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Signify Premium Insight: To Dream and to Do – GE Stands Alone

Earlier this month, years of planning and preparation came to fruition as GE HealthCare successfully floated on the Nasdaq exchange as an independent company. There was considerable appetite for the new entrant, which saw shares up 8% at the close of its first day trading.

While the spin off has been well received by investors, what does the future look like for GE HealthCare itself?

The Signify View

Breaking free from the wider concerns of the GE conglomerate will no doubt be both liberating and invigorating for the stalwart healthtech vendor. The move means that GE HealthCare’s destiny is almost entirely in its own hands. It will no longer have to return profits to the conglomerate should other GE businesses such as Aviation or Energy need support amidst difficult conditions in their own markets.

More significantly, however, spinning out of the larger conglomerate gives GE HealthCare a chance to stand alone as a more streamlined and reactive business, answering more readily to the calls of the markets it serves. Much of the work to remake GE HealthCare into a more focused vendor has already been undertaken. The spin-off has, after all been mooted for some time, and several times, in preparation, various units and operations have been divested. Some of these have been sensible moves; its sale of its finance unit in 2015, for example. With hindsight, however, other moves look less wise. Given the growing interest in digital pathology, the 2018 sale of Omnyx to Inspirata, itself recently acquired by Fujifilm, could have been short sighted.

Beyond this focus afforded by the spin-off, as a newly independent company, GE HealthCare will also be able to increasingly chart its own course and follow its own priorities. There are several areas where such a focus could be rewarded. Among the greatest opportunities afforded the vendor are in the development of digital tools.

Digital Direction

GE can already boast a strong digital offering, highlighting in its financials that it derives around $1bn in revenues from its digital offerings. However, sizable opportunity remains. GE’s chief rivals, Siemens Healthineers and Philips also have strong digital capabilities, however both have tended toward building their digital prowess in specific clinical areas. GE has, however, been more generalist in its approach. With its Edison Digital Health Platform and Command Center software, GE has the chance to cultivate a broader workflow toolset bringing together disparate systems within a providers’ network in order to present clinicians with aggregated and indexed patient data.

Achieving such a system represents a considerable challenge. It would require GE to bring together capability that currently resides across a very fragmented assortment of platforms and vendors. Not only does this present technical hurdles, a front on which so far, GE has been performing strongly, it also is challenging from a commercial perspective. The broader the remit of a digital solution that is being sold, the more stakeholders are potentially involved. As such even identifying the key decision maker, let alone convincing that person that a particular solution will be most beneficial for their provider network, is difficult. This is particularly true for the likes of GE, that is targeting a broad user base. It may be able to make compelling arguments to the individual users of a system at a departmental level, but if they are trumped by enterprise-wide decision makers, whose primary concern is often cost, it could be difficult for GE, or another vendor, to make inroads. If GE is able to continue to deliver compelling digital products, and navigate this governance side of hospitals, however, it will be well placed to capitalise on an as yet untapped appetite for holistic digital provision.

Acquisitive Ambition

Beyond such broad aims the float of GE HealthCare can also enable the company to make more significant strategic plays, including freeing capital for acquisitions. On this front GE has already made headway. One of the broader trends in medical imaging is a more integrated relationship between diagnostics and therapeutics, with the latter representing another sizable opportunity for the vendor. Last year GE announced it was buying BK Medical, an interventional ultrasound specialist, while earlier this month the vendor announced it is picking up IMACTIS, an image-guided therapy firm.

Both acquisitions will strengthen GE’s portfolio, broadening its capabilities and enabling the vendor to seal ever more holistic deals. However, while it does allow GE to offer its customers additional capability directly, it does not offer a transformative change.

This is typical of the type of acquisition that GE is likely to make in the immediate future. While the vendor has highlighted its plans to begin making acquisitions, these are likely to be additional ‘tuck in’ deals rather than the sort of deals that will reshape the business for the future.

This echoes one of the potential criticisms of GE Healthcare’s post-IPO plans, that the lack of grand acquisitions or announcements could be seen as a lack of vision or ambition. It is true, after all, that GE’s central competitors have particular areas in which, by reputation at least, they are leaders. Philips, for example, can use its strength in cardiology to open wider deals. Siemens Healthineers, by dint of its Varian acquisition, can boast the most complete oncology offering. GE lacks such a speciality, and, although there are areas in which it could hang its hat, it has not yet, at least, announced or intimated any such plans.

