There's a lot going on right now at General Electric (GE 1.78%), especially for the new CEO John Flannery. The stock is down 47% since July 2016, which is not something that happens very often to $250 billion companies. Several difficult decisions had to be made, such as a massive one-time charge for a legacy insurance portfolio, and more promises to be on the way.
Therefore, it probably wouldn't be a bad idea for the industrial conglomerate to keep its head down, focus on its core businesses, and right the ship. After all, a handful of big, bold bets made in the past are at least partly responsible for the company's current woes. It would be difficult to convince shareholders that similar moves today would be an antidote to the current chaos.
But there's an intriguing possibility for General Electric's future now that Flannery is at the helm. The former head of GE Healthcare has doubled down on life sciences and quietly led the industrial conglomerate to a leadership position in biomanufacturing. While that only concerns biopharmaceuticals today, there's a $140 billion per year opportunity in industrial biotech in the United States alone.
Industrial biotech isn't what most people think of when they hear "industrial conglomerate," but there's a case to be made that General Electric's future is in biology.
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Beyond healthcare
To date, synthetic biology start-ups have been forced to master a complete technology platform ranging from the genetic engineering and design of organisms capable of churning out useful chemicals to the design and scale-up of massive facilities. Those require completely different mindsets and skill sets, which has a lot to do with why most industrial biotech start-ups have failed (with more destined for that fate) and why billions in venture capital has been vaporized.
The list is long and painful. Microalgae specialist Solazyme (which later became TerraVia) built a massive facility in Moema, Brazil costing several hundred million dollars, but could never get the facility up to speed. It went bankrupt in 2017, selling itself to one of the few companies with a history of success in the industry. And even though it has remained afloat, industrial biotech pioneer Amyris has never manufactured industrial products at a profit, losing hundreds of millions in its lifetime. It, too, sold its manufacturing facility to a leading company in the field, which may be able to salvage the operation.
While there are other factors at play, including product selection and poor leadership, scale-up remains a huge obstacle -- and opportunity. Enter General Electric.
Having the industrial conglomerate throw its hat in the ring of industrial biotech could completely change the game. General Electric could design and operate biochemical production facilities, while its customers focus on organism design and regulatory affairs, essentially mirroring the company's current relationships with biopharma customers. Considering the massive opportunity in the bioeconomy for industrial biotechnology, it's an idea that the conglomerate should strongly consider -- even (and perhaps especially) if it breaks itself apart.
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Strong starting point
GE Healthcare was the second most profitable segment in the fourth quarter of 2017 and turned in the best year-over-year performance in the entire portfolio. The business sells hardware (MRI scanners), services (software tools), and various inputs for life sciences research and development. The latter comprises the highest margin products for the segment and includes everything from chemical reagents to disposable bioreactors to process equipment.
General Electric has quietly made inroads with its FlexFactory for biomanufacturing, which mostly relies on single-use production equipment. Rather than operate stainless steel and fixed-in-place process equipment, facility owners can swap in sterilized parts, run their process, collect the product, throw the equipment away, and begin a fresh batch. Since sterilizing equipment consumes a significant amount of time and money in traditional biomanufacturing facilities -- and risks contamination -- the FlexFactory creates a tremendous amount of value.
In fact, the FlexFactory design cuts time to market in half for biological products and offers 48% lower capital expenditures, 30% lower operating expenses, and higher production volumes than conventional facilities. It also comes with a proven track record of quality and regulatory compliance.
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It shouldn't be surprising that FlexFactory has enjoyed success throughout the world with some of the leading biopharma companies. That's also true for General Electric's KUBio biomanufacturing facility design, which relies on prefabricated equipment and doesn't require single-use processes. It should also prove true for the ambitious new BioPark facility design, which is really an entire biomanufacturing campus that would be owned by customers and managed by the industrial conglomerate. The BioPark is what should get the hamster wheels in investors' heads turning.
After all, General Electric's experience and bioprocess know-how would transfer over pretty well to industrial biotech applications beyond biopharmaceuticals.
Moving from biopharmaceutical manufacturing to the production of biochemicals would not be trivial. The largest FlexFactory designs come with a handful of 2,000-liter bioreactors that could produce 100 kilograms of product per year -- the total needed for ultra-high-value biologics. But an industrial biotech facility making a specialty chemical would boast multiple bioreactors of at least 100,000-liters and need thousands of metric tons of annual capacity. A commodity biochemical facility would require an additional 10 times step-up from that in terms of output.
Needless to say, single-use production is probably out of reach for the largest industrial biotech applications, where the facility looks more like a petrochemical refinery than a biologics facility.
But General Electric has an envious amount of experience in designing, ramping, and operating production facilities. That just so happens to be the single largest bottleneck facing the industrial biotech sector -- and only a single company (Genomatica) has offered any reliable solutions. In other words, the opportunity is wide open.
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Should General Electric focus on biology?
Two opposing arguments could be made about the potential for General Electric to invest more heavily in biology, and both make sense.
On one hand, Flannery is already in the process of doubling down on life sciences in the GE Healthcare unit. While there's a lot of uncertainty and moving parts at General Electric right now, the market opportunities in industrial biotech and bioprocess services that extend beyond biopharmaceutical applications are intriguing (and high margin). The market opportunity is wide open -- and few companies could tackle the opportunity quite like the industrial conglomerate.
On the other hand, you could argue that now is an awful time to make a big, bold bet. General Electric has a handful of great businesses in its portfolio right now. Adding more focus and executing on long-term goals could be more than enough to pull the company out of its rut. And, of course, much of the industrial giant's current problems stem from previous big, bold bets that didn't quite work out.
While I think General Electric could make a splash and move the entire industrial biotech sector forward, I also don't think it's a likely outcome in the near term. However, I think the chances of pursuing industrial biotech increases if the portfolio is divided into separate companies, and I think the effort could be handsomely rewarded if undertaken at all.
