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Though GE Healthcare Revs Grow, Contribution to Corporate Still Slides

While GE Healthcare's revenues are skyrocketing, the unit's contribution to GE's overall revenues, which CEO Jeffrey Immelt has promised to grow at 8 percent a year, is not keeping pace.

In the three quarters since it closed the $10-billion acquisition of Amersham and created GE Healthcare to house both the acquisition and the company's legacy medical systems, the unit has averaged 37 percent growth in revenues, and 34 percent growth in profits, year over year.

Billed by GE as one of the growth engines for its business, the addition of Amersham's molecular biology tools platforms and its imaging agents to GE's well-established healthcare technologies has clearly delivered revenue growth.

But the unit's contribution has declined year over year during the last three quarters.

In the third quarter of 2004, the first quarter that included the Amersham acquisition, GE Healthcare said revenues grew 43 percent to $3.3 billion. Unit profits grew 31 percent to $503 million. However, the unit's revenues as a percentage of overall sales fell to 11.5 percent from 14 percent in the year-ago period. Net income fell 8 percent from a 9.5-percent contribution.

In the fourth quarter of 2004, the unit reported 36 percent growth on sales of $4.5 billion for the period. Net income climbed 50 percent to $860 million. But the unit's contribution to corporate for the quarter fell to 9.6 percent. And, its net income contribution fell 6.3 percent year-over-year.

Last week, the decline continued when GE Healthcare Q1 revenue grew 33 percent to $3.3 billion. Net income ballooned 21 percent to $409 million. But GE Healthcare's contribution to GE's top line fell to 12 percent from 13 percent year-over-year. However, for the first time, the unit's contribution to GE's bottom line grew to 9.9 percent from 9.6 percent a year ago.

Analysts, however, were more interested in margins and compared the unit's 21-percent growth in net revenues year-over-year with 33 percent growth in its top line and asked 'Why?'

GE executives said Healthcare's margins were affected by the company's amortization of approximately $40 million per quarter in higher non-cash, goodwill amortization charges from the Amersham acquisition. CFO Jeff Sherin said that excluding the intangible charge, net revenues for the unit grew 33 percent.

Overall, GE total revenues for the three months ended March 31 increased 19 percent to $40 billion from $33.4 billion for the year-ago quarter. Net revenue for the period increased 25 percent to $4.04 billion from $3.2 billion for the year-ago period.

Nicholas Heymann, an analyst for Prudential Equity Group, said the company's business units, including Healthcare, "now seem to be positioned to benefit from stronger performances for the rest of the year."

In a research note in December, Heymann wrote that the addition of genomic information and Amersham's imaging agents are being factored into the development of GE's healthcare products — including CT, PET, MR and ultrasound — while Amersham's imaging agents are helping GE charge premium prices for those products.

In the quarter, the Biosciences unit, which houses assets from Amersham's Biosciences unit, increased revenues 25 percent while the protein separations unit increased revenues by 31 percent, said Sherin. In the Healthcare technology unit, the company reported that orders for equipment were up 19 percent overall with CT orders increasing 35 percent. The company did not disclose revenue amounts.

The company reported savings of $50 million from integrating Amersham and said it is on track to its goal of creating $250 million in savings from the integration of the units for 2005.

In the quarter, the company launched five products and another seven collaborations involving legacy Amersham businesses, the company said.

— Mo Krochmal ([email protected])


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