Continuing Appeal

That, however, is OK. While the IPO presented an opportunity to share a vision, and capture more mindshare, there was no necessity. GE HealthCare, after all, leads the market in many of the segments in which it competes. It is and remains one of the global superpowers in medical imaging and the broader healthcare technology space. What’s more, despite GE now facing some headwinds stemming from its past focus of seeking growth in emerging markets, the vendor’s forecasts for the coming year are strong. Siemens Healthineers expects 2023 revenues to be essentially flat compared to FY2022, albeit including a significant hit from the expected decline in Covid antigen testing. Philips meanwhile struck a downbeat tone in its latest Q3 2022 results announcement, forecasting mid-single-digit decline in comparable sales in its Q4. GE though, seemed strong. In its preliminary Q4 results GE HealthCare noted revenue growth of 4%, and forecasted further revenue growth in 2023 of 5-7%, with margins of 15-15.5%, 50 basis points higher than the previous year.

Given such forecasts, GE doesn’t need to reinvent the wheel. Amidst wider inflationary pressures and logistic challenges, the vendor doesn’t need to make transformative changes. Instead, doubling down on its fundamentals and hitting its targets, particularly that of margin expansion, will be enough to keep investors happy. Going into its first year as an independent vendor, this is a sensible and practical strategy. Several carefully considered tuck-in acquisitions can add to these measured targets, allowing the vendor to capitalise on add-on sales without deviating from a well-defined path. While other plans, such as the considered development of certain prestigious halo products, for example can help the vendor capture headlines and maintain and elevate its status as one of medical imaging’s technical leaders.

Over time, assuming GE Healthcare does meet its targets, and none of these ancillary activities detract from its core focus, there may come a time when the company can look further ahead and strike out on a bold new journey to tackle grander, epochal health challenges head on. Until then, confident consistent capability, with just a dash of greater vision, will be enough to lay a solid foundation.

Signify Premium Insight: GE Dreams Big with HealthCare IPO

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Last month GE HealthCare offered further details of its upcoming IPO with the release of its Form 10 registration statement. The document offers an overview of the vendor’s plans for the business and the strategy it will adopt after it lists publicly as a separate entity. After the spinoff GE HealthCare will be comprised of four segments: Imaging, Ultrasound, Patient Care Solutions and Pharmaceutical Diagnostics. With these segments it hopes to continue along its global path and capitalise on the current macro health trends.

This document is illuminating, offering a level of detail not before seen while GE HealthCare was part of the broader conglomerate. The Form 10 statement also offers hints as to how transformative the spin off will ultimately be to GE HealthCare.

The Signify View

There are many who will have first read the news of GE HealthCare’s spinoff, when it was first announced in November 2021, and thought to themselves ‘about time’. Before the move was announced, back before the ‘C’ of HealthCare was capitalised, there was a sense that being part of the broader GE umbrella was constraining the potential of the healthcare giant. It could, as an independent company be more focused and reactive, only concerned about the changing dynamics of the global healthtech markets, and not having to fret over the ramifications of developing trends in segments over which it has no control.

More substantially, in addition to being freed from this burden of concern, GE HealthCare will also be freed from the financial burden of supporting GE’s other businesses. In the past, the profits that have been hard won by GE HealthCare have been subsumed by the broader GE conglomerate to be frequently spent elsewhere in the wider business. Such a model meant that GE HealthCare had to adopt a more risk averse attitude when it came to investing in its own business. Freed from this obligation, one of the most exciting prospects for the vendor, and one which is mentioned throughout the Form 10, is the ability to become more acquisitive. GE HealthCare has made some moves of late, in imaging in 2020 and 2021 the vendor bought out Prismatic Sensors and BK Medical respectively. The former to secure supply of advanced sensor technologies for GE’s upcoming photon-counting CT system, and the latter to bolster GE’s already comprehensive ultrasound offering.

While sensible, these acquisitions were not strategically transformative in the way that Siemens Healthineers’ acquisition of Varian, Philips’ acquisition of Carestream or Canon’s acquisition of Toshiba Medical Systems is. GE’s acquisitions supplement and improve existing revenue streams rather than opening entirely new opportunities. Freed from the broader GE’s oversight, such significant acquisitions are now a possibility.

As detailed in the Form 10, post-IPO GE HealtCare’s business will be comprised of the below segments:

Imaging: portfolio of medical imaging solutions including CT, MR, molecular imaging, X-ray, women’s health, image-guided therapies, enterprise imaging software, service capabilities, and digital solutions
Ultrasound: ultrasound consoles and probes, handheld devices, intraoperative imaging systems, visualisation software, service capabilities, and digital solutions
Patient Care Solutions (PCS): monitoring, anaesthesia and respiratory care, maternal infant care, and diagnostic cardiology solutions, as well as consumables, service capabilities, and digital solutions
Pharmaceutical Diagnostics (PDx): imaging agents that include contrast media and radiopharmaceuticals that enhance diagnostic images

Buying Better?

