Healthcare spinoffs aren't normally seen as companies with strong growth potential. More likely than not, spinoffs stem from a division of a company that, while possibly profitable, is seeing slower growth.
Embecta (NASDAQ: EMBC.V), Viatris (NASDAQ: VTRS) and GE Healthcare Technologies (NASDAQ: GEHC) are three of the bigger healthcare spinoffs in recent years. The key for all three will be using their strong cash flow to create revenue growth.
Embecta can count on strong diabetes tailwinds
Embecta is a leading provider of diabetes injection devices, such as pen needles, syringes, and safety devices, in addition to digital applications to help diabetics manage their condition. It was spun off from Becton, Dickinson (NYSE: BDX) last April.
Over the past year, the stock has fallen almost 30%, but so far this year, it is up more than 18%. The thinking behind the spinoff was that the company will do better on its own as a pure-play diabetes company. So far, that hasn't happened, but trends are in its favor as it adjusts to being a stand-alone company.
In the first quarter of fiscal 2023 ended Dec. 31, Embecta reported revenue of $275.7 million, down 4.7%, year over year, and earnings per share (EPS) of $0.61, down from $1.73 in the same period in 2022. The company's forecast shows it expects 2023 revenue of $1.084 billion to $1.107 billion, compared to $1.13 billion last year.
The need for Embecta's products is expected to grow as poor diet, an aging population, and better diabetes diagnosis lead to more diabetes care. The diabetes care devices market, according to a Future Market Insights report, was expected to be $9.7 billion last year and is projected to have a compound annual growth rate (CAGR) of 6.3% through 2032, reaching $17.87 billion by that time.
Embecta, counting its time as a part of Becton, Dickinson, has raised its dividend for 51 consecutive years. Its first dividend as a new company of $0.15, which it began offering last year, delivers a slightly above-average yield of about 2%. The payout ratio is only 19.7%, so there's little reason the company won't raise its dividend this year.
Viatris steering toward being more profitable
Viatris is a spinoff that resulted from the 2020 merger of generic drugmaker Mylan and the Upjohn division of Pfizer (NYSE: PFE), known for its generics and older branded drugs.
The company's stock is down more than 16% so far this year, and it is trading for only roughly 5 times earnings. That's because the company's transformation comes with some risk. It is selling off less profitable assets while attempting to produce new generics and biosimilars to replace that lost revenue.
Viatris has raised its quarterly dividend for 13 consecutive years, counting its time as a division of Pfizer, including a 9% bump last year to $0.12 per share. That dividend equals a market-beating yield of more than 5%. Its payout ratio is only 14.5%, leaving plenty of room for more increases, considering the company's strong cash flows.
Viatris' revenue fell 9% last year to $16.2 billion. But at the same time, by paying down $3.3 billion in debt, the company became more profitable. Over the past eight quarters, it has repaid $5.4 billion in debt. It will need to continue to trim its roughly $19.5 billion in debt, however.
Its yearly EPS was $1.71 after a loss of $1.05 in 2021. The company is investing more in its pipeline, focusing on eye care, novel products, and injectable therapies. Last year, new drugs contributed $483 million in revenue, and the company said it expects $500 million in new drug revenue in 2023.
GE Healthcare is spinning in the right direction
GE Healthcare, which was spun off from General Electric (NYSE: GE) in January, focuses on medical technology, pharmaceutical diagnostics, and digital solutions. It operates in five segments: Imaging, ultrasound, patient care solutions, pharmaceutical diagnostics, and digital solutions.
The stock has climbed more than 29% after surprising investors with better-than-expected fourth-quarter and full-year earnings. The company reported fourth-quarter revenue of $4.9 billion, up 8% year over year, despite the downward pressure of a higher dollar overseas. For the year, the company said it had $18.3 billion in revenue, up 4%. What's exciting is that each of the company's five segments saw revenue gains in the fourth quarter, led by imaging's 18% rise year over year to $2.7 billion.
Investors are also excited about the company's focus on artificial intelligence (AI), shown by its Feb. 9 announcement of its purchase of Caption Health, a company that focuses on detecting disease through AI in interpreting ultrasound scans.
The one negative in the report was that EPS declined in the quarter and for the year. Quarterly and yearly EPS were $1.21 and $4.18, respectively, compared to $1.24 in Q4 2021 and $4.91 for the full year in 2021.
Unlike its parent company, it does not yet offer a dividend, but that hasn't been ruled out yet.
An easy choice
Of the three stocks, I think GE Healthcare is already further along in increasing revenue. Embecta and Viatris are doing a good job of becoming more profitable, but in the long run, they can't boost revenue just by trimming costs. I put them more in the category of income stocks because of their solid dividends that are well covered. There's nothing wrong with that, but if you're looking for growth, GE Healthcare appears to have a better shot at doing that in the coming years.
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Jim Halley has positions in Pfizer and Viatris. The Motley Fool has positions in and recommends Pfizer. The Motley Fool recommends Becton, Dickinson and Viatris. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.