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Signify Premium Insights: GE Healthcare’s Singular Vision

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In late April GE announced its first quarter earnings results for 2022. In its Healthcare business, the company saw total revenues of $4.4bn for the quarter, a figure 2% higher than for the equivalent quarter a year earlier. This figure was comprised of $2.26bn from equipment, and $2.11bn from services.

Orders remained strong for the vendor, which, at $4.8bn, were 8% higher than in Q1 21. However, GE Healthcare’s margin, at 12.3%, came under pressure from continued supply chain disruption and material inflation.

During the results presentation GE also gave an update on the spinoff of GE healthcare, which is scheduled to go ahead in early 2023. Company CEO and Chairman, Larry Culp highlighted that GE Healthcare was working on “developing long-term plans to accelerate top and bottom-line growth as an independent company”, but where exactly should these plans focus? What, in short, are the opportunities for an independent GE Healthcare?

The Signify View

There are occasions when the spinning out of a company is wholly transformational. Instead of being beholden to a corporate parent’s rigid structure, budget stringency and overarching direction, companies can take charge of their own destiny. In these instances, a newly independent vendor can revel in its own freedom, acting nimbly to create and then realise its own vision. For GE Healthcare, however, the picture is less dramatic. While it does, as Culp explained at GE’s Investor Day, present a “once-in-a-lifetime opportunity to take a 100-year-old company…and optimise it”, the company has been keen to emphasise the importance of continuity, and that transformation will occur in only specific areas where it is necessary.

Part of the reason GE Healthcare can emphasise continuity is thanks to the work that has been going on under the conglomerate umbrella. It has for example been paring off businesses that aren’t integral to its long-term vision such as Clarient in 2015, and its BioPharma business in 2020. While less dramatic, this process mirrors the streamlining that GE Healthcare’s chief competitors, Philips and Siemens Healthineers, have undergone as part of their own transitions into the healthcare companies they are today.

This continuity also means that some of GE’s biggest opportunities as an independent company are the same as when the vendor was part of the larger conglomerate. As healthcare is increasingly focused on precision care, and is reliant on an entire ecosystem, the likes of GE Healthcare cannot rely solely on the sale of equipment to drive growth. Instead, the vendor must look to capitalise on the interface between different hospital systems.

Digital Destiny

In this regard, GE is performing strongly. It is making headway with its Edison Digital Health Platform, part of GE’s digital business which contributed around $1bn to the company in 2021. This vendor-agnostic hosting and data aggregation platform, alongside its Command Center software and other digital tools could become a major differentiator for GE. Siemens Healthineers and Philips both have tended towards cultivating specific clinical areas at which they excel relative to their peers, but GE has taken more of a generalist approach, performing strongly across the board, without any clinical areas in which it is significantly differentiated.

Although not a clinical area, GE’s platform and ecosystem strategy, including its native digital tools, could fulfil this role. Efficiency is key, particularly as providers are struggling under the weight of the backlog of elective procedures in the wake of Covid-19’s peak. Providers are willing to invest in solutions that improve their efficiency. Hardware will offer some benefits in this regard, but digital solutions which are able to bring together disparate systems within a providers’ network and present clinicians with a wealth of aggregated and indexed patient data will have the greatest impact. GE’s Edison platform will help to enable this, integrating and utilising datasets and capability that has traditionally been siloed, offering interoperability solutions and facilitating the useful deployment of AI.

Successfully fulfilling these goals will, however, prove challenging. Its closest competitors have also been wrangling with similar platforms and, in several instances have been struggling to meet their own digital integration targets punctually. This complexity only increases as a vendor attempts to target different markets. In Europe, for example, where there are numerous health services across the region, frequently with differing EHRs and different implementations of such systems. GE’s tools such as Command Center are flexible in this regard, enabling deployments to be adapted to different providers’ needs.

Precise Ambition

Precision medicine is a central pillar shouldering the strategies of all the major imaging vendors, but the implementation and exploitation of this very broad ambition is very challenging. Compared to its peers, GE Healthcare is progressing well, particularly focusing on data aggregation and integration, and care pathway tools.

There are, however, some aspects of precision medicine in which GE is behind. Despite its recently announced partnership with Elekta, the American vendor is still not as strong in oncology therapy as Siemens Healthineers, whose Varian business is increasingly beneficial to the German vendor. As precision medicine becomes more widely implemented, Siemens’ ownership of Varian is likely to bring further advantages, with a closer integration between the increased data and diagnostics facilitating improved therapy choices.

