By: Lisa Chai, Sr. Research Analyst
Microsoft has announced plans to acquire Nuance Communications, accelerating its strategy of advancing into the $3 trillion healthcare industry. This mega-deal is cashing in at $19.7 billion—an all-cash, 23% premium over Nuance’s closing price on April 9, 2021. While a move like this by Microsoft may seem bold, the likes of major Silicon Valley companies have been stealing AI talent from Nuance for the past decade.
Nuance is a company in all three of the ROBO Global innovation indices due to its leadership in intelligent systems powered by AI, such as speech recognition, natural language processing (NLP) text-to-speech (TTS), biometrics, and more. The company has been at the forefront of driving innovation with AI technologies for decades and delivering enterprise-grade AI systems and currently holds 2,350 patents.
This acquisition is Microsoft’s second-largest in its history, behind the $26 billion purchase of LinkedIn in 2016, and speaks to the value of AI applications across the healthcare industry moving forward.
We believe that conversational AI presents tremendous potential in terms of applications across all sectors and that investors should have exposure to this rapidly evolving space. Here’s how the technology is being applied across healthcare by companies like Nuance and how we anticipate Microsoft to dominate in healthcare technology by providing cloud and AI infrastructure.
Nuance’s Market Leadership in Healthcare AI
As a trusted cloud provider in AI, machine learning, and conversational AI, Nuance is an undisputed leader in healthcare AI. Its proven conversational AI platform is currently used by more than 55% of physicians and 80% of radiologists in the U.S., as well as 90% of hospitals. More than 300 million patient stories are captured in a year, and 427 million medical images are shared every day using Nuance’s healthcare solutions. This helped drive Nuance's healthcare cloud revenue up 37% YoY in 2020.
Nuance has several industry-leading SaaS offerings, including Dragon Ambient eXperience, Dragon Medical One, and PowerScribe One for radiology reporting, which are all built on Microsoft Azure, its cloud service. Nuance recently announced an expansion of its Cognitive Innovation Group focused on applying the latest advancements in artificial intelligence capacities.
Nuance was the smartest way for Microsoft to really to accelerate its push into healthcare, make a big bet on the use of AI across numerous applications in the medical space, as the industry is ripe for disruption due to the transition to the cloud accelerating at a rapid pace.
Exploring Microsoft’s Strategy for Healthcare AI Applications
Microsoft, much like Amazon, has been dabbling in healthcare over recent years but hadn’t earned meaningful revenues from the industry. This acquisition signals a power move into the space as it looks to advance its AI and cloud capabilities in the healthcare industry—what Microsoft CEO Satya Nadella calls “the most urgent application.” Microsoft now not only wants to reinvent or disrupt the medical record process flow, but it will also compete with Amazon’s cloud services (AWS), so the race to penetrate into the healthcare industry is going to be fierce.
While Nuance had been a Microsoft Cloud partner since 2019 for healthcare, it didn’t really take off until about six months ago. Microsoft has been itching to make an acquisition after losing Slack to Salesforce and passing on TikTok and has been rumored to be looking at Discord, a messaging and collaboration platform.
We believe that Microsoft’s strategy behind the acquisition of Nuance is to compete with the likes of IBM, Google, Amazon, Apple, and Alibaba. The next direction for these tech giants to move in is to target healthcare for cloud services.
In the clinical setting, integrating Nuance’s AI into Microsoft Teams would power an ambient clinical intelligence solution. This product would summarize patient-clinician interactions using conversational AI, integrate that data with information from the EHR through deep learning and automate workflows, and update the patient’s medical record. Imagine a world where a physician can speak to their smart computing device that ties in with radiology, pathology, and others, to accelerate the time required for proper medical diagnosis and for a better patient outcome. This use case only scratches the surface.
Follow the Money: Investing in Healthcare Technology & Future M&A Activity
We believe that this acquisition signals the major M&A deals to come in healthcare, given the low single-digit levels of penetration and digitization. We anticipate that this is just the beginning of an era where technology and innovation using AI-powered platforms will dominate healthcare for faster and more accurate diagnosis and will improve the quality of the patient experience and improve patient outcomes.
So how can investors tap into these inevitable market movements without having a crystal ball?
The ROBO Global innovation indices are one way for investors to capture the growth across disruptive technology while removing some of the associated risks. The HTEC index, in particular, provides investment exposure to a basket of healthcare technology companies that are working to innovate the industry, a phenomenon that is still in the early innings. The THNQ index captures the entire global AI ecosystem, with pure-play AI leaders small and large providing cutting-edge technology to key industries such as healthcare. This Nuance acquisition? It’s only the beginning of disruption as we continue to see more and more applications of AI technology in healthcare.