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The Role of AI in Health Care M&A: Driving Value in a Difficult Market
Wednesday, May 10, 2023

Health care merger and acquisition (M&A) activity reached a significant level in 2022, even if not matching 2021’s record-breaking standard. This reflects the overall economy’s holding pattern in which resources are still being deployed strategically, but not at full throttle. At the same time, prognosticators including Moody’s have predicted that dealmaking may remain high over the next 12 to 18 months. This is due to a combination of factors, including pharmaceutical companies seeking to restock their pipelines in the face of approaching patent cliffs and long-term pricing pressure.

Many of last year’s deals were underscored by significant ties to artificial intelligence (AI) technologies, a trend likely to become more prevalent going forward. More broadly, Precedence Research estimated that the global AI in health care market will grow to over US$180 billion by 2030 - up from a 2022 estimate of US$15 billion.

In particular, AI technologies can drive value for health care companies by:

  1. Adding new or complementary capabilities
  2. Expanding customer and user bases
  3. Enabling firms to extract new insights from existing data
  4. Allowing access to new data sources

This article will review several health care M&A deals from 2022 and Q1 2023 to draw out these trends and highlight how companies can acquire AI capabilities to succeed in the rapidly evolving health care landscape.

Notable Health Care AI Deals

Many of the Top 10 medical tech M&A deals in 2022, as identified by Fierce Biotech, had direct AI considerations. For example, Microsoft’s acquisition of Nuance was based on expanding the addressable market for its Microsoft Cloud for Health Care platform:

“In shelling out the big bucks, Microsoft forecasted that adding Nuance’s conversational AI and other ambient intelligence products specifically to its Microsoft Cloud for Health Care service would double its total addressable market among health care providers, creating a revenue opportunity of up to US$500 billion. The duo, which have been working together since 2019, aims to help reduce clinicians’ workloads — and therefore the epidemic of health care worker burnout — by embedding automated note-taking technology and other cloud-based tools into electronic health record software.”

Meanwhile, R1 RCM’s purchase of Cloudmed was directed towards adding data processing capabilities to uncover added revenue streams:

“It kicked off 2022 by offering US$4.1 billion in stock to purchase Atlanta-based Cloudmed, which has built an AI-powered, cloud-based platform that hospitals and health systems can use to analyze medical records and billing and insurance data, with an aim of uncovering “underpaid or unidentified revenue.”

While most AI activity in the pharmaceutical and drug development space has focused on venture capital investments, BioNTech made a notable acquisition of InstaDeep to add InstaDeep’s AI technologies for drug discovery and manufacturing.

In addition, several other top 10 deals had AI-related nuances, particularly in generating new data streams and other integrations. The QuidelOrtho merger combined Quidel’s digital health platforms with Ortho’s point of care solutions, while Stryker’s acquisition of Vocera blends voice assistance with day-to-day clinical communication data.

These major deals illustrate some of the value propositions of AI technology, namely in terms of how they demonstrate one or more of the ways in which AI can value.1

Further Insights and 2023 Outlook

These trends are also consistent with 2022’s M&A activity for hospital and health systems. Commentators have noted that activity in this space underscores that “the movement to capability-based scale is much more prominent than adjacent market-based scale,” particularly in cross-market mergers that create value without changing “the competitive structure of the markets involved in the merger — there is no increase in the concentration of local hospitals or health systems, an increasingly important feature considering the current regulatory landscape.” A noteworthy element of many of this year’s cross-market mergers is that the systems have a common focus (e.g., rural health), complementary skillsets (e.g., academic medicine and community health), or a shared desire to improve health outcomes. These common focuses – including emphasis on complementary skillsets – reflect the value proposition of acquiring AI businesses to reach existing customers in new ways, enter new markets, expand market share, and create new value for customers.

2023’s early M&A activity demonstrates how AI plays can add value for health care companies through all four key value propositions. On the medical device side, in its first acquisition as a sole company, GE HealthCare is bolstering its ultrasound portfolio by acquiring Caption Health’s AI-powered technology for helping guide medical workers through ultrasound procedures. Following its acquisition of Nuance, noted above, Microsoft further recently announced a new collaboration with Epic to integrate their platforms for boosting productivity and improving patient care. Inflect Health – the incubator of Vituity – merged its startup Healthful with Sympto Health, combining each company’s core technologies to create a new AI and personalized care automation platform.

Pharmaceutical companies with long-term outlooks may also be looking for strategies to compete after the patent landscape changes by around 2030 for several blockbuster drugs. Companies developing computational drug discovery technologies may prove to be valuable acquisition targets, providing useful platforms to plug into existing drug development roadmaps.

What’s Ahead?

Adding AI capabilities through M&A can help health care companies innovate and create value in several different ways. Recent deals in this space have emphasized how AI solutions can create new patient service opportunities, whether companies have more traditional business and care models or are more technology-centric. These trends are expected to continue as the AI in health care market expands into the US$100 billion-plus range in the coming years. From health care systems seeking to add data analytics and patient-service capabilities, to medical device companies looking to improve how their technologies operate and deliver the right results at the right time, to pharmaceutical companies needing to strategize in view of impending patent cliffs, acquiring AI technologies will be valuable for continued success.

Appendix 1 - AI Value Propositions in 2022/2023 M&A Deals

Appendix 1

1 Please refer to Appendix 1 for detail of the key AI value propositions for each of these major deals.

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