Major conglomerates 3M, GE, Philips bet on healthcare

Major global conglomerates like 3M and Philips have taken steps to increase focus on healthcare in recent years, shedding units covering other industries while buying additional medical assets in the belief the aging population will drive growth. GE took a different path, initially planning to spin off its healthcare unit (like Siemens did with a 2018 Healthineers IPO), only to decide to keep it in the fold. Across each company, healthcare is now a key element of growth forecasts, made clear during earnings reports this week.

Philips

In 2011, Philips' diagnosis and treatment, connected care and personal health units generated half of its revenues. Since then, Philips has split off big, non-health units like its lighting division to transform itself from a far-reaching conglomerate into a more focused health technology company. In 2019, the three health-focused units accounted for 98% of Philips' sales.

Philips outlined plans to continue that shift in its most recent financial results. The personal health unit currently houses an appliance business that sold €2.3 billion ($2.5 billion) worth of products such as coffee machines and vacuum cleaners last year. Philips no longer sees domestic appliances as a good fit, leading it to create a separate legal entity for it and "review options for future ownership."

The anticipated split from the domestic appliance business will further narrow Philips' focus on health technologies. Philips' share price has risen more than 50% since 2011, but the move into health technology has encountered turbulence.

In the fourth quarter, Philips reported sales growth of 3%, missing analyst expectations and sending its stock downward. Connected care, a unit focused on health analytics and workflows, posted the slowest growth, increasing sales by 2% on a comparable basis. The unit underperformed Philips' other businesses throughout 2019. Philips also put a new connected care leader in place, moving former personal health business head Roy Jakobs into the role.

3M made a big push into healthcare last year, buying wound care player Acelity and MModal's technology business for a total of about $7.7 billion. The impact of the acquisitions was clear in 3M's fourth quarter results, which featured a 25.4% increase in healthcare revenues. However, the increase was solely due to acquisitions, with sales falling slightly on an organic, local-currency basis.

The 0.2% fall in organic healthcare sales nonetheless made the unit one of 3M's better performers in the quarter. 3M's non-healthcare units contracted by as much as 5.9% in the quarter. The consumer unit recorded the only organic growth in the quarter, although at 0.2% the increase was small.

Faced with those financials, 3M reiterated its focus on healthcare, using its quarterly conference call with investors to explain why it has tied its prospects to the industry.

"Healthcare is going to be a leader for growth for us," 3M CEO Mike Roman said. "We see medical solutions improving. The market outlook there is strong, and our position is strong." Roman added that the integration of Acelity is going well and "off to a good start."

In the near term, the coronavirus outbreak could provide a financial boost for 3M, which is making more masks for use in controlling the virus.

GE was poised to spin off its healthcare business last year but it reconsidered after accepting a $21.4 billion offer for its biopharma unit from Danaher. Since the decision, the healthcare business has contributed to an upturn in GE's fortunes.

That momentum continued this week, when GE's share price rose 10% on the back of fourth quarter results that beat analysts expectations. The results were underpinned by growth at the aviation unit, which offset flat financials at the healthcare division. Healthcare sales for the full year grew 1%. GE expects the unit to grow quicker in the future, forecasting low- to mid-single-digit increases.

GE took a step toward faster growth in the fourth quarter by increasing its orders by 2%, underpinned by equipment. Life sciences orders were up 10%, offset by imaging. China was also a headwind, although GE's efforts to improve its performance in the country are now overshadowed by the coronavirus outbreak.

CEO Larry Culp said on a conference call with investors the company's healthcare team is "smack in the middle" of the outbreak, "servicing our equipment, certainly prioritizing new equipment deliveries, particularly to the Wuhan hospitals." Culp also said GE made "a significant donation" of patient monitors and ultrasound equipment to assist.