Siemens Healthineers achieved such therapeutic prowess through acquisition. Similarly, Philips has expanded its image-guided therapy portfolio through a series of acquisitions. Freshly independent from the broader conglomerate such an acquisition would now be possible for GE Healthcare. Instead, of a buoyant Healthcare business supporting other ailing parts of the conglomerate, GE Healthcare can now increasingly invest in its own strategic aims. In the near term at least, this option to make significant strategic acquisitions does not appear to be one which GE will take, with the vendor noting only that it intends to make “tuck-in” acquisitions.

Despite its apparent conservatism, this is a sensible approach. As mentioned, GE Healthcare has already undertaken a process of streamlining. What’s more, separating GE Healthcare, a company with almost 50,000 employees across the world, will be complex enough. The vendor will be forced to direct some of its attention internally, risking losing focus on some of its markets for a spell as it completes the spin out. This potential for distraction will only be exacerbated by a major strategic acquisition. However, this could be an option in the future as GE Healthcare seeks to minimise gaps in its portfolio, with, for example, surgery and therapy two areas that the vendor could look to bolster in future.

Renewed and Refreshed

As well as these factors surrounding GE Healthcare’s products and strategy, there are also wider considerations which will impact the vendor’s future.  Both GE Healthcare and the broader conglomerate have seen a number of leadership changes over recent years, which will no doubt have led to a lack of strategic clarity, as different personnel sought to lead the company towards their own targets. This will have been exacerbated by the restrictions the healthcare vendor will have felt under the broader company. As a company freed from the conglomerate, Healthcare could undergo something of a rejuvenation. Although following a strategic path largely laid out previously, its newly found autonomy and ability to invest wholly in itself will be refreshing, heralding new enthusiasm for those at GE.

There will of course be a price to pay for this freedom. GE Healthcare may not have the same access to GE’s wider technological competence in areas adjacent to healthcare such as additive manufacturing, robotics and broader digital tools, while the vendor will not be able to rely on its sister companies in times of difficulty, as GE’s aviation business relied on healthcare in the wake of Covid for example.

These, however, are small prices to pay, for such a move. GE Healthcare’s spin-off will not see the healthcare vendor rebuilt from the ground up with new missions and mandates. Instead, it will ultimately allow more flexibility and focus in order to meet the strategic objectives previously laid out, many of which are shared with its competitors. The fruits of this labour will not be seen for several years, with all moves of this size requiring time to ferment, but, longer term, GE Healthcare will emerge a stronger, leaner company. Until those fruits are realised, for GE, it is just a matter of working away.

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Signify Premium Insight: The Enviable Problem Facing Siemens Healthineers

This Insight is part of your subscription to Signify Premium Insights – Medical Imaging. This content is only available to individuals with an active account for this paid-for service and is the copyright of Signify Research. Content cannot be shared or distributed to non-subscribers or other third parties without express written consent from Signify Research. To view other recent Premium Insights that are part of the service please click here.

Siemens Healthineers has enjoyed a run of very strong results over recent quarters, even accounting for the disruption caused by the coronavirus pandemic. The Healthineers business, a market leader in many of its core segments, has exceeded most industry expectations since it announced its IPO from Siemens AG. This however leaves Siemens with a problem, albeit a rather good one: where can it go from here?

In its recent Capital Markets Day and Shape 22 presentations, Siemens Healthineers laid out its answer to this tricky question, and emphasised the technologies and strategy that it was going to rely on to power the next phase of its growth. This plan, which it has dubbed the New Ambition will focus on three areas, Patient Twinning, Digital, Data and AI, and Precision Therapy, and is hoped to bring together the different sides of Siemens Healthineers’ business to accelerate growth.

The Signify View

Siemens Healthineers’ imaging business has been very successful of late. Its most recent results (Q4 2021) showed revenues 12.7% higher than Q4 2020, and 6.2% higher than Q4 2019, before the Covid pandemic took hold, while its steady stream of product releases highlights its technical leadership in some market segments (most notably first to market with photon counting CT – see below). These successes are predominantly found in markets where there are well established mature healthcare customer groups, both in global terms, with the vendor performing strongly in mature markets, and in clinical terms, with Siemens being one of the go-to-vendors in radiology and general imaging.

