Image credit: GE Healthcare booth, RSNA 2016, Fine Design Associates
On October 28th, General Electric published its financial results for Q3 2020. This provides some insight into the sales performance of its healthcare business. The results show that both sales and profitability were lower during the quarter, although both showed improvement relative to the second quarter. Overall sales revenue from the healthcare business reached $4.57 bn during Q3 2020, compared with $4.92 bn during Q3 2019, a decrease of approximately -7% year-on-year. This took cumulative 2020 sales revenue to $13.19 bn, compared with $14.54 bn during 2019, a decrease of approximately -9% year-on-year. Overall orders from the healthcare business contracted significantly. During the quarter, orders reached $4.13 bn, compared with $5.14 bn during 2019, a decrease of approximately -20% year-on-year. This took cumulative 2020 orders to $13.66 bn, compared with $15.28 bn during 2019, a decrease of -11% year-on-year.
The services business continued to have a stabilising effect on sales growth as the third-quarter decline was led by lower equipment sales. Quarterly service sales were approximately -3% lower, whereas equipment sales were approximately -10% lower year-on-year.
The reportable segments for the healthcare business have recently been changed, in part, due to disposal of the BioPharma business which was sold to Danaher Corporation in March-20. The healthcare business was previously segmented into ‘healthcare systems’ (HCS) and ‘life sciences’. The life sciences segment no longer includes the BioPharma business and has been renamed to ‘pharmaceutical diagnostics’ (PDx). During the quarter, sales growth was driven by higher revenues from the HCS segment, which was more than offset by lower revenues from the pharmaceutical diagnostics segment. Total sales originating from the HCS segment reached 4.1 bn during Q3, compared with $3.6 bn during Q3 2019, an increase of approximately +12% year-on-year. This took cumulative 2020 sales revenue to $11.0 bn, compared with $10.5 bn during 2019, an increase of approximately +3.5% YoY.
The quarterly HCS sales result was driven by increased demand for products and services highly correlated to the COVID-19 pandemic. This included the sale of ventilators, monitoring solutions, x-ray systems, anaesthesia and point-of-care ultrasound systems. Although demand continued across these product categories, the company noted that it experienced some moderation in COVID-19 related demand and experienced some recovery in hospital spending on non-COVID-19 products. Higher sales from COVID-19 related product categories were offset by lower sales from other parts of the portfolio, such as magnetic resonance (MR) systems. Approximately $300m (70%) of the quarterly revenue increase was related to the delivery of ventilators to the U.S. Department of Health and Human Services. Excluding this ventilator business, quarterly sales were up +3% year-on-year.
During the Q3 earnings call, Carolina Dybeck Happe, CFO and Senior VP commented: “in HCS, order declines are moderating [non-COVID related products], particularly in public healthcare markets, where the governments are prioritizing investments in quality and access” … “we saw continued softness in Imaging and Ultrasound demand [orders] and significantly lower demand [orders] for pandemic-related products” … global procedure volumes largely recovered to pre-COVID-19 levels with some variation by region” … broadly, global scans have now approached the fourth quarter baseline, and we saw better sequential demand in Imaging and Ultrasound [non-COVID related]”
About the healthcare systems segment
The HCS 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 (MR), 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 complimentary services. The segment also encompasses Enterprise Software & Solutions (ESS) which includes enterprise digital, consulting and healthcare technology management as well as Life Care Solutions (LCS).
Recent developments in Ultrasound
- On October 22nd, GE announced its largest-ever ultrasound deal in the United States. This is an $11 million order by St. Luke’s University Health Network to install 76 ultrasound units along with automated reporting and processing systems estimated to save $300k per annum in efficiency gains.
- On October 12th, GE announced that it received FDA clearance for it’s Vivid™ Ultra Edition, an AI-enhanced cardiovascular ultrasound system. This enables the efficiency capabilities of its artificial intelligence technology (AI) to its entire Vivid cardiovascular ultrasound portfolio.
- On September 30th, GE unveiled Voluson SWIFT, an AI-enhanced ultrasound system for women’s health. This enables the efficiency gains from its AI technology to OBGYN applications, including reducing patient scanning time and automating exam measurements.
Recent developments in X-ray
- On September 1st, GE announced that it’s AI algorithms used to detect pneumothorax have been licensed by Health Canada to be embedded onto its mobile x-ray devices.
- On June 18th, GE announced the launch of its Thoracic Care Suite on x-ray systems in partnership with Lunit. The suite leverages AI to help alleviate clinical strain on radiologists.
Recent developments in Mammography
- On October 20th, GE announced an industry-first contrast-enhanced guided biopsy solution branded Serena Bright™. This solution will enable clinicians to conduct Contrast Enhanced Spectral Mammography (CESM) biopsy using existing mammography equipment to increase diagnostic accuracy and avoid long waiting times for follow up MRI biopsies.
Third-quarter profit reached $765m, compared with $974m during Q3 2019, a decrease of approximately -21% year-on-year. This represents a 300bps deterioration in profit margin from 19.8% to 16.8%. Lower profitability was driven by lower volume in both HCS and PDx segments, a shift to lower margin business, inflation as well as logistics pressure arising from COVID-19. These margin losses were partially offset by cost reduction initiatives. For the first nine months, profit reached $2.21 bn, compared with $2.71 bn during 2019, a decrease of approximately -18% year-on-year. This represents a 190bps deterioration in profit margin from 18.7% to 16.8%.
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 outside of China. The US-China trade tensions and their impact on the GE business was not a talking point during the Q3 earnings call. The net impact from tariff-related actions was previously 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.