May 16, 2022

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GE Healthcare spinoff will attract investors, analysts say

General Electric’s spinoff of its healthcare division could give the new company greater flexibility and facilitate the advancement of its artificial intelligence-based diagnostic tools, industry analysts said.

The conglomerate announced its plans to split its healthcare, aviation and energy businesses into separate publicly traded companies Tuesday. The newly formed healthcare company is slated to launch in 2023. GE revealed a plan to spin off the GE Healthcare subsidiary in 2018 but backed off the following year. The parent company intends to retain a 19.9% stake in the profitable diagnostics-oriented business as it aims to raise capital and pay off debt.

GE Healthcare has been investing in new artificial intelligence and imaging technology. Last year, GE unveiled new software that uses artificial intelligence to increase the clarity of MR images and the company acquired Prismatic Sensors, the photon counting CT technology.

A spun off GE Healthcare could operate more nimbly as a standalone company and attract investors, healthcare consultants and analysts said.

“This was a hot division inside of GE. Maybe they can make decisions faster without the corporate structure,” said Jeff Goldsmith, president and founder of consulting firm Health Futures. “There is a lot of money pouring into AI. This technology could make for a quantum improvement in diagnostic efficiency. There’s reason for optimism there.”

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GE Healthcare has sold a lot of imaging and diagnostic hardware to healthcare companies, but the spinoff may need time to improve its software development, Goldsmith said.

Breaking away from a diversified conglomerate is a double-edged sword, said Michael Abrams, managing partner of healthcare consultancy Numerof & Associates. The new entity will have more flexibility, but it won’t have the might of a giant company backing it, he said.

“Having all the resources of GE behind them enabled GE Healthcare to do things other firms of the same size could not do,” Abrams said. “On the other hand, while they may not have the same wealth of resources, it’s not clear whether they were used in the most profitable way. I’m sure the GE structure was a challenge in making decisions.”

GE Healthcare aims to leverage its medical equipment contracts with providers to form consulting and data analysis partnerships. The subsidiary has been expanding its network of command centers that gather real-time data to help health systems streamline patient flow, reduce wait times, balance workload and increase clinical standardization.

“GE has the potential to upgrade the software of the equipment that’s already installed in a lot of healthcare facilities. That is a huge plus,” Abrams said.

GE has a responsibility to “move with speed to deliver precision health,” GE Chair and CEO Lawrence Culp, Jr. said in a news release. Culp will be non-executive chair of the new company and Peter Arduini will take over as president and CEO of GE Healthcare next year, ahead of the spin-off.

By making all three standalone companies publicly traded, GE will need to lure investors to each new entity. That won’t be a problem, said Mark Armstrong, shareholder at the consultancy LBMC.

“Breaking off these different products into separate companies enables them to attract investors that are solely interested in healthcare tech,” Armstrong said. “There are investors that want to avoid bricks and mortar, and breaking off their process, technology and hard asset divisions is in part to try to entice more investors.”

GE Healthcare accounted for about 23% of the parent company’s $79.6 billion in revenue last year. Healthcare was GE’s most profitable division last year, although it typically doesn’t generate as much profit as aviation. GE shares rose 2.65% on the announcement Tuesday.

“Investors will now have the opportunity to own either or both exceptional franchises in aviation and healthcare without having to hold on to GE’s more challenged businesses,” Joshua Aguilar, equity analyst at Morningstar, wrote in a note to analysts. “GE’s plan is a much-needed audible from the prior broad portfolio construct first contemplated by CEO Larry Culp’s predecessor, John Flannery, in June 2018.”

As a well-capitalized standalone business, GE Healthcare will be able to accelerate decision making, focus on key growth areas and rejuvenate its merger-and-acquisition activity, said Nathan Ray, a partner in the consulting firm West Monroe.

“The bottom line is that the standalone GE Healthcare will be able to focus on investing in innovation and allocating capital to large and promising growth opportunities, both organically and inorganically,” Ray said.