Image credit: GE Healthcare booth, RSNA 2016, Fine Design Associates
On April 29th, General Electric announced it’s financial results for the first quarter of 2020. These provide some insight into the performance of its healthcare business and show that sales revenue, orders and profitability all developed favourably during the first quarter. The sales revenue from the healthcare business reached $4.73 billion, compared with $4.68 billion during Q1 2019, an increase of approximately +1% year-on-year. Healthcare orders reached $5.29 billion, compared with $4.93 billion in Q1 2019, an increase of approximately +7% year-on-year. Orders were reported to be +9% organically, and +6% organically excluding the BioPharma business. The underlying profitability of the healthcare business improved by 230 bps to 19.0% of sales revenue.
The high-level reporting on the healthcare business is segmented into two core divisions, Life Sciences and Healthcare Systems (HCS), which accounted for 27% and 73% of revenues respectively. The overall sales growth of +0.9% during the first quarter was driven by higher sales revenue from both HCS and Life Sciences. The reported sales revenue from HCS increased by +1% and for Life Sciences increased by +2%, relative to Q1 2019.
Healthcare Systems Segment
The healthcare systems segment encompasses a broad suite of products and solutions used in the diagnosis, treatment and monitoring of patients. Its primary activity is the development, manufacturing, marketing and servicing of a portfolio of medical imaging solutions. This includes magnetic resonance (MRI), computed tomography (CT), molecular imaging (MI), x-ray and ultrasound imaging systems. Sales revenue originates from both the sale of hardware and software as well as complementary services. The healthcare systems segment also encompasses Enterprise Software & Solutions (ESS) which includes enterprise digital, consulting and healthcare technology management as well as Life Care Solutions (LCS).
Q1 2020 revenue and orders:
- Revenues were reported to be approximately +1% higher year-on-year.
- Orders were reported to be higher, although specific figures were not published for HCS.
- Both higher orders and revenues were driven by a surge in demand for products used in the diagnosis and treatment of COVID-19, partially offset by lower demand for products used in elective and less time-sensitive procedures. The medical equipment which saw increase demand due to COVID-19 includes respiratory, computed tomography (CT), monitoring solutions, x-ray, anaesthesia, and point-of-care ultrasound product lines. In particular, the company doubled its capacity of ventilators during the first quarter and plans to double it again by the end of June. GE is collaborating with Ford Motor Company to support the further ramp-up of ventilator production.
Q4 2019 revenues and orders:
- Revenues were reported to be approximately -1% lower year-on-year.
- Orders were +1% higher year-on-year driven by higher orders from life care solutions, ultrasound equipment and services. These growth areas were partially offset by lower orders from the imaging segment, predominately due to the market dynamics in China. Imaging orders from the U.S. and Canada were higher year-on-year and reflected stable demand.
Q3 2019 revenues and orders:
- Revenues were reported to be approximately +2% higher year-on-year. Growth was driven by Japan and Latin America, partially offset by China and the Middle East. The weakness in sales activity for imaging equipment within China was driven more by the private sector rather than the public sector.
- Orders were flat year-on-year, organically, with the higher volume being offset by pricing pressures. Orders were driven by growth in life care solutions, ultrasound and services, offset by imaging, largely due to China market dynamics and longer sales cycles on larger deals in the U.S.
Q2 2019 revenues and orders:
- Revenues were reported to be marginally higher year-on-year, driven by higher volume, with strength in Europe offset by China and North America, and Life Sciences was up. During the Q2 earnings call, Larry Culp CEO commented, “We certainly saw bits of the business that didn’t perform at the top line in the way that we would have liked. I think Healthcare revenues were a little soft in the U.S. and in China”.
- Orders were reported to be -2% lower year-on-year and flat organically, driven by growth in ultrasound and services offset by imaging and life care solutions largely due to U.S. order closure timing.
Q1 2019 revenues and orders:
- Revenues were reported to be approximately -4% year-on-year, driven in part by pricing pressures as well as adverse effects of a strong U.S. dollar.
- Orders were up 5% organically. This was driven by Imaging growth up 7% due to strong growth in premium and performance CT and new product introductions in MR, including our AIR coil technology as well as Life Care Solutions up 6% due to continued momentum on solutions-oriented deals.
Life Sciences Segment
The Life Sciences segment encompasses GE’s portfolio of products, services and manufacturing solutions for the pharmaceutical and biopharma industries. The Coronavirus pandemic had an adverse impact upon the pharmaceutical diagnostics business during the first quarter and demand for its products and services was significantly lower, relative to Q1 2019. The volume of less time-sensitive elective procedures dropped off by as much as -50% which adversely impacted revenues within this segment. GE noted that this is a short-term drop-off in demand against a longer-term growth trend and favourable growth dynamics in the longer-term. The pharmaceutical diagnostics business is positioned in the contrast agent and nuclear tracer markets. This market is expected to grow over the long-term, driven by continued diagnostic imaging procedure growth and increasing contrast and tracer-enhanced biomarkers of these same procedures, as these products help to increase the precision of the diagnostic information provided to clinicians. In terms of the BioPharma business, during February 2019, GE Healthcare announced an agreement to sell its business to Danaher Corporation for a total consideration of approximately $21 billion. This disposal was completed on March 31, 2020, which significantly improved GE’s cash and liquidity position, a much-needed cash injection given the challenges faced by GE’s other businesses such as Aviation, Power and GE capital.
Profit reached $896 million during the first quarter, compared with $781 in Q1 2019, an increase of approximately +15% year-on-year. A significant proportion of this increase was driven by BioPharma as GE reported that healthcare profits increased by +10% organically but +3% organically when excluding the BioPharma business. The Q1 result reflects a profit margin increase of 230bps from 16.7% to 19.0%. This increase in profitability was predominantly driven by volume growth, design engineering and service initiatives as well as significant cost productivity due to the cost reduction actions implemented during 2019. These margin gains were partially offset by inflation, logistics pressure arising from COVID-19 as well as investments into R&D.
US-China Trade Tensions
The trade tariffs between the US and China continue to result in increased product costs for GE, particularly for medical equipment and renewable energy systems. The company continues to take mitigating actions which include relocating manufacturing as well as parts of its supply chain to outside of China. The US-China trade tensions and their impact on the GE business was not a talking point during the Q1 earnings call, although the report notes that the dynamics relating to tariffs reduce growth from China during 2019. The net impact from tariff-related actions was estimated to be between $400 and $500 million across the Group, with the majority of this shouldered by the healthcare and renewables businesses. Although there has been some moderation in tariffs both in the U.S. and China, they are likely to continue to have a material impact on underlying profitability.
The company reported that its facilities across China were back to the baseline operating levels as seen during 2019 and that it’s service teams and delivering to customers on a 24/7 schedule. During the Q1 earnings call, Larry commented: “The second quarter will be the first full quarter with pressure from COVID-19, and we expect that our financial results will decline sequentially before they improve later this year. The bottom line is that we have some challenging times ahead”… and … “while there are many unknowns, there will be another side—planes will fly again, healthcare will normalize and modernize, and the world still needs more efficient resilient energy. We’re embracing today’s reality and accelerating our multi-year transformation to make GE a stronger, nimbler, and more valuable company.”
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