GE Healthcare Is Focusing On Emerging Markets, R&D And Cost Cuts To Drive Growth

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General Electric

Driven by growth from the emerging markets and gains from cost cutbacks, profits from GE‘s (NYSE:GE) healthcare segment have risen strongly in the last few years. During 2011-2013, GE Healthcare’s profits grew at a compounded annual growth rate (CAGR) of 4.3%, and the company anticipates this strong growth to continue in 2014. [1] The company provides medical imaging systems, diagnostics, patient monitoring systems, drug discovery tools, medical equipment repair services and related IT solutions in the global healthcare space.

GE has employed multiple strategies to achieve this solid growth in its healthcare business. Primary among these is its expanding footprint in the emerging markets that has allowed the company to benefit from the rising healthcare spending from these regions, particularly in Asia-Pacific and Latin America. A strong focus on research and innovation has also enabled this growth by allowing the company to retain its competitive advantage. At the same time, driven by benefits from cost reduction activities like headcount reduction and exit from low-margin products, GE has improved its healthcare segment margins to 16.7%. [2] The company anticipates its margins to continue to expand in 2014. We figure the simplification initiatives that GE has employed across its industrial businesses have also contributed to expand its healthcare margins. For instance, under this initiative the de-layering of management structure in Europe and reduction of the number of zones in the U.S. has contributed to margin expansion. In our view, in the coming years along side oil & gas and aviation, healthcare segment will likely also play a key role in driving growth at GE. This segment constituted nearly 20% of GE’s $16.2 billion industrial profits last year. [1]

We currently have a stock price estimate of $26.20 for GE, marginally below its current market price.

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See our complete analysis of GE here

GE Healthcare’s Advanced Product Portfolio Underpins Its Growth

The medical equipment market is driven by technology. Imaging machines, patient monitoring systems and other equipment that offer higher resolution videos/images or more accurate monitoring are preferred by doctors and hospitals. Thus, it becomes imperative for equipment companies such as GE, Siemens, Philips and Toshiba to invest in their research to continually improve their offerings.

GE has invested in its technology to occupy a leadership positions in the ultrasound, computed tomography (CT) and molecular imaging segments, and it is fast progressing in magnetic resonance (MR). Overall, diagnostic and clinical equipment like MR systems, CT/PET scanners and X-ray technologies generated around $9.5 billion in sales for GE in 2013. Medical equipment repair, data management and healthcare related IT services generated another $6 billion, while molecular medicine products which include tools used in drug discovery and agents used in scanning procedures grossed around $3.7 billion in sales for GE in 2013. [2]

GE Healthcare’s Expanding Footprint In The Emerging Markets Is Driving Its Growth

Apart from relying on growth from innovation, GE is steadily expanding presence in the fast growing emerging markets. To increase its presence in these markets the company has expanded its product portfolio to address the pricing challenge that is specific to some of these markets. For example, GE Healthcare has come up with a super value CT machine specifically for India that costs about one-tenth its premium segment Revolution CT, which costs roughly $2 million a unit. [2] The company has also established research centers in China and India outside of the U.S. and Europe, and has established several manufacturing plants across Asia-Pacific, the Middle-East and Latin America. GE Healthcare’s employee headcount in the emerging markets during 2009-13 has also grown at a CAGR of 13%, while its headcount in most developed markets has either remained flat or declined. [2] We figure that due to healthcare sector’s critical importance to a country there is limited protectionism in this sector. This plays out in the favor of large healthcare equipment and service providers such as GE when they expand in the emerging markets. Overall, GE Healthcare’s investments in the emerging markets have generated strong returns as its sales have grown by 23%, 19%, 15% and 10% from China, Latin America, ASEAN (Association of South-East Asian Nations) and India respectively, during 2009-13. [3]

In comparison, the company’s healthcare sales from the developed regions have grown at more moderate rates. The rising share of emerging markets in the overall sales-mix of GE Healthcare also bodes well for its future as healthcare sectors of the emerging markets will likely continue to grow at faster rate than their counterparts in the developed markets for the foreseeable future.

Having said that, even in many developed markets, GE will likely benefit from the rising share of health expenditure in the government’s total spending. For instance, in the U.S., France and Japan, health expenditure as a percentage of the gross domestic product is increasing due to aging populations. This will likely continue to drive up healthcare spending from these countries in the coming years.

Life Sciences Segment Could Continue To Accelerate GE Healthcare’s Sales Growth

Additionally, in the Life Sciences unit of its healthcare segment, GE has experienced a compounded annual growth rate of 10% over the past six to seven years. [2] This unit provides tools for research on cells and proteins, and drug discovery and manufacturing. The company supplies its life sciences products to many major pharma companies including Pfizer (NYSE:PFE), Roche, Novartis and Sanofi. GE is making further investments in this unit to broaden its offerings, which could maintain its strong sales growth in the coming years. We figure if that happens then this unit will continue to raise growth in GE Healthcare’s sales.

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Notes:
  1. GE’s 2013 10-K, February 2013, www.ge.com [] []
  2. GE healthcare at global industrials conference, March 18 2014, www.ge.com [] [] [] [] []
  3. GE Healthcare at global industrials conference, March 18 2014, www.ge.com []