General Electric‘s (GE) decision to spin off its 3 major divisions comes amid a small burst of such “de-conglomerations”. It wasn’t a surprise to most analysts and industry watchers; indeed, many wonder why it took so long to get there. The conglomerate structure forced investors to buy into some of GE’s promising business at the cost of also investing in its weaker ones. The other downside of the conglomerate structure is that as the corporation grew, the complexity involved in decision making began to outweigh the potential for synergy across businesses.
This spinoff, however late, promises to make investments in GE more pure plays, which investors find easier to understand and to value. Investors will be able to own the aviation and healthcare franchises without having to own GE’s more challenged businesses.
In 2020, GE’s healthcare division brought in $18 billion in revenue, 23% of GE’s total of 79.6B. It develops MRI, CT scan, X-ray machines, and other diagnostic devices. It also sells software to be used for clinical monitoring, ICU management, and anesthesia delivery. Their product focus enables clinicians to make faster, more informed decisions through intelligent devices, data analytics, applications, and services.
The company is a leader in precision health and applications of digital technology to drive productivity and improve outcomes. Medical imaging, which constitutes about two-thirds of GE Healthcare’s revenue base, is increasingly commoditized, but one where GE also benefits from intangible assets, scale, and switching costs.
In 2020, the company bulked up its imaging capabilities and bought several assets that brought new technologies under its wing. One significant one was their acquisition of Prismatic Sensors. The application of Prismatic’s photon-counting technology positions them for a technological lead in the race to improve the capabilities of CT technology space.
GE’s work in AI is already being used to deliver quantum improvements in magnetic resonance technology.
Also in 2020, GE bought BK Medical, which develops imaging support technology for use in the operating room, and French company Zionexa, which brought a novel imaging agent which was recently approved by the FDA to help diagnose breast cancer.
GE has an install base of over 4M units, and that presents an opportunity to sell such technological enhancements as add-ons to existing customers. With those sales come continuing revenue streams from maintenance support, consumables, and upgrades.
Themes in the healthcare delivery market that represent opportunities for GE include the drive to lower the cost of care delivery in ways that improve quality and – most importantly – contribute to margins in ways that don’t reduce revenues. So, technology that reduces the time it takes for a radiologist to receive and read imaging results means the same revenue at a potentially lower cost. Another emerging theme in the market is the need for newly consolidated healthcare systems to translate their larger size into faster, more coordinated, and higher quality decisions.
Less widely noted is GE’s commitment to broaden its offerings in the services space. In 2015 GE bought the Camden Group from DaVita HealthCare Partners to complement its existing consulting capabilities. More broadly, GE has been attempting to leverage its relationships with hospital systems to generate consulting opportunities and to use its consulting capability in some cases as a loss leader to lock out its competition for imaging equipment.
On the competitive front, GE is largely in a three-way competition with Siemens and Phillips. GE and Siemens are said to dominate the market and are often the only two vendors actively considered by many large hospital networks (except in some specialty areas like Hologic’s mammography machines). Reportedly, some physicians choose their residencies based on whether the prospective hospital is a “GE hospital” or a “Siemens hospital”.
Given the necessity of imaging to the clinical task, the high cost of failure, and the importance of physician familiarity of use, switching costs represent an important competitive moat for GE relative to Siemens and other competitors. Switching costs are reinforced by GE Healthcare’s extensive field service workforce, which enables the firm to quickly address service requirements and avoid patient care disruption.
Other key market drivers of growth in imaging include increased access to healthcare services in emerging economies and an aging U.S. population, coupled with digital initiatives that save practitioners’ time while protecting them from risks. If the U.S. healthcare system successfully makes the transition to a value-based payment model, GE’s promise of better outcomes and higher efficiency will be that much more attractive.
As with other medical device companies, COVID-19 negatively impacted their business. GE saw increased demand for ventilators, x-ray machines, monitoring solutions, and other products related to the pandemic. At the same time, it saw reduced demand for other products, such as MRI machines and contrast agents. The net result was a 16% reduction in year-over-year revenue.
But as vaccines and other therapeutics work their magic, the character of market demand is expected to largely revert to some extent to the preexisting one, albeit with a new focus on technology for care settings outside the acute care environment.
If there is a weakness in the current strategy, it’s GE’s focus on acute care. The locus of care has been migrating from acute inpatient sites to less intensive ones like ASCs (ambulatory surgery centers) and home care. Long-term, acute care is a shrinking market that will consist of only the most complex patients, as the market drives toward managing health issues on a lifecycle basis in lower intensity settings. There will be a growing need for the products GE provides, driven by financial pressures across the industry. But the real growth will be in less acute settings, and GE needs to acknowledge that trend in their strategy.
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