GE HealthCare Technologies Inc. (GEHC) Earnings Call Transcript & Summary

Okay. We'll kick this one off. Thank you, everyone. It's Patrick on the U.S. MedTech team. I'm delighted today with Jay, Carolynne and Kevin to join us as CFO, Head of IR Communications and the Head of the PDX business from GE HealthCare. Super topical, good for a tech conference as well on the NASDAQ side. So thank you so much for joining.

Yes, Patrick, thanks for having us here today. We appreciate the opportunity with NASDAQ. And thanks to the folks in the room who've joined us for our session today. We appreciate your interest in our company.

You guys had Obviously, your Investor Day fairly recently, about 2, 3 weeks ago now, I think it was on the New York side of things. I don't know if it's worth just before we kick into the direct Q&A, just key points that you felt like you really wanted to communicate just high level about the business from that day.

Yes. I think for us, it's about a real excitement around the future driven by innovation and supported by solid fundamentals. It starts with over the last 1.5 years since the spinoff almost 2 years now, we've made tremendous progress in terms of delivering on a revenue profile, delivering on an innovation promise and delivering on margin expansion. So a really good start as an independent public company. And then as we sit here today and look to the future, we were able to confirm and improve upon the midterm outlook that we previously shared from a financial standpoint. We expect compounded sales growth of mid-single digit, margin expansion of high teens to 20% plus, continued free cash flow conversion and all of this is built on exciting innovation, be it in the pharmaceutical diagnostic business. We're so thrilled to have Kevin here today. That's really a new feature that we've started to emphasize in the portfolio that was much less emphasized during the last Investor Day. And then in addition, continued progress in terms of enhancing leadership positions or bolstering our position in imaging and ultrasound and some of the core modalities. So really exciting Investor Day. We walked away incredibly excited, that's still available online, I believe, for those that want to watch that, it's a worthwhile exercise if you're interested in our company.

If we, maybe, start with the base market environment, maybe starting with the U.S. and then we can talk about some other geographies. What are you hearing from the hospital executives on the willingness to invest on that side of things?

Yes. We -- the hospital environment has been good in the U.S. What we're seeing is a willingness to invest, in particular, in revenue-generating assets and hospitals. So we've seen a fairly buoyant environment. If you look back at our third quarter results, we saw 8% growth in the U.S. business. So really, really robust sales performance. And in addition to that, we had very good orders growth in the U.S. as well. We're pleased with that backdrop and it's something that, of course, we survey it every quarter, and we'll be conducting a survey in January as we really assess the health of the customer. But so far, so good.

Yes, we did a -- we did all usual year-end survey, and it sounded very good for the U.S. on the core imaging platforms. I mean, I guess, as well before we pivot off the U.S. into some other stuff, the base environment, I mean, PDX has been very strong.

Yes, strong, absolutely.

What are you hearing from your customers in terms of patient volumes and the outlook going forward?

Yes. Look, I think as we shared at the investment -- in the Investor Day when you think about our business, we segment into contrast media and radiopharmaceuticals contrast media. We said 2 years ago, we expected CT and x-ray contrast to double in the next 10 years. There's nothing we've seen in the last 2 years that would change that outlook. Look, and we're continuing to invest -- and to ensure the security of supply and the #1 thing our customers ask for in contrast media is security of supply, make sure the product is there when the patients come in to scan. And that's what we invest and that's what we're focused on every single day. When it comes to radiopharmaceuticals, it's all about innovation. What can you bring to market in urology, cardiology and oncology, partnering with next-generation therapies when you think about Alzheimer's with lecanemab, donanemab now in the Alzheimer's space? Vizamyl, we've seen sequential growth since those products were launched, and we're investing behind that product. And Flyrcado, which is our new imaging agent for PET myocardial perfusion, better diagnostic efficacy than existing standard of care with SPECT. Customers are asking us, when can you get us that product? We've got a controlled launch plan. We're going to be shipping at the end of the first quarter, but we're really excited about the growth in that product as we shared before.

We're definitely going to drill into a lot of those. It's impossible to escape at least mentioning and questioning to some degree, China. And it's a bit of a black box, obviously, for those of us externally. But how are you feeling about that for the imaging business?

