Description

Nuance Communications (NUAN) 

Nuance communications is the premier provider of voice recognition for the medical industry for the purposes of clinical documentation. It also uses the same technology stack in the Enterprise segment, where it provides voice recognition technology tailored to call centers and security for customer service and authentication. 

Nuance had a limited launch of Dragon Ambient Experience (DAX), a flagship new product during the last quarter. DAX has the potential to transform the process of clinical documentation for most of the health care market by applying AI and voice recognition directly to the conversation between doctors and patients. If this product works as advertised, it will lead to significant time savings, cost efficiencies, reduced physician burnout, and greater quality of life for physicians. 

Dragon Medical 

550,000 physicians use Dragon Medical, making it the most widely used voice to text tool for clinical documentation in the world. Its nearest competitor is M*Modal, which is now owned by MMM. Both products integrate directly with EHR systems like Epic, Cerner, NextGen, Meditech, and others, and allow the doctor or medical assistant to dictate part of the medical note instead of typing it. Dragon Medical is also integrated with additional products from Nuance like Clinical Documentation Improvement (CDI), which automatically detects when a medical note is not specific enough and prompts doctors to clarify their notes, leading to higher reimbursement. While Dragon Medical penetration in the United States is high, the company continues to experience revenue growth from cloud conversions.

We conducted several calls with physicians and Chief Medical Information Officers (CMIOs) at hospitals to better understand DM and the end user. Doctors told us that utilization of the product varies a lot even at hospital systems with enterprise or site licenses, and that users that are skilled with the tool can reduce the time they spend documenting by 20% or more. Everyone agreed that the revenue is very sticky – doctors and other users are very reluctant to switch tools once they’ve learned to effectively use the tool. In addition, more than one CMIO told us that the price tag of Dragon Medical is low enough that they are willing to offer it to all their physicians in order to keep them happy and reduce turnover. To illustrate this point, an orthopedic surgeon can make $400,000-$500,000 per year, and just the fees incurred to pay a recruiter to hire one can represent a significant portion of a year’s salary. A Dragon Medical license runs between $1,000 and $2,000 per year.

Dragon Ambient Experience (DAX)

Dragon Ambient Experience (formerly called Ambient Clinical Intelligence, ACI) aims to revolutionize the documentation process by having the software listen directly to the conversation between the patient and doctor, transcribe the conversation, and use the information contained in the conversation to write the note by itself for the EHR system. The only task required for the doctor is to review and edit the note as necessary. For DAX to work, the facility must be equipped with microphones and wireless internet, and the doctor needs to vocalize the information that will go into the note. Nuance launched beta versions of DAX with some of its most loyal clients starting in February and released the product commercially during Q2 2020. It is now available in 10 specialties: Cardiology, Podiatry, Orthopedics, ENT, Ophthalmology, Neurology, Nephrology, Dermatology, Urgent Care, and Primary Care. Company IR told us that Nuance expects make DAX available to 30 specialties total within the next 2-3 years.

The company has said that it intends to price DAX at around $10,000 per physician on average, though there will be variation by specialty. Nuance also claims that subscribers can achieve a 10x ROI on their investment based on increased patient throughput. 

We spoke with two CMIOs at institutions that are running tests or pilot programs of DAX. One institution was using the DAX combined with a transcription service employing human scribes. Under this model, the conversation between the doctor and patient is recorded and a preliminary medical note is written by DAX. The scribe listens to the conversation and edits or amends the note from DAX as necessary. The other institution was beta testing DAX with no human intervention before the note is delivered to the doctor.

The feedback from the doctors using DAX from both institutions was very positive. They were generally satisfied with the quality of the notes, and both CMIOs emphasized that this group of people tends to be vocal when they are dissatisfied. In addition, the doctors said that they did not need to change their behavior for DAX to function properly. One institution found that using DAX resulted in a time savings of 2.5% of the doctors total working hours with no statistically significant change in patient satisfaction. For a surgeon making $500,000 per year, the time savings is worth $12,500 by itself without accounting for the benefits of increased revenue or reduced physician turnover. The other institution was careful about not disclosing any proprietary information but said that they are evaluating ROI using 3 different metrics.

1. Patient throughput

2. Patient satisfaction, as measured through HCAHPS surveys. These are tied directly to reimbursement from CMS.

3. Provider satisfaction, which is linked to turnover.

Early indications are that DAX improves all 3 metrics. The CMIOs believed that the 10x ROI given by the company may be possible in some circumstances but is probably exaggerated as an overall average, but they thought that 5x would be possible. Both also voiced some interest in expanding usage of DAX at their institution at the conclusion of the pilot / test but expected to roll out the technology in a deliberate and thoughtful way specialty by specialty.

The Addressable Market

The AAMC puts the total number of active physicians in the United States at nearly 893,000 in 2017. Some specialties, such as psychiatry, pain management, radiology, and emergency medicine are not well suited to the DAX solution or won’t be technologically feasible in the immediate future. We estimate that the around 85% of the market, or 759,000 doctors, are addressable within the United States. In addition, Dragon Medical One is sold in Europe and Australia, which management has said are together an equivalent market size to the United States, though that may come later.

Competition

Our research indicates that Nuance is ahead on the development of DAX, but there are 3 competitors worth mentioning.

• M*Modal (3M) has a competing product for Dragon Medical but no one we spoke to has seen it demo of something similar to DAX, so  M*Model does say that its virtual assistant offers some of the same benefits. 

• Amazon has a partnership with Cerner, but apparently that relationship hasn’t gone as well as planned. Cerner selected Nuance over Amazon as a partner to build its medical assistant software. 

• Google does have a partnership with Stanford University to build a DAX type product. All we’ve found on this are old news articles. 

Outlook and Valuation

The speed of DAX adoption is of course difficult to forecast, but let’s assume for a moment that Nuance is able to get 100,000 subscribers at the end of FY 2023 at an average of $10,000 per doctor, along with some modest growth in its other healthcare products. I also assume that Enterprise segment revenues grow at 4% per year, which is the low end of the range of the guidance provided at the company’s investor day. This leads to annual recurring revenue (ARR) of about $2 billion and 2023 Enterprise revenue of just under $600 million. Assuming a 11 EV/ARR multiple for healthcare and 4x EV/S for Enterprise, I get to a value of $73.49 per share at the end of FY23, assuming conversion of all the convertible debt.

Catalyst

Rollout and ramp of Dragon Ambient Experience