GE to Spin-Off Healthcare: The Signify View

Publication Date: 12/07/2018

Written by

Steve Holloway
  • GE announces plans to spin-off its $19B Healthcare division, to be completed no later than the end of 2019.
  • The industrial conglomerate plans to monetise 20% of the healthcare business, with the remainder distributed to shareholders.
  • Announcement comes after GE Healthcare had announced the sale of its Caradigm, ambulatory value based-care business and Omnyx Digital Pathology division already in 2018.

After months of uncertainty, GE announced it will separate its healthcare business into a stand-alone entity as part of a massive restructuring plan, which will involve a loss of almost 30% of all GE business revenue. Separating the $19B division, with business in over 140 countries and approximately 54,000 staff from the industrial conglomerate will be no easy task..

Here’ our view of the deal, what it means, and what lies ahead.

Build It Up, Tear It Down

The news breaking of the massive GE restructure came as a surprise to many; the healthcare division had long been one of the better performing units for the conglomerate (growing revenues 5% in 2017), suggesting it might have wanted to hold onto one of its prized assets. Compounding this, the process of reducing the scope of the Healthcare division had already begun with the sale of several healthcare assets, suggesting that the division was being optimised and refocused to remain as a growth engine for its industrial parent. Instead, GE took the bolder approach of spinning out the whole division into a stand-alone entity. The spin-off of the healthcare division could simply be the executive management capitalising on debt-reduction for GE overall. However, the idea of separating healthcare technology from industrial businesses has gained popularity of late, first with Philips separation of its Healthcare and Lighting divisions to become a pure-play healthcare vendor, followed by Siemens earlier this year with its IPO for Siemens Healthineers. But given the size and scale of GE’s healthcare operation, what short-term challenges will arise?

The Sound of Milwaukee

Where to start? Most uncertainty lies around horizontal service functions, including research and development, supply chain, financing and other shared operational functions. GE has for a while operated a network of global research and innovation hubs, shared across all divisions; extracting healthcare from this will be no easy task and could well interfere with future technology innovation, stalling new product pipeline. The legacy of GE Capital and GE’s finance division is also closely intertwined with GE’s medical device business, no doubt adding some concern and uncertainty for its large customer base.

Manufacturing and supply chain will also need to be readdressed; while the firm has a variety of dedicated manufacturing sites for healthcare, component and material supply to these sites will also be closely associated with broader procurement and inventory across the industrial units. GE Healthcare will most likely become a “customer” for material supply in the short- to mid-term, maintaining a certain level of status quo.

Questions and uncertainty will also arise around how cross-division initiatives announced in the last few years will play out. GE Healthcare has for a while been marketing the value of the GE Predix analytics platform, with an aim to connect and capture data from its vast installed base of imaging and clinical devices to help providers run more efficiently and develop next generation systems. With Predix now shifting to an open source model, GE Healthcare will again likely become a customer of GE Predix, though it is still too early to establish what the cost to the Healthcare unit will be. Furthermore, the role of the horizontal, GE Digital, trumpeted as taking GE Healthcare into the new era of big data analytics and software, is far from clear. The fate of the well publicised $500m for investment in software engineers for GE Healthcare, as announced in 2017, also remains uncertain (see further detail below “Machines Can Do the Work”). Ultimately, clarity as to the overall future of the healthcare unit as a solo entity, has created a multitude of new questions and uncertainty for customers and employees.

Push and Shove

One thing is obvious though – a change of this scale is going to have an impact on the healthcare business in the short-term. For GE’s peers and competitors, this could also create a significant opportunity. GE Healthcare is one of the global market leaders in medical imaging, clinical care and diagnostic IT, something that is too often overlooked. However, maintaining this position in a hugely competitive market while extracting itself, will be no mean feat. Therefore, this does present a window of opportunity for its biggest competitors.