Yes. No real change in our perspective. Like so we had a point of view on the third quarter call, we commented that as we look to the first half of next year, we don't really anticipate benefit of stimulus. And we said that because as we looked at where we are at, and we outlined a 4-step process to getting to an order -- completed order, pre-tender all the way through to awarding the final order. It's taken a long time to get things through that. And while we've seen some increase in pre-tender activity, which I think is good and potentially promising, it really is too early to say. And I think it's going to be a muted impact in the first half of the year, and then we'll just have to watch. So this is an open question for us. And at the Investor Day, I said, we'll wait until we give guidance in February in order for us to get as much information as we can around the market evolution because this year has proven very hard to forecast.

I absolutely promise, Carolynne, no 2025 guidance question.

I'm not going to drop that on you.

I mean within that China market, like how much do you think is a function of -- it's impossible to know really, but the macro side versus the -- because they have the anticorruption behavior, is there a discussion internally on the relative weightings of those 2?

It's hard to say. Actually, there's 3 because there's anticorruption, there's waiting for stimulus and there's macro. And so there's 3 different elements in play. And I think perhaps each of them is playing a contributory factor to the overall kind of stagnancy that we've seen in the market, and it's really hard to discern because even if a hospital we're going to invest, they might wait just because of lack of clarity. They might wait because of lack of funds available to them, just generally speaking, given the challenging macro environment, it's really hard to say. But as this shakes out, we're -- I would take a step back and just say, as we've looked at China over the years, it's been a really important catalyst for growth. And in any given year, there's volatility, growth up 20%, growth down 20%, a lot of volatility on a year in, year out basis. But overall, over time, it's been a good market for us. And to the extent that, that continues, I think it's -- we expect that to be going forward.

I'd love, Kevin, to pivot a bit to the PDX business.

Sure.

Probably the most frequent question coming into me from the buy side is around Flyrcado and the potential size. Maybe for this audience, it might be worth giving a bit of a background to the product, and then we can go into the...

Sure. So Flyrcado is a next-generation imaging agent using PET technology for the imaging of the -- for the myocardial perfusion procedure, which is the diagnostic for coronary artery disease. The existing standard of care is using SPECT technology. So think about looking at images on television 10 years ago and comparing that with a high-definition image, you would see through a PET camera, and the PET agent has much higher diagnostic efficacy and for particular groups of patients, a much greater application.

Now when you think about the rollout of that, CT has been historically a little bit more cardio -- oncology skew. How do we think about the extra demand that it could generate for CT as a modality? And then also what that means for the speed of rollout?

Yes. No, absolutely. And that's a question we get many, many times now. I mean the product was just approved by the FDA, and we've announced pricing. We're putting in for pass-through pricing right now. We expect to be shipping the first commercial doses in -- towards the end of the first quarter next year. Just to put it in context today, there's 6 million of these procedures performed in the United States. About 5% to 10% of those are done on PET today. So as you think about the ramp-up over time, there's a first step of looking at the installed base of existing users who are using PET cardiac procedures. But then you say, right, how do you then expand that PET installed base to increase the capacity in the system over time, and that will be a pull-through over time? And that's -- I wouldn't put a time line on that right now, but that's part of our role as a company now in terms of building out supporting health care systems to build out that infrastructure. I think the reimbursement changes in the U.S. have certainly helped that environment now and improve that investment case as well. But our first target is to launch -- to get approval, which we've done, first commercial patients during the first -- towards the end of the first quarter. And then we'll build out over time. And as we indicated at our own Investor Day, we're targeting revenues in excess of $500 million by 2028 -- by the start of 2028.

So the -- I mean, you mentioned it, so it feels like very topical. Maybe give a little bit of background for those in the audience not familiar with it, the reimbursement change that happened more broadly and what that impact could be for you guys?

Sure. So today, in the United States, if you go in for a PET diagnostic procedure as an outpatient in the hospital, the hospital receives a flat fee for that exam that combines both the diagnostic pharmaceutical tracer and the cost of doing the scan itself. And I'll give an example of that. We have a product SERENA, which is used for imaging patients to identify estrogen-positive tumor burdens. That's a diagnostic that probably costs about $3,000 to the hospital. But when the hospital scans the patient today, they do an exam on the 10th of December today, they'll be reimbursed $1,500 for that procedure, both for the combined PET scan and the radiopharmaceutical. From January 1, they'll receive 2 payments. They'll receive a payment of $1,500 for the scan plus a further $3,000 for the diagnostic pharmaceutical. So by unbundling those 2, the hospital is now getting reimbursed for the value of the diagnostic. They're getting the value for the diagnostic. It encourages companies like ourselves to invest in technology in this space and encourages hospitals to use next-generation diagnostic imaging agents and gives patients greater access. So we believe this is going to be a real game changer with absolutely supportive, and it's really opening up the market now going forward.