GE HealthCare can now embark on such endeavours, but whether it should is an entirely different matter. This largely depends on its chosen target for acquisition. There are opportunities to make profound, if not transformative change through the acquisition of companies that plug holes in its portfolio, and better allow GE to offer solutions that address disease states and specific clinical care pathways. Such deals could make sizable progress in helping GE HealthCare achieve its headline ambition of focusing on precision medicine.

While potentially on a smaller scale, such moves would mirror some the sector’s most successful acquisitions, in which vendors have acquired companies which operate in allied areas where there are clear synergistic advantages to the combination, but with very little duplication of capability. The acquisition ideally adds something substantive and new, which sits snugly alongside existent business.

This suggests one of the pitfalls that GE HealthCare would do well to avoid; looking for a quick win by making an striking acquisition, but instead of quickly adding a standout new business and revenue stream, simply lumbering itself with significant challenges in integration and execution.

One area where this risk is particularly apparent is with regards to GE HealthCare’s digital play. In the Form 10 filing, the digital solutions were present across all business’ segments, rather than being established as a vertical of its own, hinting at how digitisation is considered by GE, as more of a “facilitator” in each business unit, than a product in its own right. While GE may be tempted to make a grand acquisition to address these limitations, such a move could offer limited benefits. GE HealthCare, after all, already harbours significant digital capability, and any sizable acquisition is likely to confuse matters and stymie successful integration and delivery, rather than immediately strengthening the company’s offering.

This is particularly pertinent given that digital solutions is one area where GE holds considerable, potential. It is a segment that brought in almost $1.2bn in 2021, a large proportion of which was derived from its imaging informatics offering. It has worked in recent years to offer a far wider brace of tools however, with its Edison data aggregation platform and Command Centre product, for example, representing some of the tools that GE hopes will add more value across the business. Such digital tools will become increasingly critical to GE as it embarks on its drive toward a more comprehensive precision medicine offering. While incremental improvements of image quality and the use of AI to extract more data will have an impact, of far greater significance is the ability to bring data from various sources together, connecting disparate streams to offer a more complete view of an individual patient.

Digital Demands

However, at present many tools out of GE’s 200-application-strong digital portfolio are more limited in scope. Many of the tools are focused within single units or businesses, and have not made the rapid progress toward a more connected, centralised digital platform play that may have been hoped. Similarly, it also appears that GE is also facing some turbulence with the legacy components of its digital portfolio, with deals being lost and even notable scaling-back in some markets. Both of these challenges will not easily be solved, but the financial flexibility offered by the IPO could well leave greater levels of investment for such products. With such investment, GE could expand on the strengths in its portfolio such as Command Center and use them to better bridge the individual silos.

Such a move could be particularly important amidst the growing trend for the decoupling of software and modality. While major modality vendors are making progress on the operational workflow and edge AI sides, for example, the core image management platform is now frequently being handled by an independent specialist vendor. Post-IPO investment could help stem this transition and better allow GE HealthCare to capitalise on its enormous installed base. GE HealthCare already derives most of its recurring revenues, which make up around 50% of all revenues, from its service business. Growing its digital business will bolster this recurring revenue further; an important consideration given investors’ appetites for such ongoing incomes.

What’s more, greater investment in digital capability will help GE HealthCare towards one of its other primary ambitions: margin expansion. Focus on these higher margin products also enables GE to capitalise on the high growth potential of digital tools, as well as the recurring revenues they offer. A trifecta of advantages that will be music to the ears of GE’s potential investors, and a nice complement to investment in other high margin parts of the business, such as Ultrasound.

In a similar vein, this and other investment in innovation will likely help GE HealthCare secure another key source of recurring revenues: managed service agreements with providers. Being seen as an innovator is crucial in convincing providers to enter into an extended contract, after all, a vendor is not judged solely on the competitiveness of its products available today, but also on the expected competitiveness of its products 10 or 15 years into the future. Beyond offering sustainable revenues, such partnerships also help maintain a vendors’ technical excellence. Further, vendors are not able to offer truly useful products, without first understanding what providers truly need. To understand this, close relationships with providers must be earned and maintained.

Flying Solo

GE HealthCare’s upcoming IPO will not suddenly solve all of the business’ challenges, indeed it will, in some cases, bring barriers to the company, forcing it to be more open about the particulars of its operations and removing some of the security that comes from being part of such an enormous conglomerate.

