to 2027, Artificial Intelligence is one of the five innovation platforms that will transform the global economy according to ARK invest.
BBC's publications claimed that AI knows what we want to buy, it could cure cancer or put an end to the existence of many jobs. But what is AI really?
There are many definitions trying to explain what it is. In the book “Preparing for the Future of Artificial Intelligence”, it is defined as “a computerized system that exhibits behavior that is commonly thought of as requiring intelligence”. Basically, it is a science that allows machines to do what people normally do. An AI system is able to reason, solve complex problems, learn thanks to its experience, and process large amounts of data.
AI was introduced in 1956 and saw a great development from 1960 to 1970. However, due to the lack of data, knowledge and rules, it knew an impressive development only in the 2000s thanks to the improvements in computing power and data volume. In fact, without huge amounts of data, data processing for AI would not be possible.
OVERVIEW OF THE ARTIFICIAL INTELLIGENCE INDUSTRY
With a market size value of $39.9 billion in 2020 and an expected compounded annual growth rate of 40% from 2020 to 2027, Artificial Intelligence is one of the five innovation platforms that will transform the global economy according to ARK invest.
BBC's publications claimed that AI knows what we want to buy, it could cure cancer or put an end to the existence of many jobs. But what is AI really?
There are many definitions trying to explain what it is. In the book “Preparing for the Future of Artificial Intelligence”, it is defined as “a computerized system that exhibits behavior that is commonly thought of as requiring intelligence”. Basically, it is a science that allows machines to do what people normally do. An AI system is able to reason, solve complex problems, learn thanks to its experience, and process large amounts of data.
AI was introduced in 1956 and saw a great development from 1960 to 1970. However, due to the lack of data, knowledge and rules, it knew an impressive development only in the 2000s thanks to the improvements in computing power and data volume. In fact, without huge amounts of data, data processing for AI would not be possible.
AI technology has developed at an incredible pace in the past 5 to 10 years and, as Deloitte researchers state, it is reshaping every industry and its role will become increasingly important in our economy. However, there are some industries in which leading AI enterprises like Microsoft or Google are investing heavily.
In the financial industry, AI is playing a big role and is expected to become more important in the future as it can provide solutions like the development of autonomous customer service thanks to the use of voice recognition or semantic understanding, as well as the development of intelligent investment advisory and risk management advisory.
In healthcare, it can be used to diagnose cancer or reduce the amount of time spent on documentation. For example, Nuance Communications developed Medical Speech Recognition Solutions that, on average, reduce the time spent on documentation by 45% and, as a consequence, allow clinicians to spend more time and energy with patients.
In the education sector, AI can be used to develop personal solutions and feedback for students thanks to learning, adaptation and calculation. Companies like Nuance developed solutions that, thanks to vocal recognition, transform classrooms by helping students and teachers achieve better results.
In Autonomous Driving, AI systems allow humans to free their hands thanks to sensors and visual technology. Companies such as Apple or Baidu are investing heavily in this field. According to Accenture, we will enter the era of Full Automation in 2030.
Furthermore, there are many sectors in which the potential of AI application has been underestimated (manufacturing is an example, as specified by Deloitte). As previously said, everything suggests that AI has the potential to reshape every industry.
According to Accenture, 84% of business executives believe they need to use AI to achieve their growth objectives. As the amount of data available increases, AI will certainly know a greater development. In terms of growth, it is hard to understand exactly how much this market will grow. However main consulting companies such as Deloitte, Accenture or PwC, expect a CAGR between 30% and 40% for the next 5 to 7 years.
MICROSOFT'S BET ON NUANCE COMMUNICATIONS
On April 12th, Microsoft Corp (Nasdaq - MSFT) announced it had reached an agreement for the acquisition of Nuance Communications, Inc. (Nasdaq - NUAN). The all-cash transaction will total $19.7 billion and includes the investees net debt. Microsoft will pay $56.00 per share of Nuance Communications, thus closing the deal at a 23% premium on the latter’s previous closing price of $45.58 (Friday, April 9th). Nuance’s current CEO, Mark Benjamin, will keep his position and work side-by-side with Microsoft’s Cloud & AI top executive, Scott Guthrie.
In the financial industry, AI is playing a big role and is expected to become more important in the future as it can provide solutions like the development of autonomous customer service thanks to the use of voice recognition or semantic understanding, as well as the development of intelligent investment advisory and risk management advisory.