In imaging, Philips Healthcare, Siemens Healthineers and Canon Medical (also undergoing a major consolidation after its acquisition of Toshiba Medical) will be actively targeting GE’s customer base in a bid to win long-term share. In clinical care, Philips Healthcare is by far GE’s fiercest competitor. In diagnostic IT, GE is also being challenged by not just the companies already mentioned, but other sizeable players such as IBM, Fujifilm, Agfa Healthcare, Change Healthcare, plus a raft of best-of breed specialist vendors. All the while, the adoption of IT and digital technology continues to rapidly evolve the healthcare market, also enticing in technology giants such as Google, Amazon and Microsoft, as well as a growing volume of artificial intelligence start-ups.

Fighting on all these fronts, within a complex and nuanced global market that is constantly shifting and influenced by political, socioeconomic and technological change, is not an easy task for any major healthtech vendor. Healthcare providers are increasingly consolidating into larger networks and transitioning towards multi-disciplinary, value-based care models. In many cases this is leading to longer replacement cycles and larger, less frequent deals. Business models are also changing, away from capital-heavy expenditure towards operational models. Thus, today it is critical for vendors to protect market share at a minimum, to ensure long-term revenue and growth opportunity. For GE Healthcare, the next 12 to 18 months could be its toughest period for some time and some collateral damage should be expected.

However, it’s not all doom and gloom for GE. Here’s why.

Put It Back Together

As described already, the landscape of healthcare technology is changing. Healthcare provider networks are consolidating, and the market is in the early phases of transitioning to widespread use of big data and analytics. Focus on inter-disciplinary care, smarter care-coordination and value-based care are behind this, as part of the bid to limit the spiralling cost of care, while still maintaining quality. Providers have also learnt, from the pain of the last two decades of siloed departmental systems with little or no interoperability, that less is more when it comes to health IT; consolidation in the acute EHR market was the first stage in this process. We believe consolidation of clinical and diagnostic IT is already underway.

This is no easy fix to the problems facing providers, most of whom have hundreds of applications, software solutions, viewers and data archives across their organisations. The monolithic acute EMR system implementation model that has proliferated over the last decade provides some guidance as to how clinical IT models need to evolve. The EMR model enabled widespread network digitisation for administration, financial and some operational functions. Agnostic Clinical Enterprise (ACE) platforms, as we call them, provide a basis for all diagnostic and clinical specialities to access complex clinical data, alongside the EMR. This allows co-ordination of care and consolidation of clinical data archiving into one platform. Adoption will also push platform vendors into a new role, as the central contractor of third-party applications and software on behalf of the hospital. For public companies, this means long-term, low-risk, sustainable revenue.

Today, no one vendor can offer the full multitude of software and applications required, to meet the unique needs of every clinical and diagnostic stakeholder. However, with providers looking to consolidate supply chains and focus more on integration and interoperability, the market advantage is shifting towards the largest healthtech vendors in terms of winning platform business. In the case of GE, it has already accrued and developed a broad portfolio across clinical IT, especially in supporting its clinical care (e.g. patient monitoring, ICU) business, while continuing to be a leading player in diagnostic imaging IT. The concept of the GE Healthcloud, with GE being one of the first vendors to come to market with an “ecosystem” approach to application access, was also promising, although todate the number and variety of applications listed appears to have stalled. It has also made some progress is pushing the “clinical command centre” model, creating centralised operational hubs for hospital management to use enterprise-wide analytics to better manage care across the network.

The Joker

It is around platform establishment and integration where the newly released healthcare unit has its greatest opportunity, and greatest challenges. GE has traditionally been relatively weak in terms of interfacing with third-party systems, though in the last few years has started to drift towards more of an open-sourced approach. That said, many of the proprietary demons of the past still lurk in its legacy architecture. However, if, and it’s a big if, GE Healthcare can make progress on interoperability and integration, it can forge ahead as a leader. The expanse of its portfolio is one of the broadest in terms of advanced imaging technology, clinical care and clinical IT. Yet it also has a rapidly emerging prized asset that many other healthtech vendors covet; a burgeoning lifesciences division.