This is not expected, nor is it necessary. Despite the challenges ahead for GE, it is still among the leaders, if not the leader in many of the markets in which it operates. While there are parallels to similar moves from other vendors such as Siemens Healthineers and Philips, which were also once part of broader conglomerates, the motivations and possibilities are not directly comparable, and so it is unhelpful to try to divine its future by looking at the success and travails of those vendors. This is particularly true given GE’s comparatively greater presence in emerging markets. It is a strategy which today, amidst global economic turbulence, gives it greater exposure to risk than would have been the case a decade ago when the ambition was first conceived.

Instead, what GE HealthCare must do is focus on execution. The IPO will give it greater flexibility and financial control, enabling it, for arguably the first time, to truly chart its own course and grow into the vendor it alone aspires to be. Whether this means myopically focusing on several areas in which it aims for technical leadership, or capitalising on its strength in digital tools to become a more valuable partner to providers, or jumping headfirst into precision medicine and pin its entire strategy around that, is entirely up to GE.

All of these are possible. Now there are no excuses, and nowhere to hide from scrutiny, GE HealthCare must now not only share its vision with investors, but deliver on it as well.

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Signify Premium Insight: Neusoft Medical to Float on United Imaging’s Rising Tide

Chinese medical imaging modality vendor Neusoft Medical has revealed its continuing ambitions to list publicly, and has announced that, for the fourth time, it plans to launch an IPO.

The vendor, which has three times failed to float, once in Shanghai and twice in Hong Kong, hopes that this time will be different. The move is being sponsored by investment banks CICC and Goldman Sachs, with the vendor hoping the fundraising will enable it to continue growing, both domestically and abroad.

The Signify View

With three previous attempts at listing publicly made already, Neusoft Medical has made it clear that raising funds through a public offering is central to its growth ambitions. Becoming a leading medical imaging vendor is, after all, an expensive business. This could be particularly true for Neusoft Medical given its modality portfolio.

At the heart of Neusoft Medical’s growth to date is its range of CT systems. Of the vendor’s total revenues, which for the first six months of 2022 accounted for RMB1.5b (~$210m), 56 percent were derived from sales of CT systems. This is far ahead of any other business line, with equipment service and training, GXR (General X-ray) and MDaaS (Medical Device as a Service), the next largest segments, accounting for 14.5%, 8.9% and 6.2% respectively.

Such a reliance on CT system sales would have been a significant asset during the peaks of the coronavirus pandemic. This is especially true given the vendor’s dependence on its domestic market. In 2021, the company derived more than 83 percent of its revenues from China. China was the first country to feel the impacts of Covid 19. CT was used as the primary diagnostic imaging modality in the country, so those vendors that were able to quickly deliver CT systems to Chinese hospitals were able to capitalise on the rapid increase in demand. This is reflected in Neusoft Medical’s results, with CT system revenues almost doubling from around $114m in 2019 to almost $221m in 2021.

This recent Covid-catalysed rally is one of the reasons why Neusoft Medical is eager to list publicly as soon as possible. The demand in the country quickly accelerated the vendor’s growth, provided a flattering portrait to show potential investors. The reality may however be somewhat more sedate. The exceptionally high growth in China in recent years will mean that many providers’ CT system needs have recently been met, potentially tempering the opportunities for the vendor in coming years.

Certain Strengths

Despite this, there are some reasons to be optimistic. Neusoft Medical will benefit from government policy which promotes Chinese medical imaging vendors potentially giving it an advantage in some situations over international competitors such as GE HealthCare, Philips and Siemens Healthineers.

There are also other opportunities for Neusoft Medical to secure growth. Its cloud-based MDaaS (Medical Data and Devices as a Service) for instance differentiates the product from its domestic competitors, giving providers a reason to choose a system from Neusoft Medical, rather than one of the many other CT system vendors in China. The offering also helps to secure sticky recurring revenues, that are less susceptible to fluctuations in markets, and changes in demand.

Moreover, by offering some cloud capability, Neusoft Medical can hope to open up new markets. Away from major urban centres in China, as well as in other emerging markets that Neusoft Medical may look to target, there is often a shortage of radiographers and radiologists, which renders the procurement of additional CT capacity unnecessary, given that providers will be unable to utilise it. If cloud and AI tools reduce the requirement for expertise at these sites, and allow doctors to collaborate with experts remotely, then Neusoft Medical may be able to sell additional systems to providers that would otherwise have been unable to utilise them due to a lack of resource.

