May 16, 2016 — 6:00 AM EDT
John Flannery built a reputation as a prolific rainmaker in his previous role as head of business development at General Electric Co., logging more than $26 billion in deals, yet acquisitions are far from his mind as chief executive of the U.S. conglomerate’s health-care unit.
Instead, Flannery is looking within for growth, even after revenue from diagnostic-imaging machines slowed. The company offers a wide range of products and services, including ventilators, software and tools to support drug manufacturing.
“When we look at the basic position of the company, we like the portfolio,” Flannery said in an interview in Beijing. “So my mandate right now is to get the earnings growth going again, and there’s a lot to just better managing the portfolio we have, align it more with customers and outcomes, for a better margin rate.”
GE Healthcare has committed to raising its profit margin by 50 basis points this year with a goal of reaching 18 percent by 2018. Sales were down 4 percent and the profit margin fell by 40 basis points to 16.3 percent last year.
Lower prices in its health-care system business, including imaging equipment such as X-ray and magnetic resonance machines, were a key reason, according to its annual report.
Government funding pressures, uncertainty related to Obamacare, market saturation, and pricing pressures all hindered sales growth, said Bloomberg Intelligence analyst Karen Ubelhart.
“Margins were hurt by all of the above and cost pressures which GE was slow to respond to,” she said via email.
To offset the decline in equipment sales, GE Healthcare is turning to data analysis services and its life sciences business, which sells products and services for drug research and bio-pharmaceutical manufacturing.
The company’s digital business will enjoy the fastest growth as GE Healthcare seeks to integrate its installed equipment with software packages. Flannery expects at least 30 to 50 percent growth from GE Health Cloud, launched last year to develop the company’s ability to operate its traditional imaging business in a cloud-computing environment.
“We are really trying to move from being just a technology provider to being a partner with our customers,” he said.
The software margins are very high, Bloomberg Intelligence’s Ubelhart said. While that segment of the business is too small to help the $18 billion GE Healthcare unit much now, “growing at more than 20 percent, it could be meaningful in five years,” Ubelhart said in an e-mail.
GE Healthcare also expects to sell more pre-made biopharmaceutical factories like the one the company just built in the central Chinese city of Wuhan. It was shipped from Germany in September in 62 containers and assembled in eight days.
A project like that will probably yield about $100 million in revenue over its lifetime, and will generate further revenue as the company supplies consumable products for its operations, according to Flannery. He expects several more such projects in the next year or two at a minimum.
“There’s a lot of potential for this in China,” Flannery said. “We have a very strong pipeline of interest.”
To win market share in developing countries, the company has been developing products with more basic functions and lower prices. Such products will suit day-to-day needs at county hospitals in China where doctors only conduct routine scanning, according to Rachel Duan, president and CEO of GE China.
China has vowed to support local equipment makers, urging public hospitals to buy from Chinese brands. Growth in the country’s public hospital market slowed after a government-led corruption crackdown in the past two-and-a-half years and is now bottoming out, Duan said. The fast-growing private hospital sector will create more opportunities in China, she said.
Sales in China will probably expand by a percentage in the mid- to upper-single digits, Flannery said.