Digging into GE & Philips Annual Results

Publication Date: 27/01/2017

Two of the largest global health technology vendors released their Q4 2016 and full year 2016 results in the last week. We dig into the key takeaways for both GE Healthcare and Philips Health Tech divisions.

GE Healthcare

  • 4Q 2016: Health division posted revenue growth of 3%; operating profit up 10%
  • Full year 2016: Health division revenues posted growth of 4%; operating profit up 10%

The Signify View:

GE Healthcare posted a solid fourth quarter and full year results for 2016. Here’s some key highlights and clues as to future performance:

Lifesciences increasingly a strong growth driver: GE has been making significant inroads into the Lifesciences marketplace, showcased with 9% growth in Lifesciences revenues in Q4 2016. While no split is provided in the recent full year 2016 results, a 2015 company report shows Lifesciences accounted for close to one quarter of the $18 billion GE Healthcare business line (~23%). This push towards biotechnology and pharmaceuticals is clearly paying off and will also help position the Healthcare division for future growth markets, especially in areas such as predictive disease treatment, cell therapy, personalised medicine and genomics. Moreover, diversification into the more predictable Lifesciences sector has also helped the healthcare division to smooth out swings in its core capital-intensive diagnostic imaging, clinical care and healthcare informatics business lines.

Long-term play in BRIC+ regions is starting to pay off: GE Healthcare has made it a strategic priority to push into emerging healthcare markets in the BRIC+ regions, at significant cost. While this has delivered growth in some regions (such as China) other emerging markets can be fickle, with large swings in procurement demand for high-end products, adding further risk to this strategy. However, Q4 2016 results suggest this strategy is starting to pay dividends, with Healthcare division revenue in China growing 19% and Latin America 16% (in comparison to 6% growth in Europe and -1% in the US). This may also reflect GE’s strategy for “in-region, for-region” manufacturing, enabling it to compete in lower-cost product markets against local competitors.

Core device business is steady but not stellar: Posting a slim 2% growth for non-Lifescience segments (such as Imaging, Clinical Care and Health Informatics) in Q4 2016 is a reasonable performance (in comparison to a revenue decline in Q4 2015), especially with operating profit increasing by 10%. However, fourth quarter results are often a useful marker as to the robustness and future potential of capital-intensive markets such as Diagnostic Imaging and Healthcare Informatics. Therefore, slim revenue growth in Q4 suggests GE Healthcare has more work to do in 2017 in its traditional healthcare markets.

Philips Healthcare

  • 4Q 2016: Health Tech division posted revenue growth of 5%; adjusted EBITA at 15.3%, 1.9% up on Q4 2015
  • Full year 2016: Health division revenues posted growth of 5% on full year 2015

The Signify View:

Philips Healthcare posted healthy Q4 2016 and full year results for 2016. Here’s some key highlights and clues as to future performance:

Large, long-term deal strategy paying off: Philips has been one of the pioneers of pushing a managed service approach for hardware and software to health providers. With several long-term deals (often 10 years or more) including bundled imaging and clinical device hardware and health informatics software closed in 2016, Philips is becoming more entrenched with key large clients and protecting it’s installed base long-term, while ensuring more repeatable revenue generation. Furthermore, as the health informatics sector consolidates towards central health informatics platforms for healthcare providers, entrenched vendors with long-term bundled managed service deals will be prime position to capitalise.

Innovative health tech sectors yet to be realised: Philips has made a strategic move in recent years towards markets that combine technology with new care models. These newer products such as telehealth are part of Philips Healthcare’s Connected Care & Health Informatics business line. While it has built up a solid reputation as a leading vendor in this sector, this move has yet to provide strong growth. Accounting for 19% of healthcare revenues (when combined with Health Informatics), the Connected Care business posted comparable growth of 4% on 2015, the same rate as Philips Diagnosis and Treatment business (which accounts for 39% of revenues). Given that Connected Care is relatively small, yet covers an under-penetrated market with high-potential for growth, it would seem Philips has yet to fully capitalise here.

Mature markets positive; emerging markets steady; Western European orders take a dive: Unlike GE Healthcare (see above), Philips Healthcare posted solid comparable fourth quarter revenue growth of 4% and 5% in Western Europe and North America respectively. However, emerging “growth geographies” were far weaker than GE Healthcare, with Philips Healthcare comparable sales growth at only 5% for 4Q 2016. This is because Philips has invested less aggressively in emerging markets and has also been less focused on rolling-out “value” device products specifically for emerging markets, instead preferring to focus on higher-end devices in more established markets. Consequently, Philips portfolio is more exposed to swings in mature markets and less exposed to swings in emerging markets, such as the BRIC+ regions.

Given this, one concern is evident for Philips Health Tech division in 2017: the outlook for mature markets is increasingly uncertain, especially with US healthcare change imminent with Donald Trump as president and a worsening economic picture for Europe. This may also be exemplified in a steep drop-off (15% in Q4 2016) in order intake in Western Europe for the Diagnostic & Treatment and Connected Care & Health Informatics segments. So, while 2016 revenues have been solid in mature markets, 2017 could be a more challenging year for Philips Health Tech’s core business.