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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: GE Healthcare’s New Beginning

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.

Last week GE made headlines when it announced that it was breaking up into three separate businesses. The firm, which at one time was the world’s largest, revealed that Healthcare will be the first of GE’s business units to be spun off, with the split taking place in early 2023. In separating GE Healthcare from GE’s Aviation and Energy businesses, the company will enjoy greater freedom, despite GE retaining 19.9% ownership of the Healthcare business. This, hopes GE CEO Larry Culp, will give the spinoffs a “greater operational focus” allowing Healthcare, along with the others, to be more flexible in targeting their own specific sectors.

The Signify View

Talk of GE splitting out its healthcare business is nothing new. In 2018, then CEO John Flannery laid out a plan for carving out the conglomerate’s Healthcare unit and establishing it as an independent business. This, he said, would provide the “best environment” for the healthcare business to flourish, and enable it to seek investment and opportunities on its own. Although those plans were shelved with the removal of John Flannery in 2018, the possibilities remain the same. A GE Healthcare unbound by the wider GE enterprise and the hardships it has faced since the 2008 financial crisis is still potent.

This newfound  freedom could, in the near term, be evidenced by the company taking an increasingly acquisitive attitude. Until GE Healthcare’s recent announcement that it had picked up BK Medical for $1.45bn (read our analysis here), the company had not made any significant acquisitions in imaging in more than four years, due in part to belt tightening at a GE corporate level. This recent dearth of acquisitive activity is in contrast to the vendor’s closest competitors, Siemens Healthineers and Philips, which have both bought up a string of companies in recent years. Siemens has picked up several vendors including Medicalis, Corindus and most-recently Varian, a $16bn investment set to be a major growth engine for the business in coming years. Philips meanwhile has also been busy, purchasing Carestream Health in 2019, BioTelemtry in 2020 and Capsule Technologies in 2021 among a number of others.

These acquisitions have enabled Philips and Siemens Healthineers to ready themselves for an increasingly digital future focused around precision medicine in which larger, more comprehensive managed service contracts are the norm. Today, Siemens and Philips are arguably better positioned for growth in the coming decade compared to GE Healthcare, which, despite being innovative internally, remains on the back foot. GE’s separation puts the vendor in a better position to fight on this front and make up lost ground.

One Vision

For this to happen GE Healthcare must establish a vision for its future and commit to a strategy to lead it there. This is another of the commonalities shared by Siemens Healthineers and Philips. For Philips, early in the last decade it saw great potential in the healthcare technology industry. Over time it sold off its other business units so could focus myopically on premium healthcare technology with a very strong emphasis on service and partnerships. Siemens Healthineers meanwhile has always strived to be a master of technical innovation and has focused heavily on precision medicine. That isn’t to say other vendors don’t share the same competencies, but Siemens and Philips have always maintained a certain clarity of vision and market reputation.

At GE Healthcare this focus has been somewhat lacking. This could in part stem from GE Healthcare’s origins in the wider GE conglomerate, which sought success in every corner of industry. GE Healthcare’s approach is similar, with the vendor a reliable performer across the board, yet no clear “leadership” identity in major market sectors. After separating from the wider GE corporation in 2023 however, GE Healthcare would benefit from prioritising and promoting several clear strategic aims. The vendor should commit to exceptional excellence in some areas in which it is already strong, such as radiology, critical care, women’s health and enterprise clinical analytics.  In doing so, and in investing in these areas, GE could foster innovation within the company and help develop areas as significant commercial differentiators compared to competitors.

Less tangibly, GE Healthcare’s release from the broader conglomerate and a clear, new vision for the company to rally around is likely reinvigorate the vendor. GE has endured several difficult years of paying down debt and striving to increase margins. These problems will not disappear, but GE’s other units are likely to bear their brunt. GE Healthcare’s freedom will offer something of a fresh start, with its now unconstrained leadership team able to chart their own course.

 Freedom isn’t Free

There are some sacrifices GE Healthcare will have to make in exchange for its newly found freedom. It could, for example, lose out on some opportunities which see healthcare equipment rolled into, or added onto a deal struck for a completely different industry sector. Some opportunities for major government tenders could have been opened in the past by connections made in deals for products made by GE’s other business units, or chosen on the back of sterling service provided in major tenders for other GE products. Although these deals would not have been common, they were sizable and long-term.

As well as no longer being able to benefit from the wider conglomerate’s reach, Healthcare may also miss its access to GE’s infrastructure. This could be in the form of company-wide software platforms and systems (such as the previously much touted Predix industrial intelligence platform), or supply chains and the economies of scale that may reduce the cost of some of the raw materials or components used in the manufacture of its medical imaging systems and other equipment, for example.

In reality, these are small and not insurmountable prices to pay compared to the possibility offered by the separation. Whether this possibility is being realised, however, will depend on whether GE Healthcare is able to hit certain achievements in the coming years. Speaking of the separation, Larry Culp said it would enable investment in both existing and adjacent markets. This needs to be attended to immediately, with GE investing not only where it is itself strong, but in making acquisitions where it is less prominent. Two obvious areas where acquisitions could significantly bolster the vendor are in the interventional and surgical space, and in digital pathology. The acquisition of BK Medical has added firepower to GE Healthcare’s interventional and surgical ultrasound offering, broadening its capability and helping to round out its portfolio, but there is still more to be done with other modalities. Digital pathology, meanwhile, is set to be a significant growth area in the coming years, and at present, GE lacks strong capability in this space following its earlier acquisition and wind-down of Omnyx.

The Value of Prestige

In addition to clarifying its mission and making several key acquisitions, GE should also aim to establish leadership positions in a select few, high-status areas. While GE is the market leader in a number of segments in terms of installed base, these tend to be in more price competitive markets. GE Healthcare would garner a great deal of cachet and credibility if it were able to assert itself both commercially and technically in one of the more advanced and prestigious market segments.

Broadly, GE’s split emphasises that the golden age of the traditional industrial conglomerate is over. But instead of a death knell, that represents the breaking of a new dawn for GE Healthcare, which now holds its destiny entirely in its own hands. If GE Healthcare can inspire its customers, its employees and its investors, and capitalise on the opportunities available to it, then the vendor is more than capable of not only maintaining its global leadership position in the medical imaging market, but doing so in a way that is more innovative, better addresses the spectrum of customer needs and is ultimately more profitable.

 

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