Do you have a sense from conversations with facilities, how many instances there were historically where they might have used an ISEP or tracer or something like that and then they weren't because of the negative economics like even just qualitatively?

Yes. I think one example I'd use is probably in the space of Alzheimer's imaging, where there's -- to get on to Alzheimer's therapy, you need to demonstrate the presence of beta-amyloid. There's 2 ways to do this. You can either use a lumbar punch, which is a relatively low cost but invasive procedure for the patient or you can use a beta-amyloid PET scan, which is noninvasive and actually has a lot more data in that scan, as I would argue, has much more diagnostic potential going forward. If a hospital has to diagnose 3 patients to identify the 1 patient that goes on to therapy and the cost of doing the expensive PET scan is $3,000 or $4,000 and they're not being reimbursed, that's significantly loss-making for the hospital. We believe and we've seen the indications now as we look into 2025, moving away from these invasive lower-cost procedures to what is a much higher quality diagnostic for the patient. That's just one example of migrating moving forward. And I'd expect you to see this in other areas as well.

Last one on PDX. The -- always with U.S. companies, like it's forbidden to talk about competition. But how do you view like the competitive environment overall, who's investing, who's not and the relative advantages you guys have for being a real owner of both the imaging side and the tracer side?

Yes. Look, I do think we have a huge advantage in terms of having both diagnostic pharmaceuticals as part of GE HealthCare and all of the imaging equipment because it enables us to position ourselves as a company, not just as the provider of a beta-amyloid diagnostic or a coronary artery disease diagnostic, but it's an enabler of the care pathway for the hospital. So I will go in with our commercial teams. We'll sit down more broadly with the hospital and say, what's the challenge you face on theranostics? How can we help you solve that as a company? What's the challenge you face in terms of scheduling patients in the Alzheimer's care pathway? How can we help you do that as a company? And it gives us a position that we wouldn't otherwise have. And we've got some great competition out there, but we focus on what our customers ask for, which is security of supply, which is innovation and which is being able to deliver that solution.

Yes. I mean in the case of Alzheimer's, it's interesting because not only is there an imaging agent constraint, there is a potential PET scan constraint and there's a potential MR constraint and how you orchestrate that for the hospital and solve that problem holistically, we think we're best positioned to solve something like that. Same with cardiac imaging and a number of other care pathways as well.

And I'd love to actually, Jay, to pivot into the margin side of things. At the group level, I think one of the positive surprises a lot of people had this year was despite a difficult volume and mix environment, the gross margins, the operating margins came in way ahead of, I think, where anybody really expected, maybe for the audience and those who are familiar, a bit of background for how that was achieved and what that means for margins going forward?

Yes. We were really pleased with the overall margin performance at the company. At the gross level, at the EBIT margin level as well. And what was, I think most interesting, is this has been accomplished. We are accomplishing this in the face of a reduced unplanned sales environment because of the dynamics that we referenced in China, our sales are coming in lower than expectations by several percentage points. And despite that, we've been able to deliver on margin expansion. And it really has come down to a few different things. First, this whole idea of productivity initiatives in our manufacturing facilities. We have been intensely focused on implementing a lean culture at the company. And in lean, you have a number of metrics that are managed at a corporate-wide level, safety, quality, delivery, cost and innovation. And then you filter those down throughout the organization, and you have initiatives designed to target them. One key area is how do you improve the cost profile of your manufacturing, of your sourcing? And so we implemented an enterprise-wide initiative in this area a couple of years ago. And I have to say it's paid very substantial dividends for us. We talked a little bit about -- in the last couple of earnings calls, we talked about some of the things we're doing to reduce platform costs, to reduce sourcing costs to enhance productivity of our manufacturing facilities. So we've talked a little bit about that, and it's hundreds of examples across the company, coordinated centrally to drive the outcome that we're looking for. So that's 1 piece. The second piece is we've had some innovation and support of pricing that's been robust. And I think that environment, for us, this idea of really focusing on the value that we provide to our customers is something that's essential and part and parcel to what our sales teams do every day and really protecting price where possible and protecting the value of new innovation. And then the final piece is, listen, we've done some cost optimization activity outside of manufacturing. This doesn't show up in gross margin, but shows up in operating margin in the area of G&A and some of the sales and marketing functions. And what this is about is effective use of resources, in particular, taking a fresh look as we come off TSAs. We've had transition service agreements in place with GE, and we're really proud that we're essentially complete coming off these TSA agreements, we should be good by year-end and with maybe 1 or 2 residual agreements of a very small nature. So a huge lift to get us to independent. But what it's allowed us to do is really think about the IT support that our business provides and optimizing that, same with finance, same with real estate. And all of those things have attendant opportunities. That's been a feature in our numbers this year. You saw really good performance on the SG&A line. And a lot of that's enabled by some of these moves that we've put in place, which will continue to next year.

