Summary
- IBM announced a new initiative to combine its Watson computing capabilities with its bug data analytics experience.
- The new business unit already announced two new strategic partnerships for the diabetes market and pre/post-operative patient care.
- The revenue potential from the new healthcare unit is significant and can go up to $3B a year.
- While this initiative alone is not a buy signal for IBM stock, it is a step in the right direction.
Earlier this week, IBM (NYSE:IBM) launched the Watson Health business initiative that will harness IBM Watson’s superior computing skills for the fields of healthcare and life sciences. This new initiative has the potential not only to win this market over quickly but also to have a large impact on smaller ‘big data’ / SaaS software providers in the healthcare analytics market.
IBM pulls out all the big guns to win this niche of big data analytics quickly and easily. The company is creating a new business unit headquartered in Boston, MA that will focus solely on healthcare data analytics. IBM will bring a large number of employees to this new business unit, and will employ 2,000 researchers, consultants, and computer engineers in the first phase. These individuals will move from other equivalent business units. In the second phase, IBM will integrate acquired life sciences companies (Cleveland-based Explorys and Dallas-based Phytel are the first ones) into this new group to create a healthcare analytics giant. By comparison, leading healthcare software provider Veeva (NYSE:VEEV) employs fewer than 1,000 people, and data analytics specialist Splunk (NASDAQ:SPLK) and Tableau employ 1,400 and 1,940 people (respectively) in all sectors including healthcare. This massive headcount that IBM puts into the healthcare analytics business highlights its importance to the company and emphasizes the resource gap between IBM and its competition.
IBM Offering
IBM’s new healthcare business unit is part of the IBM Watson business, the artificially intelligent computer that can analyze quickly and efficiently large amounts of structured and unstructured data. In its new healthcare initiative, IBM plans to employ Watson’s computing resources to extract meaningful insights from personal health data and clinical and research resources. Ideally, IBM will provide medical practitioners with the ability to offer patients the best applicable solution based on their medical records, health data inputs, other similar cases, and available treatment alternatives. This SaaS-based solution is expected to be seamlessly integrated with Apple’s (NASDAQ:AAPL) devices, and not only will IBM have a better insight into Apple Watch, the iPhone, and other health data-gathering devices, but it will also offer unique applications to retrieve these capabilities from the Cloud.
IBM launched the Watson Health unit after work had been done with potential partners and introduced two new partnerships in addition to the Apple partnership mentioned above. The first partnership is with Medtronic (NYSE:MDT) to provide an analytics solution for diabetes patients. The IBM-Medtronic solution will provide diabetes management solutions to patients and healthcare providers based on analyzed information gathered from patients’ insulin pumps and glucose monitors. The second partnership with Johnson & Johnson (NYSE:JNJ) is targeted to provide preoperative and postoperative patient care based on IBM Watson’s cognitive solutions that were developed based years of collaboration with leading medical institutions.
IBM data and solutions are expected to be available in a SaaS model through Watson Health Cloud that could be accessed by medical practitioners, academic researchers, patients, and healthcare providers. As the pricing and revenue models are still unclear, I can only assume that potential customers of IBM Watson Health will include healthcare providers, insurance companies, pharmaceutical companies, and life sciences research companies all aiming to use the aggregated, anonymous data to extract meaningful insights in different practice areas of medicine. Pricing will probably vary according to the number of licenses purchased, their research authorization with the database, and the amount of data analyzed.
Market Overview
Healthcare is perceived to be the next big sector to embrace big data analytics. The amount of health and medical data gathered by electronic devices (e.g. smart watches and smartphones), medical devices (e.g. insulin pumps and heart pacers), institutions (e.g. hospitals, insurance companies and healthcare providers), and private companies in the healthcare business (e.g. pharmaceutical companies, medical equipment companies, and healthcare research institutions) are increasing as technology develops. Amounts of data have grown so much that it requires special tools to gather, map, and manage its efficiency in order for the data to be properly available for use.
The entire healthcare industry came to realize that the large amount of data gathered from different sources can be used to provide better treatment, real-time reactions, lower healthcare costs, and higher quality of research. The worldwide market for healthcare analytics was estimated at $4.8B in 2014 and is expected to increase an impressive 24% CAGR to an incredible $11B in 2017 and $21B in 2020.
The healthcare analytics market includes data analytic experts such as Splunk, Oracle (NYSE:ORCL), and SAS as well as healthcare analytics specialists such as Optum Health, McKesson (NYSE:MCK) and Cerner (NASDAQ:CERN). IBM brings its knowledge and experience as a big data analytics provider together with its Watson computing capabilities and the Watson cognitive experience to create a top-notch healthcare analytics company aiming to win the market.
Revenue implications
IBM has struggled for some time to find the correct, optimal way to use Watson’s cognitive computing capabilities in order to generate substantial revenues for the company. In the past, CEO Ginni Rometty said she expected the Watson business to make $10B by 2023, and it seems that Watson Health will contribute a decent portion of that estimate. Assuming IBM will gain only a 10% share of the market, that would mean an additional $1B-$2B for IBM revenues, which is a substantial amount even for a giant like IBM. However, this only includes analytics revenue and does not include any revenues from healthcare CRM solutions, regulatory submissions management tool, clinical trials management systems, and other complimentary services in the healthcare business. Complimentary services might drive additional $0.5B-$1B of revenues for IBM. In the total optimistic high-level estimation of $1.5B-$3B, annual revenues is a serious business even for IBM. In the case that IBM gains an analytics market share greater than 10% and more substantial complimentary services revenues, the revenue potential of the healthcare sector is vast.
Conclusion
Last week, IBM launched a new business initiative that would combine the company’s big data experience and knowledge with Watson’s cognitive computing capabilities to create a healthcare analytics business. The new business aims to win over the market with its superior computing resources, the strong IBM brand, and its vast experience in the big data analytics business. While this is a significant emerging revenue stream that is additional to the company’s other businesses, it may severely impact the pure-play healthcare players as Cerner and McKesson. This new initiative solely does not make IBM a buy, but it indicates that the company is not satisfied with its big data offering but looking to expand into new evolving markets to drive additional revenues. This is a sign of improvement and increased innovation for current IBM stockholders, who should expect that these revenues will add to the top line in the long term.
Date: April 20, 2015