Emerging markets, life sciences to drive renewed growth at GE Healthcare, CEO says

John Flannery has been appointed CEO of GE Healthcare.

Almost one year into the job, GE Healthcare ($GE) President and CEO John Flannery recently outlined his strategy for returning the healthcare business to growth. It's an $18 billion business that accounts for about 16% of the conglomerate's total revenues. He affirmed that the business will remain within GE, despite ongoing restructuring involving the divestiture of the finance arm.

Improving profit margins and better partnering are central to Flannery's vision for the unit, which he expects to be driven mostly by organic growth rather than acquisitions. He does anticipate some "tuck-in" life sciences acquisitions, but cautioned that the prices for assets are high.

"And the prices--there is a lot of momentum," noted Flannery, speaking at a Morgan Stanley conference on Sept. 16. "I get bankers coming all the time saying look at what this person bought, that person bought what about--but you got to be super careful."

"If you're paying 20x EBITDA for something it might feel good to announce it but you got to live that for and rationalize those returns," he added. "So, in certain segments I think those kinds of values can make sense, but you got to be really careful I think in the market right now that you are not paying the price you will regret later."

Partnering too slowly and poor margins are Flannery's primary critiques of the healthcare business.

"On the negative side of things really just how we move the company to partner. We've got to get that mindset going faster," he noted. "And the other I would say is on the things around our margins. I just see a lot of areas for improvement, product margin, cash flows, how we do supply chain, how we quote, how we configure packages for customers, how we handle our customers."

Flannery pointed to GE's ultrasound business as one that's successfully managed the margin issue, pushing down product costs by as much as 20% even as the prices have eroded on the order of 15% over the last 5 years. But the business has managed to achieve an expanding profit margin and substantial sales growth. He used it as an example of the culture that he wants to drive through the rest of the business.

GE Healthcare has three segments: imaging equipment including MR, CT scans, X-ray and ultrasound; an IT and services business; and a life sciences business that is largely bioprocessing. Flannery said that new MRI and CT equipment is just coming to market that he expects to "be a big lever for us." But cautioned that the services business, though high margin, has stalled growth.

On life sciences, Flannery noted that GE is "investing very heavily in this business organically and inorganically" in this business.

"We love this business," he added. "One thing I want to focus on inside of it is our bioprocessing business. This is about half of this business and a highly profitable segment. I say to people this business is really a sort of picks and shovels, very high-tech picks and shovels business being sold to people who are researching, developing and producing bio-pharmaceuticals. There's very strong underlying growth in the bio-pharma segment for an extended period to come, we believe."

In addition to cutting costs to improve margins, Flannery sees a lot of growth potential in emerging markets. He also noted that in the U.S. an aging fleet of imaging equipment is ready to be replaced, since hospitals may have held onto a CT or MR machine for 9, 10 or even 11 years rather than replacing after a more typical 7- or 8-year cycle. He said that about 35% to 40% of the installed base for CT and MR machines is more than 10 years old.

On the emerging markets side, Flannery said GE has invested heavily in India and China. He expects to see "20%+ growth" in the emerging market segment--that's almost half comprised of first-time GE customers that typically require end-to-end solutions.

In the life sciences, he sees cell therapy and immunotherapy as having potential for high growth--but cautions enthusiastic investors. "I look at that as another lottery ticket inside that business. It's a very tiny business today. But it could be a really substantial asset. Frankly, we are going to be able to take the learning we've had in the life sciences in the bioprocess business and be at the ground flow of the cell therapy cycle. I think we're going to capture a lot of upside."

Flannery identified three over-arching themes in healthcare as key to his strategic vision: government and payer focus on value, cost and improving patient outcomes, the explosion of data density and the shift of healthcare delivery out of the hospital.

- here is the conference transcript

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