However, if Siemens is going to achieve its new growth target of 6-8% per annum in the period between 2023-25, it will have to rely on growth from other areas. It is after all, according to its own figures, the market leader in CT, MRI, X-Ray and Molecular Imaging, so establishing strong footholds in new markets will be essential to build on this position. This will involve targeting less mature geographic markets, or less premium tiers of mature markets. This shift was illustrated by some of the products announced at the Shape 22 event, including the Magnetom Free.Star. This new 60cm bore MRI scanner with a field strength of 0.55 Tesla will offer a total cost of ownership around 30 percent less than comparable scanners. The new scanner is being positioned by Siemens to make the modality more accessible to the 50 percent of the global population that currently has no access to MRI.

The Magnetom Free.Star is the second product in the Magnetom Free line-up, following the Max, which was unveiled a year ago. Siemens Healthineers expects these products to expand MRI’s reach geographically, but also in targeting new clinical segments. Instead of MRI being focused only on radiology departments, Siemens hopes to derive revenues by selling into other care settings, such as orthopaedics, paediatric and emergency medicine for example.

Expanding Imaging

In addition to seeking new customers from outside its current core markets, Siemens also hopes to be able to use its innovation to drive new sales, and more lucrative sales at existing customers. The vendor was proudly promoting its Naetom Alpha scanner at the events. This, the world’s first photon-counting CT system, is indicative of how the vendor hopes to be able to drive increased spend at providers. It is an innovative new system which offers greater capability than other top end scanners. This will encourage providers to replace older systems for the new PCCT system, which will, initially at least, be sold at a significant premium (see FDA Approval Lets Siemens Make CT Count). Furthermore, photon counting CT produces a huge volume of data, which Siemens also hopes will encourage providers to also use more of its software portfolio, founded on the new Syngo Carbon interoperability platform.

Data will also form a key part of Siemens Healthineers’ New Ambition in other ways too. AI will play a major part in this strategy, and Siemens, arguably has the upper hand compared to some of its key competitors, which are increasingly looking to partner with third parties to add AI capabilities to their ecosystems. Siemens has instead predominantly been focused internally. The vendor now claims to have more than 60 AI enriched offerings, 1.3bn curated data sets and aims to provide solutions for anatomies covering 85% of imaging procedures by 2025, up from 35% today. This could be a real differentiator in supporting providers in tackling the challenges of today, with imaging volumes continuing to increase and a dwindling pool of clinician resource to interpret scans. Additionally, Siemens advances in AI are also set to help facilitate the targeting of new customers, who may not have the same training and experience as those in established imaging departments. Advanced clinical decision support tools will somewhat offset that lack of expertise and should smooth the transition of imaging modalities to new areas and new markets.

New Challenges Will Come

It won’t all be plain sailing for Siemens Healthineers, however. The vendor has been very successful in many markets, but it has really made its name in premium segments. Striving to deliver growth in value-orientated segments and a greater focus on emerging markets will provide several stern challenges. One of these will be selling the systems. While the product might be attractive, if Siemens doesn’t have the right operational sales and service support, it could still flounder. Other vendors have better established sales channels in emerging markets today, with sales teams and distributor networks better connected to providers and teams more experienced in selling value-focused products. In these markets, loyalty to other lower-cost brands will also play a part, as too will aggressive price competition.

Siemens could also find itself increasingly competing with Chinese vendors, which are becoming increasingly capable despite being more affordable than their western counterparts. This is evident in the growing presence of vendors such as United Imaging, both in the Chinese market but also in mature markets where Siemens holds a leadership position. China is also becoming more focused on AI, with multiple vendors having secured sizeable funding rounds and many solutions already deployed for clinical use in the domestic Chinese market. Despite Siemens’ best effort, the value proposition provided by these vendors could prove too appealing for less premium customer tiers and the German vendor could miss out.

Siemens may also face competition from vendors willing to adopt innovative business models. In emerging markets, smaller challenger vendors which are looking to offer their products on pay-per-scan basis, or in other innovative ways, could grant cash-strapped providers additional imaging capability for a lower upfront cost than Siemens. This alone could be enough to tempt providers away.

A Problem that Must be Solved

While these obstacles are tangible, they are not insurmountable. What’s more, regardless of the challenges they offer, if Siemens is to achieve its growth target laid out in its New Ambition, they must be faced. Siemens Healthineers is uniquely placed to achieve this though, with the vendor’s scale bringing with it opportunities that would be out of reach for almost all other vendors.

