NUAN Nuance Communications Inc

By Rolfe Winkler and Aaron Tilley 

Microsoft Corp.'s $16 billion deal for Nuance Communications Inc. is the latest sign that the next battleground for technology giants will be in healthcare, an industry whose need to embrace data and software was underscored by the pandemic.

The acquisition will help Microsoft tap into Nuance's big business selling its software to healthcare systems, according to analysts and healthcare executives. Speech-recognition software like that developed by Nuance is emerging as an important new opportunity in medicine as doctors seek to speed up documentation of patient work with dictation rather than getting bogged down taking notes, executives said.

"This coming together is about empowering healthcare," Satya Nadella, Microsoft's chief executive, said in an investor call. "It's now very clear that healthcare organizations that accelerate their digital investments can improve patient outcomes and reduce cost at scale."

The pandemic helped showcase healthcare's potential as a growth area for tech companies, such as the boom in telehealth services. Microsoft will have an ability to use Nuance as a means to sell healthcare customers its more lucrative products and services, such as cloud-computing, analysts said.

"The pandemic response by the healthcare industry has proven the value of technology to healthcare delivery," said Gregg Pessin, a senior research director at Gartner Inc. "All the digital giants are paying attention."

Nuance has spent years building up its language-processing engine to understand medical terminology, Mr. Pessin said. Microsoft has the opportunity to integrate this ability to understand medical lingo into products like Teams, its collaboration tool that has emerged as a key piece of its lucrative Office 365 productivity software.

Microsoft's purchase of the voice-recognition company also appears to be a signal that healthcare acquisitions by big tech companies aren't likely to be cheap. Including debt, the software giant is paying a price that is 13 times Nuance's fiscal 2020 revenue. The company is only forecast to grow as much as 8% this year.

Gregory Moore, a corporate vice president of Microsoft's health and life sciences business, will oversee the integration of Nuance into Microsoft, according to an internal Microsoft email. Before Microsoft, Mr. Moore led Google Cloud's effort to get into the healthcare market.

Mark Benjamin will remain CEO of Nuance and report to Scott Guthrie, executive vice president of Microsoft's cloud and AI group.

Microsoft, Amazon.com Inc. and Alphabet Inc.'s Google are focused on selling their cloud-computing services -- hosting data and providing online services remotely -- to health systems, a sector that has been slower than others to adopt them.

"Healthcare is a paper-based, manual, terrible industry riddled with inefficiency," said Brent Thill, an analyst at Jefferies. Helping the sector stitch together a better digital strategy, selling cloud-computing services as well as software applications to power newer technologies like telehealth, could enable Microsoft to unlock a market worth billions, Mr. Thill said.

The big tech players are going after the healthcare market in different ways, playing to their strengths, said Glen Tullman, a long-tenured executive in the industry who is now chief executive of health startup Transcarent Inc. Patient data is a priority, either from medical records culled by health systems or directly from consumers themselves, including through wearable devices. The companies can find new markets and revenue opportunities by collecting and assessing such data.

Microsoft's Nuance deal shows that it is focused on selling enterprise software to the sector. Amazon is jumping into healthcare e-commerce, delivering prescriptions after acquiring online pharmacy startup PillPack for $1 billion. Last month, it announced it would offer telehealth services nationwide, a service it can deliver via its cloud-computing platform. It also offers an activity-tracking device.

Apple's healthcare strategy centers on selling its devices to healthcare providers, as well as offering mobile apps that track things like exercise activity or heart rhythms through the iPhone and Apple Watch. IPhone users can also download electronic health records from doctors or hospitals to their device.

Google, meantime, has a research effort in concert with two medical systems to help make health records searchable for doctors. It has its own app to track exercise activity, sleep and other wellness data. And it bought Fitbit, the company behind another fitness-tracking wristband, completing the $2.1 billion acquisition recently.

The healthcare industry, with its many demanding security and privacy requirements, has been a challenging area for tech companies. International Business Machines Corp. tried to sell its Watson artificial-intelligence service to the healthcare industry to help doctors diagnose and cure cancer. But IBM struggled for years to live up to its own hype and gain market share. In February, IBM began exploring the sale of Watson Health, The Wall Street Journal reported.

In recent years, Google's moves to gain access to healthcare data through deals with hospital systems and other healthcare providers has drawn criticism from some privacy advocates and patient groups. A top company executive said it was a mistake for Google to build a large, sensitive program outside the public eye.

Since the onset of the pandemic, Microsoft has focused on selling more to the healthcare industry. Last October, it announced a bundle of cloud services specifically for the healthcare industry, its first industry-specific cloud offering.

"Microsoft sees lots of opportunities now where healthcare cloud is an opportunity to drive growth," said Mark Moerdler, an analyst at Bernstein Research. "If they can put some more fuel on the fire, they will."

Write to Rolfe Winkler at rolfe.winkler@wsj.com and Aaron Tilley at aaron.tilley@wsj.com

(END) Dow Jones Newswires

April 13, 2021 10:13 ET (14:13 GMT)

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