These opportunities could become more significant with the added capital afforded by listing publicly. The vendor’s research and development spending is relatively low, for example, and could benefit from the added capital. The vendor spent 14.4% of its revenue on research and development in the first six months of 2021. As a percentage this is in line with some of its competitors, but in absolute terms it is a small figure. At $10.4m it is dwarfed by that of United Imaging, which in the first six months of 2021 spent $60.7m on R&D, let alone that of major international competitors such as GE HealthCare, Philips and Siemens Healthineers, which spend many times that amount each year.

Finding a Niche

Investing in research and development makes sense for the vendor. While it is unlikely to challenge the top-end of the CT imaging market, by investing in technologies such as cloud and AI it can still hope to differentiate itself from other competitors and establish itself as a competitive vendor offering some advanced capability in an affordable package. While this is unlikely to worry top vendors in established markets, Neusoft Medical could still carve out a niche for itself in second and third tier hospitals in China, as well as in some emerging markets across the world.

This latter ambition will, however, remain a challenge. Providers in emerging markets, as with providers in developed markets, tend to prefer products from large, reliable international brands with good support networks and post-sale service. This is true even if it means forgoing some extraneous features. Such preference does, however, also highlight another area where Neusoft Medical may choose to invest the money from its IPO: its sales and support operations.

Currently the Chinese vendor relies heavily on distribution partnerships. While this is an efficient way to be able to offer products across a wide range of markets, a vendor is not always able to guarantee the neutrality and knowledgeability of the distributor, nor the ability and dependability of its after-sales support and service. Further, by sharing sales revenues with a distributor, Neusoft Medical will have to accept lower margins. This might be worth the trade-off if it allows Neusoft Medical to facilitate sales further across the world, and potentially compete in more volatile markets in which it would be unwise to overly invest, but in most cases, over the longer term, it will become a hindrance. Sales made through distributors have also been a source of accusations of bribery and improper conduct, allegations which, whether true or not, could impact Neusoft Medical’s reputation by association.

Opportunity Knocks

This will become particularly acute as Neusoft Medical strives, as it must, to scale. To continue to grow, the vendor must establish itself as an alternative to the many other vendors offering increasingly affordable CT systems. To do this it needs to scale to be able to continue to invest in the product to differentiate itself, and to be able to leverage the economies of scale to be able to improve its returns. Improving margins will be of particular importance given that a sizeable proportion of its profits weren’t a result of product sales or service contracts, but were in fact derived from other sources, such as government grants and foreign exchange gains. In 2021, for example, of the vendor’s $48m net profit before tax, $40.5m is a result of ‘other income’.

Such strategic focuses and such spending priorities could, over time help Neusoft Medical continue to establish itself as an attractive vendor in the Chinese and some other emerging markets, which offers reasonable technical prowess at affordable prices. What is ultimately having a more direct impact on Neusoft Medical’s prospects, however, is something the vendor has no control over.

Earlier this year United Imaging, China’s biggest domestic medical imaging vendor, listed publicly on Shanghai’s STAR index. While that vendor has a different focus to Neusoft Medical and aspires to target medical imaging’s most technically advanced segment and secure sales in developed markets, it bears some similarities to Neusoft Medical. Significantly, its listing, which netted more than $1.6bn for the vendor, was oversubscribed more than 3,500 times. This means that Neusoft Medical will benefit from the excitement that United Imaging’s listing will have raised and capitalise on the strong prospects for the Chinese medical imaging market that the public company touts. Moreover, it will also offer an opportunity for those investors that were unable to put their money into United Imaging to bet on a similar alternative, which competes in many of the same markets, and will benefit from similar market conditions as United Imaging.

Given this rising tide, despite the severity of some of the challenges facing Neusoft Medical, it could still capitalise. As demonstrated by its repeated attempts to go public, listing does appear to be the only way forward for the Chinese vendor, and now, when the conditions are in its favour, represents the firm’s best opportunity yet to realise its ambition.

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Signify Premium Insight: United Imaging Gives the Public what it Wants

As 2021 drew to a close, Chinese medical imaging vendor, United Imaging, made clear its intention to list on Shanghai’s technology – STAR index in 2022. This ambition was last week realised, when the vendor made its debut on the bourse.

Demand for shares in the company was high, with the firm’s IPO massively oversubscribed, and an increase in share price of as much as 75% when the company made its debut on the index. The offering will net the vendor more than $1.6bn, with the firm stating it will use the cash to fund research and development, production and marketing.

The Signify View

Even before United Imaging announced it was going to list publicly at the end of last year, the move seemed like the natural progression. The vendor has grown incredibly quickly since being founded in 2011, and now brings in around $1bn in revenue annually. To continue to grow, raising capital was necessary as it bids to compete with the largest international imaging vendors.