Siemens can afford to invest heavily in technologies like CT, MRI and AI, it should also invest in the growing service side of the business which will help grow stable revenues in markets where it is strong, and it can invest in market education and sales in new markets. Further, we expect Siemens to continue to leverage its new market positions in Oncology (via the Varian acquisition) to support cross-sell of imaging competency into Oncology, while also moving the needle further towards more personalised, precise care provision in mature markets.

The business does have areas where it is less strong such as Ultrasound, in which it is according to Siemens, ranked fifth, and in some specialities. But on balance these gaps are relatively few and far between. Digital competence will also play an increasingly important part in the future success of the business. While the firm has a legacy of technical hardware innovation, its digital record in imaging has been patchier. To address this the firm has clearly laid out its roadmap plans in imaging for improved interoperability between its portfolio, under the Syngo Carbon brand. As deals with providers increasingly focus on digital assets as well as hardware assets, the success of Carbon will become more and more important to underpin its New Ambition strategy. Mid-term, Carbon is also expected to play a central role in underpinning Siemens’ broader digital precision medicine play too, especially in bringing data from its Imaging, Oncology and Diagnostics divisions more closely together.

Siemens Healthineers’ recent events detail how the vendor will combine strengths from across its business to solve its enviable problem and indicates where its growth will come from next. Now all that remains for the firm is the hard yards – the realisation of this ambition.

 

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Signify Premium Insight: Vendor Financials Roundup – The Health of the Imaging Sector Q3 2021

This Insight is part of your subscription to Signify Premium Insights – Medical Imaging. This content is only available to individuals with an active account for this paid-for service and is the copyright of Signify Research. Content cannot be shared or distributed to non-subscribers or other third parties without express written consent from Signify Research. To view other recent Premium Insights that are part of the service please click here.

The third quarter of 2021 has been impacted less by the coronavirus pandemic than any of the previous six. This is evidenced in the financial results of the major medical imaging companies which shows that vendors are, by and large, progressing steadily along the recovery curve and in many instances showing growth for the trailing 12 months in the upper single digits and beyond.

One of the vendors that did, at first glance, appear to struggle, was GE Healthcare, which posted year on year growth for the quarter of -5%. However, this negative growth figure was, in part at least, a result of a tough comparable quarter, with last year’s $300m ventilator order for its Life Care Solutions business proving hard to match. This fall, however, was at least partially offset by increased volume in Imaging and Ultrasound. Despite this, the figure still stands in sharp contrast to those of its closest competitors, Siemens Healthineers and Philips, which posted growth figures of 12.7% and 10% in their respective Imaging and Diagnosis and Treatment businesses.

Of more concern than a tough comparable quarter in 2020 are the supply chain issues that GE pinned most of the blame for the negative growth on. GE was not alone in suffering from such problems, with players in industries as diverse as carmaking and meat production all being affected. The vendor did highlight that it was working to minimise the disruption, citing the example of its CT team in Japan that has worked to reduce production lead time by 40% from when parts are received compared to a year ago, but these initiatives have so far been unable to offset the challenges being faced. Canon was another vendor that highlighted this problem. Although the Japanese firm posted a year-on-year improvement just shy of ten percent, the vendor noted that the figure was still below its expectations.

Medical imaging vendors have, for the most part, performed strongly over Q3 2021. N.b. While Fujifilm Healthcare did enjoy organic growth and saw a ‘surge’ in revenue, the acquisition of Hitachi Ltd.’s diagnostic imaging-related business also contributed to its dramatic quarter-on-quarter growth.

Order from Chaos

GE Healthcare’s decline does look set to be short-lived, however, with it, and several other vendors highlighting remarkably robust order books. GE reported year-on-year order growth of 21% globally. Philips boasted comparable order growth of 15% in its Diagnosis & Treatment business in the third quarter, Siemens Healthineers highlighted that it had booked more than Eur20bn of order intake in its FY2021, Canon’s medical segment mentioned that it was building up its order book for the coming year, while Agfa described its order book as ‘healthy’.

The strength of these vendors’ order books is a result of several factors. The aforementioned supply chain issues are among them, with providers being forced to place orders for purchases that cannot be made right away. There are also other more pervasive trends having an impact.

