Microsoft and the foray into healthcare
We covered Microsoft and their strategic acquisition of Nuance on the most recent podcast and what it means for Microsoft’s near future. In this blog, we will cover where we ultimately think Microsoft will end up within the healthcare space.
Nuance Acquisition
Nuance was acquired for $19.7b in March 2022 by Microsoft. It is interesting to think about the timeline and the discussions within the boardroom and strategy team around this deal.
Microsoft first made an investment into OpenAI way back in 2019, which likely equates to when they realized how world-altering AI technology would be to every facet of today’s tech stack. The corp dev team at Microsoft was definitely aware of the OpenAI investment and likely begin searching for new industries they could look to make further investment to not just grow their revenue potential but also apply their new AI capabilities.
How many other industries could Microsoft realistically enter to increase their revenue base by any meaningful amount — enter their interest in healthcare. As they looked around the healthcare industry, there are only a handful of companies that could move the revenue needle — EHRs and enterprise SaaS platforms.
Nuance represented an interesting strategic bet — could they take this company that was already entrenched within the healthcare system and increase their product velocity by pairing it with the emerging ChatGPT technology. Well, that is exactly what they did.
Nuance announces ambient listening with ChatGPT functionality
Read full press release, here.
Nuance had already created an ambient listening technology — DAX — that was a response to smaller companies (Augmedix, Abridge, DeepScribe, and others) that were creating listening devices to transcribe patient encounters and build out EHR patient notes. These types of softwares have vast potential to save physicians time and energy and hopefully reduce physician and clinician burnout.
However, now that Nuance has announced the development of an ambient listening device with ChatGPT 4 at it’s core, does that change the trajectory for these other companies? The easy answer, yes. But why?
Distribution Advantages
There is one large advantage that a company like Nuance has over these smaller, more nimble companies, distribution. Nuance is in most every hospital already given they have been in the market since the early 2000s and their Dragon software is used by most radiology practices as their dictation software of choice. However, now combine that advantage with the distribution of Microsoft, which has been pushing Microsoft 360 into the hospital environment with their HIPAA-compliant cloud platform, Azure and Microsoft teams for in-patient team communications.
Product Velocity
Typically, product velocity is the advantage that startups have over the incumbents. However, Microsoft has increased their product velocity to a break-neck pace and that appears to extend to their subsidiaries like Nuance. The issue that startups will have with competing with Nuance within this ambient listening space, Microsoft has the advantage of developing with the newest and fastest version of ChatGPT and may even be developing within the framework of future ChatGPT versions.
Future Microsoft Healthcare Moves
Big, bold prediction — Microsoft will eventually acquire Epic (or another EHR).
Why? Going back to the revenue piece, they need to find new ways to continue adding to their gigantic revenue base. An EHR like Epic that is so well distributed within the US healthcare system provides a really interesting acquisition target not just from the revenue standpoint but also from the product development standpoint. If Microsoft got their hands on Epic, they could rebuild the platform with ChatGPT as the engine of innovation.
Imagine Epic, powered by Microsoft/ChatGPT with the ability for physicians to become more superhuman — automated patient notes, discharge summaries, in-basket messages, prior authorization, billing, patient scheduling, etc.
Microsoft could then do what Microsoft does best, bundle. They could acquire a small startup building an innovative PACS system, improve it with ChatGPT functionality and have it hosted in the cloud with Azure.
How much revenue would this bring in for Microsoft and how much would they need to pay to acquire Epic?
According to a recent Becker’s report, Epic’s revenue grew 13% from 2020 to 2021 to $3.8b and has been growing by double-figures for the last 10 years. Microsoft’s revenue in 2022 reached $198b. However, if Microsoft did decide to acquire Epic or another EHR, they would likely see it is a growth play with a land and expand strategy. Given Epic has a healthy (albeit much smaller than anticipated) market share of the inpatient EHR market of approximately 36.5% according to a Definitive Healthcare report. This gives Microsoft a nice base of revenue with continued growth potential to take market share for competitors (don’t forget, Cerner was recently acquired by Oracle for $28b) so purchasing an EHR is not unheard of.
Now, how much would they need to pay to acquire Epic? With the baseline of Cerner’s acquisition at $28b, likely they would need to pay up to $50b (~13x top-line revenue) for the EHR company that remains private (and bootstrapped outside of an initial friends and family raise of $70k way back in 1979).
Gregory Hanson, MD, MPH