In healthcare, it can be used to diagnose cancer or reduce the amount of time spent on documentation. For example, Nuance Communications developed Medical Speech Recognition Solutions that, on average, reduce the time spent on documentation by 45% and, as a consequence, allow clinicians to spend more time and energy with patients.
In the education sector, AI can be used to develop personal solutions and feedback for students thanks to learning, adaptation and calculation. Companies like Nuance developed solutions that, thanks to vocal recognition, transform classrooms by helping students and teachers achieve better results.
In Autonomous Driving, AI systems allow humans to free their hands thanks to sensors and visual technology. Companies such as Apple or Baidu are investing heavily in this field. According to Accenture, we will enter the era of Full Automation in 2030.
Furthermore, there are many sectors in which the potential of AI application has been underestimated (manufacturing is an example, as specified by Deloitte). As previously said, everything suggests that AI has the potential to reshape every industry.
According to Accenture, 84% of business executives believe they need to use AI to achieve their growth objectives. As the amount of data available increases, AI will certainly know a greater development. In terms of growth, it is hard to understand exactly how much this market will grow. However main consulting companies such as Deloitte, Accenture or PwC, expect a CAGR between 30% and 40% for the next 5 to 7 years.
MICROSOFT'S BET ON NUANCE COMMUNICATIONS
On April 12th, Microsoft Corp (Nasdaq - MSFT) announced it had reached an agreement for the acquisition of Nuance Communications, Inc. (Nasdaq - NUAN). The all-cash transaction will total $19.7 billion and includes the investees net debt. Microsoft will pay $56.00 per share of Nuance Communications, thus closing the deal at a 23% premium on the latter’s previous closing price of $45.58 (Friday, April 9th). Nuance’s current CEO, Mark Benjamin, will keep his position and work side-by-side with Microsoft’s Cloud & AI top executive, Scott Guthrie.
Nuance is an American software technology developer based in Burlington, Massachusetts. It provides cloud and AI software solutions to over half of the physicians and 75% of radiologists in the United States. Being a leader in its niche industry, Nuance’s technology delivers cutting-edge AI, voice-recognition, or ambient technology to almost 80% of US hospitals.
The firm was incorporated in 1992 under the name Visioneer. After the acquisition of Xerox’s spinoff ScanSoft in 1999, and the merger with SRI International division in 2005, the newly formed group adopted the name Nuance Communications. Before 2001, the group was a pioneer in developing desktop imaging softwares and focused chiefly on delivering its platforms such as OmniPage to large corporations. After acquiring distressed firms Lernout & Hauspie and Dragon Systems in 2001, the group’s focus shifted towards developing speech recognition technology. Most notably, it played a pivotal role in assisting Apple Inc with the development of Siri.
Nuance has promoted aggressive inorganic growth in the past decade and managed to gain a leading position in the niche of ambient cloud technology within the healthcare industry, working closely with Electronic Health Records to ease clinical documentation processes and improve the efficiency of patient interfaces.
This deal extends Microsoft’s chief executive Satya Nadella’s path of significant acquisitions to expand into high-growth markets such as healthcare and video gaming. It is the second-largest acquisition in Microsoft’s history after the firm spent nearly $26 billion in 2016 to gain control of the professional social network LinkedIn. In fact, the tech behemoth has undertaken more than 100 M&A deals since that year, spending more than $25 billion (Nuance excluded).
Strategically, the timing of the deal is perfect for Microsoft. While big tech competitors such as Amazon, Facebook, and Google face strict scrutiny by both antitrust and fiscal authorities, Microsoft’s relatively calmer situation justifies executive’s confidence that the deal will go through.
The firm was incorporated in 1992 under the name Visioneer. After the acquisition of Xerox’s spinoff ScanSoft in 1999, and the merger with SRI International division in 2005, the newly formed group adopted the name Nuance Communications. Before 2001, the group was a pioneer in developing desktop imaging softwares and focused chiefly on delivering its platforms such as OmniPage to large corporations. After acquiring distressed firms Lernout & Hauspie and Dragon Systems in 2001, the group’s focus shifted towards developing speech recognition technology. Most notably, it played a pivotal role in assisting Apple Inc with the development of Siri.
