GE Healthcare’s profits drop 17% on flat sales; warning on other medical device companies

General Electric (GE) shocked Wall Street with its first disappointing earnings report in years, mostly due to problems in its financial business, but GE Healthcare’s 17% drop in first quarter profits on a slight revenue decline should be giving investors in medical device companies pause. What does GE’s explanation that “Healthcare earnings were impacted by a difficult U.S. environment and continued regulatory shipping restrictions on the surgical supplies business” mean for JNJ, COV and ISRG?

In my March 1 comment on Intuitive Surgical (ISRG), I wondered whether

problems in the municipal bonds markets would cause hospitals to cut back on their capital expenditures. While ISRG has rallied impressively since my bearish review, GE says that community hospitals have cut capital expenditures significantly due to the credit markets crisis. This is bad news for all medical devices companies.

Update: In their conference call, GE’s executives said they think funding will continue to be a problem for clinics and hospitals. They also noted that the unit’s first quarter wasn’t as bad as the figures suggest, because accounting changes made last year look a bit stronger than it was.

For an idea of the broad range of products offered by GE Healthcare, click here.

In its presentation prepared for its call with securities analysts,

GE said that in the first quarter, its healthcare business saw a 1% decline in major equipment orders, following a 7% decline in the fourth quarter of last year, and an 8% increase in services orders following an 11% increase in the fourth quarter of 2007. In the medical equipment business, it said “MR and life sciences strength [was] offset by CT.” GE said it that in healthcare services it saw “broad strength across core services and in” health care information technology services. Healthcare earned $528 million on revenues of $3.9 billion.

Drilling down, GE’s presentation offered more hints at what’s happening in the health care major equipment and services markets. It reported:

Healthcare
  Global growth in Diagnostic Imaging, Services & Life
Sciences
  U.S. market pressure ‚Ķ OEC, DRA & customer access
to capital markets

Deep in the presentation, on page 9, GE reveals the problems with its health care business:

Segment highlights – Healthcare
1Q commercial trends
• Orders up 2% … service +8%,
equipment down 1%
• Service backlog $2.1B, +7%
• CSA backlog +17% driven by HCA
~$1B contract win
Revenues $3,887 -%
Segment profit $528 (17)%
($ in millions)
1Q dynamics
Challenging U.S. environment … strong global growth
• OEC expected to ship in April
• U.S. equipment market remains soft
‚Äì Americas DI orders   -13%
‚Äì Community hospital orders   -18% in
March ’08 … funding & CAPEX
• Global equipment revenues as expected
– DI International +8%, Clinical Systems
International +13%
– Life Sciences Europe +24%
• Service revenues strong +9%
– DI service +9%, Clinical Systems +25%

GE’s OEC problems are explained here. The January 2007 Food and Drug Administration press release announced:

The U.S. Food and Drug Administration (FDA) today announced that GE OEC Medical Systems, Inc., its parent company, the General Electric Company doing business as GE Healthcare, and two of their top executives have signed a consent decree of permanent injunction related to X-ray surgical imaging systems manufactured by GE OEC Medical Systems. The consent decree prohibits the manufacturing and distribution of specified GE OEC Medical Systems X-ray surgical imaging systems at facilities in Salt Lake City, Utah, and Lawrence, Massachusetts, until the devices and facilities have been shown to be in compliance with FDA’s current good manufacturing practice (CGMP) requirements as set forth in the Quality System (QS) regulation for devices.

The decree was filed today in the U.S. District Court for the District of Utah and is subject to court approval.

The X-ray surgical imaging systems subject to the decree are manufactured and designed at GE OEC Medical Systems’ facilities in Salt Lake City, Utah, and Lawrence, Massachusetts, and include the 9900 Elite C-Arm System, 9900 Elite NAV C-Arm System, 9800 C-Arm System, 2800 UroView System, 6800 MiniView System, Insta-Trak 3500 NAV System, and ENTrak 2500 NAV System, as well as their components and accessories. These are radiological image processing and image-intensified fluoroscopic X-ray systems that are used during diagnostic, surgical, and interventional procedures, such as orthopedic, cardiac, critical-care, emergency room procedures, and other imaging applications.

‚ÄúThese devices are used on thousands of patients, and their dependability and accuracy are critical for the successful outcomes of important medical procedures,‚Äù said Daniel Schultz, M.D., director of FDA‚Äôs Center for Devices and Radiological Health. ‚ÄúWhen FDA’s August 2006 inspection found ongoing CGMP deficiencies at the Utah facility, GE voluntarily stopped distributing devices from that facility and is working with FDA to ensure that necessary corrective actions are fully implemented.”

I don’t own GE, COV, JNJ or ISRG, but my investment club owns GE, ISRG and JNJ.

For educational purposes only. Investigate before you speculate.

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