To do this, the vendor will have several priorities for its newly-raised funds, chief among them is product development. In the first instance, this means investing in the development of products that will allow it to better compete with GE HealthCare, Philips and Siemens Healthineers. United Imaging has been more successful compared to its domestic peers, thanks, in part, to its focus on high-end imaging rather than just cost competitiveness as is more typical of its domestic peers. To continue its arc of success this should remain a priority.

United Imaging therefore will likely invest in products to compete with other vendors’ most premium products, such as photon counting CT. CT is, by far, United Imaging’s biggest product line, accounting for around half of all revenue. As the next generational evolution of that modality, offering a flagship photon counting CT system and, over time, enriching its lineup with photon counting detectors, enables United Imaging to continue to compete on a comparable footing. In a similar vein, other paths being trod by other vendors such as helium-free MRI, and high-Tesla MRI represent necessary product development directions if United hopes to truly be thought of a competitor to other international vendors.

Portfolio Planning

In addition to continuing the development of product categories in which United Imaging is strong, the vendor will also need to address the gaps in its portfolio. As hospitals are increasingly looking to enter broader multi-modality imaging deals, they are turning to vendors which can address the majority of their imaging requirements and offer holistic solutions. United Imaging will therefore need to address the gaps in its line-up with modalities like angiography, mammography and ultrasound, for example, which currently represent significant omissions. Developing products in these modalities and addressing these gaps in its portfolio could therefore represent an opportunity beyond sales of those modalities themselves.

Another aspect of product development, which, pragmatically at least, is arguably more important than the portfolio offered by the vendor, is integrated production. For their advanced imaging lines, the likes of GE, Philips and Siemens, make almost all components themselves. This gives them more granular control over product, enables them to react to adversity in supply chains and external shocks and helps them to control costs and quality more tightly. United Imaging on the other hand still relies on external suppliers for many core components. The vendor therefore is likely to invest some of the fruits of its listing into bringing production of those components in-house. This is particularly true for components that are produced outside of China, with trade barriers and geopolitical tensions making dependency on international supply chains risky.

Turning Away from China

Beyond the products themselves, United Imaging also needs to invest in sales and service infrastructure internationally. United Imaging’s revenues have, so far, come almost entirely from its home market. The vendor would do well, however, to prioritise international growth. Chinese policies which focus on centralised purchasing are likely to depress the average selling prices of modalities in the country, given United Imaging’s strong dependence on these Chinese market, even a relatively small decrease in selling price could have a significant impact on profitability.

Furthermore, scale is crucial for success of the vendor. Even though United Imaging spends a relatively high proportion of its revenue on research and development, its actual spend is far outstripped compared to its much larger rivals. The only way it will be able to reduce this deficit and compete at the upper echelons of medical imaging is by selling significantly more medical imaging systems. It is unrealistic for such an increase in sales to come from its domestic market, particularly given the fact that many Chinese providers purchased additional CT systems and brought forward purchasing plans during the Covid 19 pandemic. Such hospitals, which have recently acquired new CT equipment are unlikely to make additional purchases in the near future, until the installed base is ready for replacement. There will be some growth as the state continues to invest in expansion of healthcare in China, but this offers nowhere near the opportunity afforded by international markets.

International Coordination

The specifics of this international expansion do, however, present some challenges. United Imaging aspires to compete at the premium end of medical imaging with the likes of GE HealthCare, Philips and Siemens Healthineers. However, to truly compete with these vendors, United Imaging must make inroads in mature markets such as the US and Western Europe. These markets are particularly difficult for United Imaging to displace incumbents. In these markets, providers are primarily concerned with image quality, and the quality of service they receive, with promises of minimal downtime for example, a significant benefit to hospitals. Doctors in these markets will also impede United Imaging’s progress, with many professionals lacking the motivation or availability to learn how to use a different vendor’s equipment, particularly if there is no significant benefit in terms of performance. Strong brand loyalty by the end user market in such developed nations further restricts penetration possibility and market access for new vendors.

This reluctance to adopt United Imaging’s solutions in mature markets could force the vendor to direct its efforts towards developing markets, including countries in Africa, and members of the Commonwealth of Independent States, including Russia. However, though these markets offer a better opportunity for United Imaging to realise sales, the markets themselves hold far less potential than other mature markets. As such, even though United Imaging will find the markets fruitful, they won’t be able to offer the vendor the scale it needs to truly compete with its established international rivals.

