General Electric (GE) decided to separate its three main divisions at a time when this small-scale outbreak of “degroupization” occurred. Most analysts and industry observers are not surprised by this. In fact, many people wonder why it took so long to get there. The corporate group structure forces investors to buy some promising businesses of General Electric, at the expense of also investing in weaker businesses. Another disadvantage of the group structure is that as the company grows, the complexity of decision-making begins to exceed the potential for cross-business collaboration.
No matter how late, this spin-off is expected to make the investment in General Electric more pure, which investors think is easier to understand and value. Investors will be able to own aviation and healthcare franchises without having to own GE’s more challenging businesses.
In 2020, GE’s healthcare sector brought in $18 billion in revenue, accounting for 23% of GE’s total revenue of 79.6B. It develops MRI, CT scan, X-ray machine and other diagnostic equipment. It also sells software for clinical monitoring, ICU management, and anesthesia delivery. Their product focus enables clinicians to make faster and more informed decisions through smart devices, data analysis, applications and services.
The company is a leader in the application of precision health and digital technology to increase productivity and improve results. Medical imaging accounts for about two-thirds of GE Healthcare’s revenue base. It is increasingly commoditized, but GE also benefits from intangible assets, scale, and switching costs.
In 2020, the company enhanced its imaging capabilities and purchased several assets that incorporate new technologies into its portfolio. An important event is their acquisition of Prismatic Sensors. The application of Prismatic photon counting technology makes them a technological leader in the race to improve the space capabilities of CT technology.
GE’s work in artificial intelligence has been used to achieve quantum improvements in magnetic resonance technology.
Also in 2020, GE acquired BK Medical, which develops imaging support technology for operating rooms, and French company Zionexa, which brought a new imaging agent that was recently approved by the FDA to help diagnose breast cancer.
GE’s installed base exceeds 4 million units, which provides an opportunity to sell such technological enhancements to existing customers. These sales come from the continuous revenue stream of maintenance support, consumables and upgrades.
The themes that represent GE’s opportunities in the medical service market include reducing the cost of medical services by improving quality, and most importantly, improving profitability in a way that does not reduce revenue. Therefore, technology that reduces the time required for radiologists to receive and read imaging results means obtaining the same income at a potentially lower cost. Another emerging theme in the market is the need for a newly integrated healthcare system to transform its larger scale into faster, more coordinated, and higher-quality decision-making.
What is less known is that GE is committed to expanding its products in the service sector. In 2015, GE acquired Camden Group from DaVita HealthCare Partners to supplement its existing consulting capabilities. More broadly, GE has been trying to use its relationship with the hospital system to create consulting opportunities, and in some cases use its consulting capabilities as a loss leader to lock in its competition in imaging equipment.
In terms of competition, GE mainly competes with Siemens and Phillips in tripartite competition. It is said that General Electric and Siemens dominate the market and are usually the only two suppliers actively considered by many large hospital networks (except for some specialized areas such as Hologic’s mammogram machines). It is understood that some doctors choose residents based on whether the hospital they plan to be admitted to is “GE Hospital” or “Siemens Hospital”.
In view of the necessity of imaging for clinical tasks, the high cost of failure, and the importance of doctors’ familiarity with use, switching costs are an important competitive moat for GE compared to Siemens and other competitors. GE Healthcare’s extensive field service workforce increases switching costs, which allows the company to quickly meet service needs and avoid interruption of patient care.
Other major market drivers for the growth of the imaging industry include increased access to healthcare services in emerging economies and the aging of the US population, coupled with digital plans that can save practitioners time while protecting them from risks. If the U.S. healthcare system successfully transitions to a value-based payment model, GE’s commitment to better results and greater efficiency will be more attractive.
Like other medical device companies, COVID-19 has had a negative impact on their business. General Electric sees an increase in demand for ventilators, X-ray machines, surveillance solutions and other products related to the pandemic. At the same time, it saw a decrease in demand for other products, such as MRI machines and contrast agents. The end result is a 16% year-on-year decrease in revenue.
But as vaccines and other therapies work their magic, the characteristics of market demand are expected to return to some extent to the previously existing characteristics, although the new focus is on technologies used in care settings other than acute care settings.
If there is a weakness in the current strategy, it is GE’s focus on emergency care. The place of care has been moved from the acute inpatient department to a less intense place, such as ASC (Outpatient Surgery Center) and home care. Long-term, acute care is a shrinking market that will only include the most complex patients, as the market is moving towards managing health issues on a life cycle basis in a lower intensity environment. Driven by the financial pressure of the entire industry, the demand for products provided by GE will continue to grow. But real growth will take place in a less dramatic environment, and GE needs to recognize this trend in its strategy.
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