A quick point just to add, Jay mentioned that we've been able to drive margin even while we've been operating in a low growth environment, but we've also been able to do that even while we continue to invest more in R&D, which is the future of the company.

Yes. It's good point. And is it fair to say that the Investor Day for those on the way, you added a plus to the maximal end and didn't put necessarily the cap on it. Is it fair to say that since joining your sense has been that you've been running ahead in terms of the cost savings versus what you originally expected? What were some of the things that surprised you that caused you to put the plus on?

Yes. I think and thanks for pointing that out because it was subtle, but for us, it was important, which is, hey, we're tracking better than we expected from a margin standpoint and despite some of the volatility that we described earlier. The -- for me, the biggest surprise is, as I've gotten into the productivity initiatives and the impact that, that can have on a mature manufacturing network, but really putting in place this lean program can have a profound impact because the SG&A opportunity, I expected, and it kind of came in as expected. Innovation, I knew there would be a positive impact from that. Pricing, I had a good sense of that, but probably the biggest one for me that has gone really well is this idea of productivity initiatives. And when we started the year, we had a lot of risk adjustment against this productivity number and we've been able to sort of move forward without that risk adjustment to a large extent, allowing us to maintain and even grow margins versus our original expectations.

One of the trends in the industry has been multiyear, multi-system deals with large IDNs that have been much less one-off in nature and much more of like a long-term agreement, at least on the imaging side. How do you guys think about that? Does it like the visibility that, that gives you relative to price and margin and how you invest? Do you think that those things ultimately end up being margin accretive for you because of the visibility and the ability to plan your cost base relative to presumably, in some instances, a little bit lower pricing if it's a massive 10-year deal, I just conceptually.

Yes. I think they could be margin-neutral to positive in some instances, depending on the situation. And it comes down to what do we do really well as an organization. And Kevin and I described it a little bit, which is, hey, we can solve problems in a comprehensive manner, bringing the full portfolio to bear to help hospitals solve problems. But then in addition to that, we sell really special innovative products. We have a world-class sales team. And in our Investor Day, Catherine talked about some of that capability. And then also, our service organization, I would put up against anybody. And so you put those things together, and it's a very compelling offer. What it gives hospitals is the ability to plan and be thoughtful about how they're going to be supported by a key vendor, what it gives us, is revenue predictability on both the service and the supply side. So of course, there may be some margin trade-offs, but generally speaking, these deals are very attractive on an overall economics basis to us.

PDX, the margin structure is obviously very, very good. Growth, probably accretive to the group in that way. Is there any reason to think that margin could keep going up or remain stable? Is there anything that would, given the reimbursement has gotten better, is there anything that would ever depress it? I mean it seems like it will go up.

Yes. Look, if you look at the portfolio, I mean, this year, we have expanded margins probably about 350 basis points. We're now north of 30%. We expect that to continue to grow going forward, particularly as the balance of the portfolio starts shifting towards radiopharmaceuticals and that growth going forward. We're investing more in R&D than we've ever done. We've got a very focused investment on the pipeline, but with all the things Jay talked about, we're continuing to drive productivity in the core of the business. We're continuing to launch new products that are accretive at a gross margin level, and that's the trend going forward.

Maybe to touch on capital allocation because you guys are pretty cash generative and outside of things. You obviously have your core markets well covered, but I know some private companies where you have venture things and them things like that. So how do you think about M&A? How are you thinking about the priorities and the direction?

