Anthem Reimagines Healthcare
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Anthem Reimagines Healthcare

On paper, the merging of artificial intelligence and healthcare should yield big results. Yet technology firms entering the market, like International Business Machines Corp. (NYSE: IBM), have been stymied at every turn.

The Armonk, N.Y.-based company is considering selling its Watson Health business, according to a report last week in The Wall Street Journal.

IBM isn’t the only big-tech firm to fail to break the code in healthcare. A group led by Amazon.com, Inc. (Nasdaq: AMZN) announced last month that it was disbanding Haven, a joint venture that was supposed to use AI and transformative digital strategies to wring out the inefficiencies that have plagued managed care. The project failed because insurers and care providers inside the ecosystem refused to give up their plan data.

Product managers at IBM tried to ambitiously play the game from inside. The company spent lavishly by buying up healthcare information technology firms. The Wall Street Journal notes the tab for Merge Healthcare, Truven Health and Phytel, all purchased since 2015, came in at $3.8 billion. Those businesses were merged into Watson Health.

Watson became a household name in 2011 after the AI platform began knocking off humans on “Jeopardy!”. Watson’s data banks were filled with knowledge about every subject and its natural language processing power was off the charts. Silly humanoids didn’t stand a chance against the soft-spoken computer.

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The big idea behind Watson Health was to have AI algorithms instantly turn teraflops of data into actionable medical solutions bereft of normal human cognitive biases. If successful, Watson would help doctors make faster and more accurate diagnoses, saving healthcare providers billions.

In 2015, the MD Anderson Cancer Center at the University of Texas began working with Watson for oncology. An internal audit a year later revealed the unit spent $62 million evaluating the AI platform with no real successes. The entire project was subsequently cancelled.

The lesson for investors is cautionary.

While digital transformation and AI is impacting healthcare, the rollout has been more deliberate. The winners thus far have come from within.

What’s happening in healthcare is much like the transition to digital media and electric vehicles. Companies with scale and forward-looking management teams are investing heavily in IT and digitalization. They’re building business models to leverage AI in new ways.

Over time, financial markets are likely to value those businesses less like traditional healthcare providers and more like technology firms that provide healthcare. This means a large multiple expansion and much higher share prices.

One of the companies from within that has massive potential is Anthem, Inc. (NYSE: ANTM).

Anthem provides private health insurance to 43 million members in the United States. The Indianapolis-based company is also the largest single provider of Blue Cross and Blue Shield coverage in the country.

Beginning in 2017, executives started the firm’s digital transformation. A team of 2,000 engineers, programmers and systems analysts grew to 3,000 strong under the leadership of Anil Bhatt, vice president of digital solutions.

They began by making data central to every aspect of the business. Engineers built software applications to harness data analytics for business synergies. They used AI in natural language processing, voice recognition and sentiment analysis for customer facing technologies. Bhatt says Anthem is now using voice recognition patterns to identify members at risk for negative health outcomes.

These tools reimagine the business providing care.

Shares have been in a holding pattern for the past quarter as the company works through the COVID-19 uncertainty. Managers said in January the outlook for the rest of 2021 remains stable. Longer-term earnings growth should be in the 12% to 15% range. Profits in 2021 are projected to be at least $24.50 per share.

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Given the current stock price of $295, shares trade at only 11.9 times forward earnings and 0.63 times sales.


 

The ongoing transition to a more digital business should support 2021 earnings to increase by 16-fold. This implies a price target of $392 per share, 33% above current levels.

Current weaknesses can be seen as entry opportunities.

Best wishes,

Jon D. Markman

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