One of the key reasons is the continuing Covid support packages from many governments. In countries with publicly-funded healthcare systems, providers are still benefitting from additional funding that has been allocated over the last 18 months. These providers have already spent heavily on equipment such as ventilators and patient monitors that was urgently needed during the worst of the pandemic, now their focus has turned to the enormous backlog of patients waiting for postponed elective procedures. To address this backlog many providers are investing heavily in imaging equipment, seeking to take advantage of both additional systems, as well as the efficiency improvements that newer equipment can offer.

This glut of orders is also present in privately-funded markets, although here providers are spending to take advantage of the backlog, which represents a significant revenue opportunity, much needed for many following the difficulties of the past 18 months.

Maintain the Chain

This increase in demand was noted by many different vendors. Fujifilm mentioned the demand of its ultra-lightweight mobile digital x-ray systems and ultrasound devices, both Philips and Siemens called out the popularity of their CT systems, Agfa mentioned the demand for its healthcare IT solutions and Konica Minolta highlighted the success of digital radiography and diagnostic ultrasound, among others. This, almost universal demand for medical imaging devices is obviously good news for medical imaging vendors, although there are also some risks.

Supply chain issues could continue to blight performances, and if one vendor is particularly struggling to supply equipment, then orders could leak away to competitors, similar to providers’ prioritisation of availability above all else in the digital radiography market during the height of the pandemic (a trend discussed in more detail here). Essentially, supply chain management and logistics is, in many ways, set to be the most crucial factor over the coming 12 months.

There are other clouds on the horizon too. While many governments have prioritised investment in new medical imaging systems, few seem able to address the shortage of radiologists. Longer-term this shortage could increasingly bite, with the purchasing of additional systems coming to an end when there is a lack of radiologists, technicians and other imaging professionals to use them. This shortage means that over time vendors will have to focus on other factors peripheral to the imaging systems themselves in order to boost their revenues. Improving efficiency and workflow, offering AI capability that will assist in some of the less complex and time-consuming tasks, and increasingly offering services as part of deals, are factors that could make a significant difference in coming years, given that the rapid rise in equipment demand can only last so long.

The worst of the pandemic’s volatility appears to be over, with vendors squarely into recovery.

Major Market Focus

One feature of this quarter’s results was that much of the commentary and discussion was centred around developed markets, with little attention directed elsewhere. Emerging markets often provide palpable growth when there is a lack of opportunity in more established markets. At present, however, many healthcare providers in emerging markets are particularly stretched financially. This combined with the more volatile nature of these markets, and the simple fact that vendors’ largest markets are enjoying unrivalled demand, means that the focus is elsewhere.

One market that is growing is China, but this has been more beneficial for some vendors than others. The two Chinese vendors tracked for this Premium Insight, Beijing Wandong and Shenzen Mindray both enjoyed year-on-year growth in the quarter above 20%. According to the latter this was a result of predominantly domestic growth, stemming from China’s ‘unprecedented’ medical investment in the wake of the coronavirus pandemic and a large expansion of public hospitals. Given China’s strategy of favouring local vendors, domestic companies have been the main beneficiaries of this investment. However other international vendors also performed strongly in the country, with Philips, for example acknowledging revenue delays, but touting mid-single digit order growth for the quarter. The vendor also said it expected prospects to improve further as regulatory guidelines in the country ‘become clearer’.

Time to Eat

Despite this nuance, when all is said and done, it has been a lucrative quarter to be a medical imaging vendor. While there have been weaker spots, AGFA noted a ‘softer’ quarter, for example, and Sectra saw revenues dip compared to the previous quarter as it experienced its usual quarter-to quarter variability, but these are minor hiccoughs in what is currently a booming market. The challenge for vendors will be how they can continue to capitalise on this very strong demand and ensure that nothing prevents them turning this demand into revenue. This will mean ruthless supply chain management and ensuring that there are no hurdles in producing and delivering medical imaging systems.

Vendors will be keen to make the most of this demand, which appears robust enough to support strong performances for the coming quarters. However, in servicing this demand they should maintain an eye on the future. The time will come when government spending boosts end, hospitals are left with more restricted budgets, providers have purchased all the medical imaging equipment their staff is able to utilise, and vendors will have to find more creative ways to grow.

Until then, the famine of the pandemic’s peak is past. Now is the time to feast.

 

About Signify Premium Insights

This Insight is part of your subscription to Signify Premium Insights – Medical Imaging. This content is only available to individuals with an active account for this paid-for service and is the copyright of Signify Research. Content cannot be shared or distributed to non-subscribers or other third parties without express written consent from Signify Research. To view other recent Premium Insights that are part of the service please click here