Nuance has promoted aggressive inorganic growth in the past decade and managed to gain a leading position in the niche of ambient cloud technology within the healthcare industry, working closely with Electronic Health Records to ease clinical documentation processes and improve the efficiency of patient interfaces.
This deal extends Microsoft’s chief executive Satya Nadella’s path of significant acquisitions to expand into high-growth markets such as healthcare and video gaming. It is the second-largest acquisition in Microsoft’s history after the firm spent nearly $26 billion in 2016 to gain control of the professional social network LinkedIn. In fact, the tech behemoth has undertaken more than 100 M&A deals since that year, spending more than $25 billion (Nuance excluded).
Strategically, the timing of the deal is perfect for Microsoft. While big tech competitors such as Amazon, Facebook, and Google face strict scrutiny by both antitrust and fiscal authorities, Microsoft’s relatively calmer situation justifies executive’s confidence that the deal will go through.
Since fall 2020, the firm released the Microsoft Cloud for Healthcare. This end-to-end system enables organizations to handle and manage data at scale, enhance patient experience, and improve efficiency and security. The comprehensive platform’s first update is scheduled for the end of April, following Microsoft’s Healthcare Innovation Forum on April 29th.
Enabled by Nuance’s technology and experience, the Cloud for Healthcare will include new features and improvements for health data management, care collaboration, and virtual health. The latter service, whose importance has grown immensely due to the coronavirus pandemic, is where Nuance’s AI systems can provide a competitive advantage. Top managers of both firms hope that Nuance’s technology, coupled with Microsoft platforms and software such as Teams, Dynamics 365, and Azure Bot Health, will pioneer a new way to view personal healthcare.
Strong of its pioneer position in healthcare software, Microsoft’s long-term plan is to dominate the scene outside national borders. On April 14th, insurance giant AXA announced the launch of a digital healthcare platform in partnership with Microsoft. The system will be similar to Microsoft’s Cloud for Healthcare and will initially be available to AXA customers in Germany and Italy (where it launched a pilot in 2020). However, the service can potentially become a global leader, with plans to expand to the United Kingdom, Belgium, Spain, and Switzerland by 2022.
WHERE MICROSOFT IS GOING: WHAT IT HOPES THE DEAL WILL ACHIEVE AND WHAT IT WANTS TO COUNTERACT
The problem everyone appears to have with Microsoft’s acquisition of Nuance Communications is simple: it is seemingly impossible to see where the deal fits in the company’s string of investments. In 2016, Microsoft acquired the social network LinkedIn for $26 billion, and in 2018 it was the turn of software development platform GitHub, acquired for $8 billion. Six months ago, Microsoft bought the private company ZeniMax for $7.5 billion, and then tried to acquire social media sensation TikTok, losing due to Oracle’s bid; finally, Microsoft tried to acquire the social media platform Discord, and then Pinterest, which uses rival Amazon Web Services as its infrastructure provider.
Identifying a pattern in most of these moves is not difficult: Microsoft, which has traditionally relied on companies as its clients, is partly shifting to a new customer base comprised of the general public. It makes sense on many levels: not only the companies perfectly fit Microsoft’s strategy – for example, with Discord becoming increasingly popular among gamers, it would have worked well with many of the gaming companies in Microsoft’s portfolio, like Minecraft.
But the chase of social media companies serves additional purposes: it would be a move to bring renown applications to Microsoft’s Azure cloud platform, and it would help train Microsoft’s artificial intelligence programs on a huge amount of data. The latter also happens to be one of the reasons behind Nuance Communication’s acquisition: recently, Microsoft has been making investments in industry-specific cloud technology, including not only healthcare but also finance and retail.
“When Microsoft buys a company, its executives typically believe they can do more with the technology than the company it is buying can,” said an analyst at the investment bank Stifel. The fact that Nuance not only has proven itself in the broad field of voice automation through artificial intelligence, but specifically in healthcare, whose voice animation is full of technical and complex vocabulary, means that Microsoft could introduce that specific technology into other types of businesses, and that none of its competitors will have access to Nuance’s know-how.
Hindering the growth of its competitors is another key factor: Microsoft’s market capitalization stands at a very enviable position of almost $2 trillion, which is just behind of Apple’s $2.2 trillion and far ahead of Amazon’s $1.8 trillion, Alphabet’s $1.6 trillion and Facebook’s $993 billion, and the company has recently started pursuing a more aggressive acquisition strategy compared to its rivals.
