IBM Acquires Merge Health To Supplement Watson Healthcare

International Business Machines (NYSE:IBM) recently announced that it was acquiring Merge Healthcare (NASDAQ:MRGE), a leading provider of “medical image handling and processing, interoperability and clinical systems”, for roughly $1 billion. ^[1] The company plans to integrate Merge Healthcare’s capabilities with its Watson high performance computing and analytics platform, which is an artificial intelligence system capable of answering questions posed in natural language. It was developed by IBM’s DeepQA project and is one of IBM’s most powerful computing platforms. Initially developed some years ago to play the television game-show Jeopardy (which it handily won), Watson (names after founder Thomas Watson), has since been commercialized and is now gain traction.  We believe that, as IBM works to overcome the difficult markets faced by its enterprise hardware and software, Watson is of critical importance. IBM aims to drive its business analytics division to $15 billion in sales by 2018.

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Transaction Details

IBM’s acquisition of Merge is to be structured as follows:  Merge shareholders are to receive $7.13 per share in cash, or 29.7x consensus 2015 EPS of $0.24. The roughly $1 billion in consideration comprises outstanding debt of $219 million and close to $800 million in equity (roughly 3.2x consensus 2015 revenue of $251 million. Merge offers software solutions to integrate medical images with the IT infrastructure present in medical facilities. It offers both on-premise and Cloud solutions. Most notably, its robust network management tools allow it to access the image repositories of its 7,500 customers as an anonymized research pool of roughly 30 billion images, including x-rays, CAT- and MRI-scans. ^[2]  The shear scale of the sample size well suits the data capabilities of Watson, though the specific subtleties of medical image analysis are likely to make for a fairly steep learning curve. That said, the potential is huge.  We note this is IBM’s third recent acquisition, coming in the wake of its purchase of Phytel and Explorys.

Machine Learning Through Picture Integration Is Key To Success In The Medical Vertical

Watson is based on machine learning and to master a subject, it takes a significant amount of time and data. For example, researchers are trying to “teach” Watson oncology by feeding the machine with answers to relevant questions. Then, to make the machine “understand”, they ask it to answer similar questions by analyzing documents, websites and books at 66 million pages a second. After several iterations and teaching the machine what answers are accurate, it is expected that Watson will develop enough expertise to assist a doctor in a practical situation. IBM had developed image recognition software which it planned to integrate with Watson. This acquisition expedites IBM’s effort to roll out a Watson as a comprehensive Healthcare solution that will be powered by it most advanced supercomputers and advancing Watson beyond natural language and giving it the ability to “see.”

Considering that nearly 90% of the data in medical science is attributed to images, medical practitioners around the world are over whelmed with medical images. Furthermore, as most of the accurate analysis for medical condition at the intersection of diverse data sets (medical records, lab tests, genomics, medical images etc.), it is imperative that medical technicians sift through large sets of discrete data.

IBM plans to leverage the Watson Health Cloud to analyze and cross-reference medical images against a plethora of  lab results, electronic health records, genomic tests, clinical studies and other health-related data sources. Insights generated by Watson could then help healthcare providers in fields including radiology, cardiology, orthopedics and ophthalmology to pursue more personalized approaches to diagnosis, treatment and monitoring of patients. In a potential health-related scenario, a medical practitioner can access Watson through a device to explain a patient’s problems and symptoms. He would also upload the medical images to Watson for the analysis. Based on the symptoms and cross referencing of images against images of established medical conditions and diseases, Watson could provide an initial recommendation. We note, however, Watson is not intended to supplant the trained eye of the radiologist, more to assist radiologists with the shear volume of images they are tasked to examine.  It could also provide information about nearby medical facilities, if needed, and contact healthcare facilities.

At present, we have a $199 Trefis price estimate for IBM, which is about 19% higher than the current market price.

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1. Watson to Gain Ability to “See” with Planned $1B Acquisition of Merge Healthcare, August 7 2015 [↩]
2. Read: IBM Crafts a Role for Artificial Intelligence in Medicine. [↩]