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Msg  7398 of 7455  at  2/3/2023 6:42:27 AM  by


GE HealthCare needs to trim down to bulk up: Chicago’s newe-st public company spins o

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GE HealthCare needs to trim down to bulk up: Chicago’s newe-st public company spins out of GE with plans to rev up growth while shedding debt and costs


GE HealthCare starts independent life with a strong position in big medical equipment markets and plans to jump-start growth through acquisitions and technology innovations. But it also carries a heavy debt load and some excess costs that need to be cut.

Spun off by longtime parent General Electric this month, Chicago’s newest public company joins a local roster of health care giants that includes Abbott Laboratories, AbbVie and Baxter International. Some 1,000 of GE HealthCare’s 51,000 worldwide employees are in Illinois, with several hundred at a downtown headquarters.

“This has been a real hub for us,” says Brian Montgomery, GE HealthCare’s chief strategy officer. “We’re . . . looking forward to life here as a standalone, publicly traded company.”

GE HealthCare sells imaging machines, ultrasound equipment, patient monitoring products and diagnostic agents to hospitals and other health care providers. Sales rose 4% to $18.3 billion last year.

Not surprisingly for a GE offspring, the health care business is No. 1 or No. 2 in each of its markets, according to Chicago financial firm Morningstar. GE HealthCare’s sales represent about 22% of the $84 billion total addressable markets for its four business segments, the largest market share.

But the markets grow relatively slowly, at annual combined rates of 4% to 6%.

Company executives figure that an independent GE HealthCare, free to control its own destiny and invest as it chooses, can deliver 5% to 7% annual growth in organic revenue, which excludes the effects of acquisitions and foreign exchange rates.

Growth plans hinge on technology innovations and precision care, which often means equipping products like radiology and ultrasound devices with machine-learning and artificial intelligence capabilities. That, in turn, requires more spending on research and development. The company boosted R&D spending to $1 billion in 2022, up from about $800 million in 2021. GE HealthCare hasn't announced R&D spending plans for 2023 yet.

The COVID-19 pandemic ushered in a widespread labor shortage, increasing the demand for hospital equipment that's smarter, faster and can help support smaller care teams, a trend driving medical device manufacturers to develop tech-forward products.

"In the next couple years, we won't have literally any products coming out that don't have embedded (artificial intelligence) in them," CEO Peter Arduini recently said at a J.P. Morgan Healthcare Conference. "It's just the way things are going."

GE HealthCare says it now has 42 AI devices approved by the U.S. Food & Drug Administration, more than any other company in the world. To support its ongoing tech ambitions, GE HealthCare recently hired a chief technology officer from Amazon.

Arduini's growth strategy also includes acquisitions, mostly so-called "tuck-in" deals that enhance existing product lines. Less than a week after the spinoff, GE HealthCare paid an undisclosed price for Imactis, a French radiology startup with precision care capabilities.

Still, GE HealthCare's growth targets are a leap for a company that has historically posted low-single-digit sales increases. Year-over-year revenues rose just 2% in 2021, well below the rate it's projecting for 2023.

"There's a portion of the market that is really skeptical that they'll only continue to grow low-single digits and they won't hit those targets," says Joshua Aguilar, a senior equity analyst at Morningstar. "They'll have to prove that they can make up that ground."

Meanwhile, German rival Siemens Healthineers grew 5.9% to 21.7 billion euro, or $23.5 billion, in 2022. Another competitor, Amsterdam-based Koninklijke Philips hasn't yet reported full-year 2022 figures but said sales slipped 1% to 17.2 billion euro, or $18.7 billion, in 2021.


An independent GE Healthcare will need to boost profits along with revenues. The company hasn't disclosed full-year 2022 figures yet, but net income fell 19% to $1.4 billion for the nine months ended Sept. 30, 2022, for a profit margin of 10.2%.

A big debt burden and high costs will weigh against GE HealthCare's efforts to boost profitability and invest in growth. In the spinoff, GE saddled its former subsidiary with $10.25 billion in debt and about $5 billion in pension liabilities, according to a December Securities & Exchange Commission filing. Chief Financial Officer Helmut Zodl told investors in December that the company plans to pay down debt, "specifically in the early years."

GE HealthCare also intends to cut costs by trimming its product line and real estate holdings. Zodl said the company is targeting more than 100 sites where it could reduce rent and operating expenses.

"This will reduce cost as well as optimize our footprint and supply chain," he explained.

Asked about the possibility of layoffs in Chicago or elsewhere, the company said it does not "anticipate workforce changes," but added "we will continue to review our businesses and monitor market conditions to ensure we are positioned for growth and global competitiveness."

GE HealthCare also faces macro challenges affecting most medical equipment manufacturers. Over the last several years, the hospital industry has consolidated into a number of large chains with growing leverage to demand price concessions from suppliers like GE HealthCare.

"Any time you have a consolidated buyer group, that gives them great bargaining power," Aguilar says.

Another source of pricing pressure comes from government and private insurers looking to rein in rising health care costs across the country. National health expenditures more than doubled from 2011 to 2021, according to analysis by the Centers for Medicare & Medicaid Services.

"It's certainly a big pressure and one that they've had to contend with for a while," Aguilar says. "And you could argue it's getting worse."

Montgomery says GE HealthCare keeps health care cost concerns in mind when making new products.

"As we think about designing any device or any software solution, what we're thinking about is solving for time, cost, quality and access," he says.


In the end, GE HealthCare's fortunes as a public company depend on investors' view of its performance and prospects. Since its debut, GE HealthCare stock was up 28% to $69, or 15.02 times projected 2023 earnings per share, as of Jan. 24. Siemens and Philips traded at $26, or 24.15 times earnings, and $16, or 16.76 times earnings, respectively.

"The argument usually for spinning off is to quote, unquote 'unlock value,' " Aguilar says. "They've got a lot of shots on goal . . . so we'll have to see. The question is open."


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