What’s more in these lower-value markets, where cost competitiveness is more significant, United Imaging could also start to lose out to other vendors, which don’t have the same lofty aspirations and instead are focused solely on producing affordable systems. Other Chinese vendors and Indian vendors such as Triviton, for example, could squeeze United Imaging in some markets by offering even more affordable advanced imaging systems.

Shares for the Future?

Despite these challenges, United Imaging’s achievements must be acknowledged. The speed at which the Chinese vendor has grown, and the range of advanced imaging products it now offers is impressive. It has also effectively capitalised on external trends. It has benefited significantly from Chinese state support, its government’s ‘buy local’ procurement policies and increased healthcare spending. The vendor has also benefitted from Covid 19, with revenues for its CT product line, a key modality used in Covid care, increasing by more than 150% between 2019 and 2020 largely as a result of increased covid spending. It has then rode this wave to its IPO, also benefitting from investors’ willingness to put money into healthcare firms, which are seen as something of a safe haven.

Even with these advantages and United Imaging’s execution, the road ahead is still difficult. $1.6bn is a lot of money, but it will only go so far. Even with this cash, United will struggle to match its international rivals’ development, which will make it hard to compete with them in developed markets, which will make scaling at the rate needed to maintain development difficult. In the meantime, it can target emerging markets, but the longer it is seen as a cost-focused vendor servicing less technically-demanding markets, the harder it will be to make the leap to the top tier markets, and the less chance it will have of competing with the established market leaders.

These constraints mean that United Imaging will likely have to settle for less prodigious growth over the coming years. Developing additional products and bringing component production in-house will offer significant benefits, but these will only truly be realised over time. More fundamentally, United Imaging also needs to home in on its targets. Can it really stand shoulder to shoulder with GE HealthCare, Philips and Siemens Healthineers? Or should it look to strike out and ace its own, unique approach. These are issues which, even given the money raised, listing publicly can’t solve.

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Signify Premium Insight: The Tightrope Upon Which Lunit Must Walk

Lunit recently announced that it has received preliminary approval for an IPO on the South Korean KOSDAQ index. Following the approval, the Seoul-based AI developer now plans to submit a listing within the first half of the year.

The outfit already has partnerships with several large international imaging vendors, including GE Healthcare, Philips and Fujifilm to incorporate its AI capability into their imaging systems, but Lunit says the money from the funding round will enable it to further develop its AI product range, and expand its global commercial reach. This will entail promoting its products, which include an AI tool for analysing mammograms, an AI solution for analysis of tissue slides for cancer biomarkers, and a comprehensive AI solution for chest X-rays that detects 10 of the most common findings, in more markets across the world.

The Signify View

That Lunit has decided to place its fortunes in the hands of public investors should come as no surprise. As detailed in a recent Premium Insight discussing medical imaging AI vendors with more than $100m of venture funding, Lunit, like many of its successful peers shares some common traits. The vendor has, for instance, taken a very robust approach to product development. Instead of relying solely on one of the available training datasets, which can introduce some ambiguity and aren’t always perfectly labeled, Lunit has chosen to use training data validated against biopsy results. This helps ground the AI tool’s algorithm and minimise the likelihood of errors. A tool is only as good as the data it is fed so supplementing images with other clinical data is a prudent approach.

In a similar vein, the vendor has also been thorough with regard to clinical validation. One of the hurdles stymieing the broader adoption of AI is a lack of robust evidence. To be profitable AI vendors need to prove their solutions are valuable to providers, to warrant hospital budgets and convince policymakers that their tools deserve reimbursement. To do this these vendors must undertake strenuous, detailed clinical validation studies. These are expensive and time consuming to conduct, but they are necessary. This need is compounded as AI vendors look to grow globally, with developers obliged to prove their solutions are as effective on non-local populations. Lunit has been able to meet this requirement, and can point to a wealth of published studies open to scrutiny, as well as regulatory approvals for its Insight CXR and Insight MMG chest X-ray and mammography solutions in the USA, Europe, Japan and South Korea and for SCOPE PD-L1 in Europe.

Available Options

In addition to this technical capability, the vendor has also been commercially savvy. As well as selling its products directly, Lunit has made its products available on several AI marketplaces, allowing providers which use, for example, Sectra’s imaging IT solutions to incorporate its tools through that company’s Amplifier Marketplace.

More significantly, the vendor has also sought to utilise partnerships to target new markets. It has received $26m from liquid biopsy specialist Guardant Health. As well as boosting Lunit’s bank balance, the collaboration will help the AI vendor target the US oncology market with its SCOPE tissue analysis platform. Lunit has also looked to international imaging vendors to grow, with the company inking deals with GE Healthcare, Philips and Fujifilm helping encourage Lunit’s adoption among those vendors’ install bases.

