IBM Corp. plans to sell its imaging and population health software along with Watson Health’s data and analytics business, the company said Friday.

The tech conglomerate and private equity firm Francisco Partners have signed a definitive agreement and expect the deal to close in the second quarter, subject to customary regulatory approvals. The transaction, of which financial terms were not disclosed, includes IBM’s medical imaging and population health software, Merge Healthcare and Phytel.

IBM has incrementally sold off parts of its artificial intelligence-fueled Watson Health enterprise, illustrating the complexity of applying budding technology to the highly regulated healthcare industry, analysts said. But IBM’s “missteps” shouldn’t downplay the potential of AI in healthcare, industry observers said.

The IT sector chronically underestimates the complexity of human illness by defining healthcare as a “big data” problem, not a human problem, said Jeff Goldsmith, founder and president of the consultancy Health Futures.

“I’ll bet IBM spent $6 billion on it, before it began buying up the collateral businesses to cover up the core failure,” he said, describing Watson Health as a “huge corporate embarrassment” that left behind unfulfilled promises. “I have no idea what Watson Health’s remaining businesses are worth, and don’t know anyone who does.”

Under the deal, the current management team will continue in similar roles in the new standalone company serving its existing clients.

The news comes after IBM sold three components of its Watson Health portfolio to the group purchasing organization Vizient in 2020: ActionOI, CareDiscovery and Market Expert.

“If IBM can get a fair price for Watson Health, we think it is a wise decision to shed the asset given the significant barriers to adoption in the healthcare industry,” Julie Bhusal Sharma, an equity analyst at Morningstar, wrote in an email to Modern Healthcare.

IBM acquired Truven Health Analytics in 2016 for $2.6 billion, which added more than 8,500 clients to the Watson Health portfolio, including federal US and state government agencies, employers, health plans, hospitals, clinicians and life sciences companies.

That acquisition followed the company’s purchase of Merge Healthcare in 2015, which was used at the time by 7,500 healthcare facilities to aggregate and analyze medical images. IBM also acquired the population health software Phytel in 2015 as well as Cleveland Clinic’s Explorys, a cloud-based application for clinical integration, at-risk population management, cost of care measurement and alternative payment models.

The “assets associated with” Merge and Phytel are part of the transaction with Francisco Partners, according to an IBM spokesperson, who declined to confirm or deny whether Explorys was included in the sale. Francisco Partners has invested in more than 400 technology companies over its two decades in business, including eSolutions, Capsule, GoodRx and Zocdoc.

Those deals, in part, drove the hype for IBM Watson Health’s artificial intelligence tool for cancer treatment, Watson for Oncology. But it reportedly struggled to navigate health system’s electronic health records, leading to internal disputes and executive turnover.

“There were a few early missteps in oncology, which didn’t perform as well as expected and failed to gain the confidence of clinicians. It’s possible that IBM took on something big and bold and it didn’t work,” said Paddy Padmanabhan, founder and CEO of Damo Consulting, noting highly public disputes with MD Anderson and Memorial Sloan Kettering cancer centers. “The whole (of IBM Watson Health) was supposed to be bigger than the sum of the parts, but now the parts seem to be worth more than the whole.”

Google, which has expanded its relationship with health systems like Mayo Clinic, and Amazon, which recently launched its pharmacy delivery service and grown its medical care service for employers, have had more success in recent years than Watson Health, analysts said. The health system-backed Truveta continues to garner support in its efforts to house de-identified medical records, images and genomics on the Microsoft Cloud for Healthcare.

But most tech companies’ progress is slower than expected given healthcare’s strict regulatory environment, among other factors, Morningstar’s Bhusal Sharma said.

Oracle’s proposed $28.3 billion acquisition of Cerner likely made IBM rethink its overall strategy around Watson Health, said Andrew McDonald, healthcare consulting leader at LBMC.

“IBM is not a major player in healthcare and those early mistakes didn’t help them. At the end of the day, they couldn’t leverage the investment and the ROI wasn’t there,” he said. “I think at this juncture, IBM is simply divesting of any assets that may degrade its reputation and any capital it can recapture will be beneficial with a potential refocus its current healthcare game plan.”

IBM Watson Health may have struggled to operate under the broader company umbrella, Padmanabhan said. But its dismantling shouldn’t discredit the progress of artificial intelligence in healthcare, he said.

“IBM’s decision to sell the Watson Health assets is not an indictment of the promise of AI in healthcare,” he said, adding that AI was one of the top technology investments for health systems in 2021. “There are challenges with data quality and bias of AI in healthcare, but there’s a broader story about IBM’s experience and how it should influence the next iteration of AI in healthcare.”