General Electric Goes Outside The Box In Healthcare

There is an old saying that if you are going to make predictions, you may as well make a lot of them. Even though I recently laid out multiple medical technology acquisition prospects for General Electric (NYSE:GE), GE managed to go off the board with an interesting purchase. On Friday morning, GE announced an agreement to acquire Clarient (Nasdaq:CLRT), a specialist in oncology diagnostics services. GE is paying cash in this deal, giving common shareholders $5 a share (versus Thursday's close of $3.74) and preferred shareholders $20 per share. That is a total deal value of $580 million for a company with about $100 million in trailing revenue.

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As a major holder (more than 30 million shares as of September), Safeguard Scientifics (NYSE:SFE) will benefit significantly from this deal, booking roughly a $145 million gain in the transaction. (For more, see Is GE About To Stir Up The Medical Arena?)

What GE Is Getting
Clarient is basically in the business of conducting cancer diagnostics tests on behalf of community pathologists, oncologists, and physicians. In simple terms, it is a model like that used by LabCorp (NYSE:LH) and Quest Diagnostics (NYSE:DGX) - clinicians send samples to Clarient, and Clarient tests those samples and reports back on the presence/absence of cancer and other important details (like the type of cancer).

What makes this sector, which also includes cancer specialist Genoptix (Nasdaq:GXDX), a little different is that these companies are often both providers of services (testing tissue samples) and creators of new tests, panels and screening methodologies. It is a "gray area" between service and technology, and one that GE could certainly exploit to its advantage with its innovative capabilities in diagnostics, imaging and life sciences. (For related reading, see A Checklist Of Successful Medical Technology Investment.)

An odd aspect to this deal, though, is that Clarient has traditionally focused on smaller clients - the community pathologist at a small practice or hospital, for instance. Given GE's global ambitions and footprint, however, it would seem probable that it will want to significantly broaden Clarient's horizons - not just in terms of the services and tests offered, but the targeted customer base as well. If that proves true, and GE is committed to building a leading oncology diagnostics franchise, then those larger diagnostic services companies had better watch out for this new competitor.

Where GE Goes From Here
With the Clarient acquisition taking less than $600 million of capital, this may not be the last healthcare deal that GE announces. This deal points to a new direction for GE Healthcare, though, one that does not just revolve around selling massive (and massively expensive) pieces of imaging equipment or entire cath lab suites.

Investors may want to assume, though, that GE will be incrementally more interested in life sciences as part of its future plans. With the FDA taking an extremely risk-averse stance to new drug and device approvals, it may prove wiser for GE to steer clear of areas that revolve around FDA approval and instead explore the gaps where approval is not such a critical component of the business plan. (For more, see Two Under-The-Radar Reports In Med-Tech.)

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