Sure. Taking a step back, we do really like the cash flow generating ability of the company. It's very strong. Balance sheet is in a good spot. So as we look forward over the next several years, we really do have an opportunity to deploy a lot of capital. I don't really see the need to pay down a lot of debt. We may do a little bit, but we don't have a huge need on that front. And so what it comes down to is organic investment in the business and then inorganic. To the extent that we have R&D opportunities, if Kevin has ideas or some of his other colleagues have ideas, we'll look at them very carefully, but we do feel good about the overall spending and that we're not passing up on a lot of great ideas. So we move on to inorganic investment. And we've done a number of transactions over the last several years, and you can expect us to continue to develop and invest. As we look at financial criteria, we want something to be revenue accretive, EPS accretive in the near term, attractive ROI, but then also this idea of, we're -- tilting us to recurring revenue has a lot of advantages. One of the reasons we like Kevin's business so much is because of the durable nature of it. It's fairly consistent in terms of performance. And so we do give nods to those kinds of businesses. So from a financial standpoint, that's the criteria that we've laid out. From a strategic standpoint, what I would say is there are a lot of assets in or near our imaging business. For example, MIMS is a great example of a deal that we recently did. What MIMS does is it brings radiation and oncology, workflow and management tools that allow hospitals to more efficiently manage that particular area. And it's got a great pipeline today of sales opportunities. It's tracking very well relative to the model that we put forth and the most interesting thing about this is, if you think about it, prior to MIMS, what would happen is, when we were selling our products, a lot of times, our customers would either, buy somebody else's because they like the MIMS alternative or they would buy our product with MIMS attached to it. So it was a great example of a natural tuck-in strategically that filled the gap in our portfolio. Caption Health is another great example. Our ultrasound devices today, for the most part, historically could only be used by sonographers. Now, with the addition of Caption, you have untrained people able to get ultrasounds and so really nice tuck-ins. I think that's an important area for us. We'll continue to look in the PDX arena. And then in the monitoring business, because of the disparate nature of the product portfolio and the strong presence that we have in a number of different areas in hospitals, it really does open it up to a lot of things that are near adjacencies, and so we'll look at those. Now, to your point, we look at this at a number of different phases. If the target is appropriate, we can acquire it straight up. But if it's smaller and not the right time, then we do have an active venture portfolio that we manage and invest in. And it's not dedicated venture funds, but we'll make venture investments along the way.

Yes. I'll definitely run into those. For the -- I mean, for each of you maybe, and I know this was a tricky question, but you do a chunk of these meetings, you meet a bunch of the sell side and the buy side, stuff that you're surprised, Kevin, stuff that you're surprised doesn't come up more or gets like excessive focus? Like is it areas that you feel just don't get asked about, but for you internally are very valuable.

Kevin and I were having a discussion just this morning about when I first joined the company about a little over 3 years ago, there really was not a lot of interest in his business, which always surprised me because I obviously recognize the value in that and it's been a complete 180 tremendous interest because things are starting to accelerate in radiopharma. So that was a little bit of a surprise that has definitely turned the corner.

Yes. And I think the one thing I'd add to that is we get less questions about our pipeline of upcoming products, and we're really excited about the pipeline. We've got 8 assets under development right now, which is just as exciting as, okay, we will talk about Flyrcado and Vizamyl and other products that are coming to market, but we've got a great pipeline coming through as well.

Yes. And Jay, on your end?

Yes, I think, the -- you touched on it, but we don't spend a lot of time with the capital deployment opportunity that we have going forward because if you just take the balance sheet where it is and then run the math forward on cash flow generation, it's a really interesting and compelling story that I think when -- with the strong franchises that we have, really lends itself to an expansion strategy. So we spend a little bit of time on that, but it's one that we don't get too many questions on. But I would agree also this idea of PDX has really started to perk up because there's some incredibly exciting launches that we have ongoing. On the other side, we do spend a lot of time talking about China and -- which I take a step back and say, long term, it's a really good business for us. We spend a lot of time on tariffs, a lot of questions really on that given the upcoming administration change. So we'll navigate our way through that.

Of course. Amazing. Perfect timing. Thank you so much, and thank you, everybody, for joining.

Thank you.