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.

The different (and not so different) future of the defense industry

The defense industry has been through major strategic changes through the years – from its days driving technology innovation through U.S. government funding, to a focus on equipping wars and conflicts when they arise, to peacetime consolidation, to the emergence of new upstarts, and then to more consolidation.  There have always been some strategic issues the industry controls, some which it anticipates, and some it never sees coming.  I’m reminded of Secretary Rumsfeld’s comments about known knowns, known unknowns, and unknown unknowns.

For almost 15 years I have been working with clients trying to identify those the strategic, operational, and tactical issues they will or could face, and help them navigate to position to win in the marketplace over the next ridge-line.  As we all attempt to look over that next ridge-line, there are some clear and common issues that must be adjudicated by defense firms—today’s known knowns and known unknowns.  These are listed in no order of importance, and I encourage my clients and friends in industry to add to and revise the list given issues and challenges your firm faces:

  1. Evolving national security policy under a new administration and ever-evolving threat dynamics from state and non-state actors. 
  1. Continued pressure on the U.S. Defense Department’s budget. This includes downward pressure on the top line from entitlement programs and internal upward pressure from people costs (healthcare, retirement, etc.), which the Pentagon faces just like every other employer. 
  1. Growing divergence within “the customer” – R&D, requirements writers, acquisition authorities, and the war-fighter community. 
  1. Silliness in U.S. export policy and decisions made about systems, sub-systems, and components that lack consistency. 
  1. Recruiting the best and brightest engineering talent to replace a current work-force that is getting older. 
  1. Threats from technology companies, start-ups, and other new market entrants.

 Strategic issues one through four above are out of the control of defense firms.  They can prepare for different outcomes and prepare to react quickly and appropriately by generating good insights on the customers, running disciplined scenario analysis and war-gaming exercises, and developing well-vetted and studied strategies to prepare for potential future states in advance.

What is in control of defense firms is the study, vetting, and adoption of alternate recruiting and business models (i.e., strategic issues five and six).

Addressing the recruiting challenge means overcoming the loss of institutional knowledge and know how as the current workforce retires, as well as the challenge of recruiting millennials into the defense industry.  Defense firms have so far been unable to crack the code on recruitment given millennials’ overwhelming desire to “do good,” their tendency to change jobs frequently, and—most significantly—the challenge of competing with compensation packages in the technology industry.  Both the defense world and other manufacturing industries are at a disadvantage, but one that can be overcome with new talent strategies.

The threat from technology companies and start-ups comes specifically from their willingness to use disruptive business models.  The traditional defense industry is challenged by innovative business models that circumvent government R&D investments and solution sets, use different program payment methods, and reduce overall cost and timing.  Many defense firms have struggled significantly with understanding and executing these more commercial business models.  The reasons behind this are varied ranging from traditionally low risk tolerance to the embedded development and manufacturing costs the defense industry bears because of FAR compliance.  This burden creates an opportunity for new market entrants to create a competitive advantage, which we are already seeing in markets ranging from UAVs to space platforms, sensors, communications, and other mission systems, to services.

The market will continue to evolve, and items on this list will come and go, but success in the future will go to those firms with the best vision of how to compete, in a disciplined way, in the future state of this industry.  The marketplace in the next ten to twenty years will look very different than it does today with companies that have solved the recruiting and business model challenge on top.