Unlocking the Value of Data: Tech Acquisitions in Healthcare

Four weeks ago, Intuitive Surgical shares rose on a report that it is open to being acquired by a larger player in medtech.  Naturally, this type of report drives intrigue and consideration of who might be a viable acquirer.  Intuitive may or may not be sold, but when one looks at the potential suitors in medtech who could do such a deal, the list shrinks fairly quickly.

For the sake of argument, let’s take the statement from MassDevice on face value: the acquirer is larger and in Medtech.  Intuitive is currently 35th on the list of largest medtech companies.  On face value, only Stryker (or possibly Boston Scientific) can truly take on a deal of this size, has interest in selling capital, is in urology/GYN/general surgery, and doesn’t have a robot in the works targeted at Initiative’s procedures. Eliminator GraphicOthers like Danaher, GE Healthcare, Siemens, or Fujifilm Holdings could be tempted to explore this opportunity because of a focus on capital or general surgery or informatics.  Further, companies like JNJ or Medtronic could explore it if internal robotic development programs fall flat.

So, we are left with three groups within the Medtech segment:

  • Group 1: Enter Surgical Adjacency – Stryker or Boston Scientific
  • Group 2: Enter a healthcare capital and/or informatics adjacency – Danaher, GE Healthcare, Siemens Healthineers, Fujifilm
  • Group 3: Hedge against internal robotic program inability to meet expectations – JNJ, Medtronic

However, is there a fourth category of strategic buyer?  Would this market be attractive to a traditional technology company?  In the way Verily partnered with Ethicon (Verb), might another tech company see the value in big data, analytics, machine learning, etc.  Could an outright acquisition be a path to expand access to information and a channel to market in healthcare?

Healthcare companies have struggled on their own to monetize data effectively and tech companies have similarly struggled with the sales cycle and regulatory environment of the healthcare market.  Beyond Verily, we have seen Qualcomm Life, IBM Watson Health, and Salesforce (via Philips partnership) make forays into the healthcare market from a data or disease management perspective.  If one thinks of a robotic platform as a data solution vs. an interventional tool, it could lead to a disruptive play.

Despite the threat of competition, Intuitive is in a strong market position with over 3900 installs and 750K procedures/year.  The result is over 70% of revenue is from recurring sources, which makes for a stable foundation.  However, two of the pillars for Intuitive’s future growth (discussed in recent investor presentations) are built on its ability to develop more intelligent systems and drive data analytics through its platform – clearly a step beyond its historical comfort zone.

It would be a bold move for a company like Apple, Cisco, IBM, or Microsoft.  It may be more attractive as a partnership, but it is worth considering.  Tying more data into the equation opens channels for novel analysis, different business models, the ability to predict value, budget more effectively, and meet broader hospital (and payer) goals.

Perhaps Intuitive will be able to address its data analytics and intelligent systems strategies in-house or via partnership to stave off competition.  This coupled with its early diagnostic platforms could provide an attractive organic growth path.  Perhaps Medtronic or JNJ wants the book of business and install base on which to build.  Or, perhaps we continue to see this steady march towards a digitized healthcare environment and entry of non-traditional companies to the market.

Intel’s Good Bet on Automotive

I’ve read a variety of opinions about the viability of Intel’s Mobileye acquisition, both positive and negative.  I found the framework Peter Cohen used in this recent Forbes opinion piece to be particularly interesting, as I think he’s focused on the right four questions.  However, after considering those same questions I formed a more optimistic opinion about the deal’s prospects.  Here’s why:

Is the industry in which the target company competes large, growing and profitable?

Intel has been dipping its toes into a variety of non-traditional computing applications, and they clearly like what they see in the automotive market.  That’s for good reason.

  • The requirements for self-driving cars align well Intel’s strengths in powerful, high-end SoCs.
  • The ecosystem is still relatively nascent, providing opportunity for Intel to influence its development.
  • While self-driving cars are over a decade from hitting the roads in any kind of volume, this gives Intel ample time to carve out a compelling value position.
  • I’m not actually convinced that having fully autonomous cars on the road is necessary to make this deal successful. Even without driverless cars, auto makers are pushing more and more technology into vehicles, so Mobileye’s market will continue to grow aggressively with or without full autonomy.

Intel hires a lot of anthropologists, primarily in market insights and user experience (UX) roles. I love this strategy, and I think it’s paying dividends in the company’s ability to understand how interactions between humans and technology are likely to evolve.  If any company has a shot at understanding how this market could, should, and likely will unfold, it’s Intel.

Will the combined companies boost market share and deliver better value to customers?

If Intel’s Mobileye acquisition disappoints, it will likely be the result of failing to create and monetize a compelling solution.  Intel as an organization has very little experience selling solutions, is uncomfortable playing higher up the stack, and lacks the infrastructure to drive a go to market strategy in this space.  But Intel’s leadership also has quite a bit of institutional memory, and hopefully this will translate into learning from past missteps.  They should collaborate with Mobileye on strategy and R&D, but defer to Mobileye leadership when it comes to executing the go to market plan.  If these relative strengths and weaknesses are recognized and the company behaves accordingly then it will boost market share and deliver value to customers.

Can the combined company generate enough future cash flows discounted to today to exceed the acquisition price?

I’ll wait and see.  Intel didn’t make this investment casually, but nobody can see the future.  I’m sure they made many assumptions in their financial analysis, but I assume they were conservative….and a 34% premium actually isn’t that terrible in a market with this growth trajectory and these margins.

Can the two companies agree on an organization structure and way of working that makes the deal seamless to customers once the deal closes?

Finally, with respect to playing nice with each other, I would defer to the long term, deep existing partnership between these two organizations as a reason to be hopeful.  Intel has had R&D operations in Israel for over four decades, and while a formal partnership with Mobileye was only announced in 2016, relationships were likely built over the course of several years. There is always risk when it comes to integrating two organizational cultures, but strong pre-existing relationships is one of the best ways companies can mitigate those risks. This should give the companies a head start in integrating their operations to deliver a seamless customer experience.

Not only does this deal support a key strategic objective (diversify into new computing markets), I think Intel has a real shot to make this deal accretive.