Such endeavours are for naught, if the products themselves are inadequate. Lunit, however, has avoided this trap. While its range of products is small, comprising of three solutions, one for chest X-ray, a second for mammography and a third for pathological tissue analysis, they are focused on valuable areas. Insight CXR, for example is a solution that is on the rising tide of increasingly comprehensive AI tools which, like those from Annalise AI and Oxipit AI seek to provide greater clinical value to doctors than narrow AI solutions which are often more limited. Similarly, Lunit’s SCOPE solution is set to benefit from the growth of digital pathology and the establishment of closer ties between diagnosis and treatment.

A Time for Temerity?

Despite these strengths, however, listing publicly also represents a risk for the vendor. Reports suggest the listing offers Lunit a valuation of around $500m. This is a far cry from the valuations of the likes of HeartFlow and Viz.ai, which saw valuations as high as $2.4bn and $1.2bn respectively in their recent fundraising endeavours, however it is still a significant sum for a vendor that, according to Signify Research’s AI in Medical Imaging report, achieved just over $1 million in revenue and a loss of $16.5 million in 2020. While the IPO will furnish the vendor with ample capital, it also adds considerable pressure. It risks facing many private investors necessitating consistently strong quarterly performances, rather than sympathetic private investors au fait with the medical imaging AI market, which are likely to be understanding of more modest returns in the name of sustainable long-term progress.

There are other hurdles too. The enormous valuations that some medical imaging AI vendors have been able to achieve through the high availability of funding for AI firms over recent years, have, in some instances proved a hindrance to these AI firms when they have looked to list. The likes of HeartFlow and Keya Medical both sought to go public, before being forced to postpone their plans, in part due to the inability of public investors to match these lofty valuations. Furthermore, in many instances, vendors that did go on and list publicly have seen their share prices fall as they were unable to meet the high expectations of their public investors. This has been true of all Lunit’s closest South Korean peers.

Vuno listed at an initial price of KRW32,150 in February 2021, and is now trading at around KRW10,500. DeepNoid shares initially traded at a price of KRW25,200 in August 2021 but now sit languishing at an all time low of KRW11,400. JLK, meanwhile went public in December 2019 with an initial price of KRW8,330, rallied to KRW14,150 in September 2020 but now trades at KRW6,220. The market as a whole has suffered, with the KOSDAQ falling 13% year-to-date, but JLK, DeepNoid and Vuno have all underperformed even relative to this benchmark, falling 20%, 38% and 44% respectively.

A Hard Market

Making headway amidst these underperforming peers will prove difficult. This challenge will also be compounded by market complexities facing its products. While the tools themselves are sound, they are competing in difficult markets. Mammography for instance has well-established incumbent vendors such as Hologic and iCad, as well as a plethora of breast imaging AI start-ups each trying to eke out a share of the market. Similarly, Lunit’s Insight CXR product will not only face stiff competition, but even when used it will be fighting for a small percentage of the limited reimbursement available for chest X-rays. Both could be successful products, but could be slow to return sizable revenues. Lunit SCOPE is likely to be similar. There are considerable opportunities pertaining to digital pathology AI, clinically as well as in other areas such as drug discovery. However, the digital pathology market is so nascent, it is unlikely to significantly contribute to Lunit’s bottom line for several years.

These weaknesses do point to one area in which Lunit should prioritise following its IPO. As well as commercialisation efforts, building sales and support networks in new markets, Lunit must also spend heavily on the development of new tools. The vendor must channel its expertise into targeting new areas that offer high potential returns, whether for better-reimbursed modalities, high-value use cases, or care coordination tools that expand beyond image analysis itself, Lunit needs to supplement its current strength with tools that will be lucrative into the long term.

Don’t Look Down

Ultimately, Lunit’s growth up to this point has positioned it in a difficult spot. While the vendor must move forward, doing so requires overcoming considerable adversity. This is not a problem that is unique to Lunit, but each medical imaging AI vendor that makes it to this pivotal moment, must navigate it in its own way. Balancing the needs of its investors while continuing to invest in product development and market creation, will be tough. The need to create significant revenues and profits to justify its lofty valuation, while not neglecting the robust way it has approached algorithm training and clinical validation, which helped establish its credentials, means walking a tightrope, where one slip can send a share price tumbling.

Lunit will see a future in which the company is successful. Consistently generating revenues, with sustainable growth, a secure user base and an innovative roadmap. The vendor can lead its investors to this future, but its challenge will be in ensuring they don’t lose faith and fall along the way.

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