This could play out well for Satya Nadella, Microsoft’s chief executive: as previously mentioned, the GAFA conglomerate has repeatedly come under the fire of American regulation authorities, and it is not yet possible to declare whether Biden’s administration will threaten Silicon Valley’s next moves, which could give Microsoft operating space to expand itself and hamper the growth of both his most notable competitors and smaller joint healthcare-artificial intelligence ventures.
Only in the past two years this sweet spot between medical and computing sciences has started to get the attention it deserves, with the arrival of the Covid-19 pandemic on the global scenes. Before the Coronavirus emergency, the employing of AI in the healthcare sector, and therefore the investment flow in it, was very low. This was due to possible regulatory concerns and a very uncertain customer acceptance, but suddenly, the importance of new technology to healthcare and pharma has skyrocketed, and private investors are funneling huge amounts of money into transactions previously thought to be too much of a gamble: a prime example of this behavior is Insitro, a start-up that is using AI to analyze human genetics and work out where to target drugs, which has raised $400 million from investors including SoftBank and Alphabet’s Google Ventures.
The moment is right: Insitro is not alone, and its generous amount of funding was not just a stroke of luck. XtalPi, an American-Chinese biotech company that focuses on AI-drug Discovery, has raised $319 million; other notable ventures include Viz.ai, which raised $71 million to accelerate the expansion of its AI platform, the Intelligent Care Coordination, that recognizes strokes, cardiology and trauma issues to timely communicate them to specialists, and Deep 6 AI, which raised $17 million for its AI-powered clinical trials acceleration software.
The examples could go on, but all of them mean the same thing: artificial intelligence in the healthcare sector is on the rise, and Microsoft is in a prime position to take advantage of it. The company itself announced that Nuance technology is being used in 77% of hospitals in the US, allowing Microsoft to access half a million doctors and some of the largest hospitals in the world, and to state that the acquisition can potentially double the size of the healthcare market where it competed to almost $500 billion.
Looking at these parameters, what initially seemed like a uselessly expensive deal assumes a different meaning: at $56 per share and an equity value of $16 billion, which is a 23% premium to the deal’s closing price, the potential revenues that will be generated by dominating the healthcare market and the potential tie-ups with uncorrelated industries can be considered far higher, and make the overall $19.7 billion valuation (net debt included) look like pocket change for a company like Microsoft, which disposes of a net cash position of $50 billion.
BSCM would like to thank FactSet for giving us access to their platform and providing charts and data.
Francesca Giuliana Paduano
Tommaso Scarlatti
Emanuele Virno Lamberti
Want to keep up with our most recent articles? Subscribe to our weekly newsletter here.
Enabled by Nuance’s technology and experience, the Cloud for Healthcare will include new features and improvements for health data management, care collaboration, and virtual health. The latter service, whose importance has grown immensely due to the coronavirus pandemic, is where Nuance’s AI systems can provide a competitive advantage. Top managers of both firms hope that Nuance’s technology, coupled with Microsoft platforms and software such as Teams, Dynamics 365, and Azure Bot Health, will pioneer a new way to view personal healthcare.
Strong of its pioneer position in healthcare software, Microsoft’s long-term plan is to dominate the scene outside national borders. On April 14th, insurance giant AXA announced the launch of a digital healthcare platform in partnership with Microsoft. The system will be similar to Microsoft’s Cloud for Healthcare and will initially be available to AXA customers in Germany and Italy (where it launched a pilot in 2020). However, the service can potentially become a global leader, with plans to expand to the United Kingdom, Belgium, Spain, and Switzerland by 2022.
WHERE MICROSOFT IS GOING: WHAT IT HOPES THE DEAL WILL ACHIEVE AND WHAT IT WANTS TO COUNTERACT
The problem everyone appears to have with Microsoft’s acquisition of Nuance Communications is simple: it is seemingly impossible to see where the deal fits in the company’s string of investments. In 2016, Microsoft acquired the social network LinkedIn for $26 billion, and in 2018 it was the turn of software development platform GitHub, acquired for $8 billion. Six months ago, Microsoft bought the private company ZeniMax for $7.5 billion, and then tried to acquire social media sensation TikTok, losing due to Oracle’s bid; finally, Microsoft tried to acquire the social media platform Discord, and then Pinterest, which uses rival Amazon Web Services as its infrastructure provider.