It is no secret to industry observers that research and development is bringing healthcare closer to the concept of precision medicine, combining genetic, pharmaceutical and diagnostic devices to provide a new era of personalised, targeted medicine. In this, GE Healthcare already has a head start on its largest competitors, with a substantial business in bio-manufacturing and cell therapy. Over the last year as the fate of GE Healthcare was being decided, rumours were also rife that leading lifescience firms such as Danaher and ThermoFisher Scientific were queuing up to try and buy GE’s lifesciences unit. Yet by holding onto it, and investing in it with new acquisitions, GE Healthcare has sensibly ensured it has a fighting chance of playing a big part in the next era of healthcare.

Machines Can Do The Work

The other sector the newly separated GE healthcare unit can ill-afford to ignore is the rapidly evolving use of artificial intelligence (AI). While the rate of market progress has often been over-hyped, the underlying trend is clear. AI will play a big part in healthcare delivery moving forward. And here lies a big unknown as to the future, especially surrounding the contribution and influence of GE Digital to the success of GE Healthcare in this field.

So far, GE Healthcare, much like its other major competitive peers, has sensibly opted to de-risk their investment in the sector by focusing on “ecosystem” development over frontline AI diagnostic tools. This has left room for a vast array of start-ups focused on AI for diagnosis in imaging and clinical care to emerge, essentially testing the water for provider uptake, business model testing and regulatory compliance. It also allows GE Healthcare to cherry-pick partners and potential acquisition targets after initial development and market testing has occurred.

That said, GE has also rightly, highlighted areas where it has an advantage in analytics and the potential to use analytics and AI for significant customer benefit, namely operational analytics in the clinical and imaging sectors. As a long-time industry veteran of medical device manufacturing, it inherently understands the complexities of imaging department workflow and clinical care pathways. Using this expertise, it is planning to focus on supporting optimised use of imaging resources in the short term, rather than focus on pure diagnosis. This is evident in its recently announced “Applied Intelligence” products, developing analytics to assist healthcare providers with compliance, safety, better working practice and clinical workflow. It has also shown some working concepts of embedding AI within its imaging modality hardware, providing a “pre-screen” of the image and subsequent “smart” workflow support, such as ensuring detected high-risk patients go to the top-of radiologist reading worklists. This is a sensible approach in so far that it allows GE to tap into a far larger pool of healthcare provider finance. For example, the market for medical imaging hardware and IT software globally tops out around $30B globally; yet the operational cost of running and staffing imaging departments, not to mention the potential savings possible with smart operational analytics, outweigh this figure many times.

Praise You

As GE Healthcare moves into a new era as a stand-alone entity, it’s clear that a challenging path lies ahead. In the short-term it has the unenviable task of extracting itself from a complex conglomeration, while at the same time competing on multiple fronts in an evolving marketplace. It must also reassure customers that is has the strength and depth without the broader GE to compete and continue to innovate, to fend off its established competitors and a whole new raft of best-of-breed specialists. However, GE Healthcare should also not be underestimated, even after the painful shedding of some assets. In having one of the largest installed bases of medical devices and clinical software, it remains well-positioned to capitalise on the next era of medicine and healthcare. In many segments is remains a world-leader in innovation, though clearly it must address its many foibles around integration and continue a path towards a more open-source strategy. Above all, it must find a way of maximising its advantage of expertise in lifesciences and medical technology and capitalising on the shift towards precision medicine. It should also be patient in its approach to artificial intelligence, continuing to focus on operational support in the short-term, creating a platform environment that allows easy integration for third-party AI tools, while also building a pipeline of new AI -based target assets to aggressively pursue on market maturation. Now the dust has settled on the news of the spin-off, the above should already be in motion. The future success of GE Healthcare as its own entity will not be won in 18 months when the spinoff is completed. Its future success starts today. Right here, right now.

About Signify Research

Signify Research is an independent supplier of market intelligence and consultancy to the global healthcare technology industry. Our major coverage areas are Healthcare IT, Medical Imaging and Digital Health. Our clients include technology vendors, healthcare providers and payers, management consultants and investors. Signify Research is headquartered in Cranfield, UK.

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