Identifying a pattern in most of these moves is not difficult: Microsoft, which has traditionally relied on companies as its clients, is partly shifting to a new customer base comprised of the general public. It makes sense on many levels: not only the companies perfectly fit Microsoft’s strategy – for example, with Discord becoming increasingly popular among gamers, it would have worked well with many of the gaming companies in Microsoft’s portfolio, like Minecraft.
But the chase of social media companies serves additional purposes: it would be a move to bring renown applications to Microsoft’s Azure cloud platform, and it would help train Microsoft’s artificial intelligence programs on a huge amount of data. The latter also happens to be one of the reasons behind Nuance Communication’s acquisition: recently, Microsoft has been making investments in industry-specific cloud technology, including not only healthcare but also finance and retail.
“When Microsoft buys a company, its executives typically believe they can do more with the technology than the company it is buying can,” said an analyst at the investment bank Stifel. The fact that Nuance not only has proven itself in the broad field of voice automation through artificial intelligence, but specifically in healthcare, whose voice animation is full of technical and complex vocabulary, means that Microsoft could introduce that specific technology into other types of businesses, and that none of its competitors will have access to Nuance’s know-how.
Hindering the growth of its competitors is another key factor: Microsoft’s market capitalization stands at a very enviable position of almost $2 trillion, which is just behind of Apple’s $2.2 trillion and far ahead of Amazon’s $1.8 trillion, Alphabet’s $1.6 trillion and Facebook’s $993 billion, and the company has recently started pursuing a more aggressive acquisition strategy compared to its rivals.
This could play out well for Satya Nadella, Microsoft’s chief executive: as previously mentioned, the GAFA conglomerate has repeatedly come under the fire of American regulation authorities, and it is not yet possible to declare whether Biden’s administration will threaten Silicon Valley’s next moves, which could give Microsoft operating space to expand itself and hamper the growth of both his most notable competitors and smaller joint healthcare-artificial intelligence ventures.
Only in the past two years this sweet spot between medical and computing sciences has started to get the attention it deserves, with the arrival of the Covid-19 pandemic on the global scenes. Before the Coronavirus emergency, the employing of AI in the healthcare sector, and therefore the investment flow in it, was very low. This was due to possible regulatory concerns and a very uncertain customer acceptance, but suddenly, the importance of new technology to healthcare and pharma has skyrocketed, and private investors are funneling huge amounts of money into transactions previously thought to be too much of a gamble: a prime example of this behavior is Insitro, a start-up that is using AI to analyze human genetics and work out where to target drugs, which has raised $400 million from investors including SoftBank and Alphabet’s Google Ventures.
The moment is right: Insitro is not alone, and its generous amount of funding was not just a stroke of luck. XtalPi, an American-Chinese biotech company that focuses on AI-drug Discovery, has raised $319 million; other notable ventures include Viz.ai, which raised $71 million to accelerate the expansion of its AI platform, the Intelligent Care Coordination, that recognizes strokes, cardiology and trauma issues to timely communicate them to specialists, and Deep 6 AI, which raised $17 million for its AI-powered clinical trials acceleration software.
The examples could go on, but all of them mean the same thing: artificial intelligence in the healthcare sector is on the rise, and Microsoft is in a prime position to take advantage of it. The company itself announced that Nuance technology is being used in 77% of hospitals in the US, allowing Microsoft to access half a million doctors and some of the largest hospitals in the world, and to state that the acquisition can potentially double the size of the healthcare market where it competed to almost $500 billion.
Looking at these parameters, what initially seemed like a uselessly expensive deal assumes a different meaning: at $56 per share and an equity value of $16 billion, which is a 23% premium to the deal’s closing price, the potential revenues that will be generated by dominating the healthcare market and the potential tie-ups with uncorrelated industries can be considered far higher, and make the overall $19.7 billion valuation (net debt included) look like pocket change for a company like Microsoft, which disposes of a net cash position of $50 billion.
BSCM would like to thank FactSet for giving us access to their platform and providing charts and data.
Francesca Giuliana Paduano
Tommaso Scarlatti
Emanuele Virno Lamberti
Want to keep up with our most recent articles? Subscribe to our weekly newsletter here.