GE health unit signals more tough times for sector

By Debra Sherman - Analysis

CHICAGO (Reuters) - Weakness in General Electric Corp's (GE.N) healthcare unit is the latest sign that medical device makers will continue to struggle with the troubled economy.

Quarterly profit at GE Healthcare, a maker of big, expensive imaging equipment like MRI scanners, fell 22 pct to $411 million on a 9 percent decline in revenue to $3.55 billion.

GE Chief Executive Jeff Immelt told a conference call that the healthcare unit hit a "real headwind," and that the market "is proving to be very difficult," particularly in the United States. He said GE's healthcare unit is "probably the one with the least visibility right now."

Immelt's comments echoed those from diagnostic equipment maker Philips (PHG.AS) (PHG.N), which reported soft results last week. On Thursday, Intuitive Surgical (ISRG.O) pulled its key revenue guidance, citing an inability to forecast earnings.

Immelt, who rose to CEO in September 2001 after heading up the healthcare unit, said weak economies, smaller hospital budgets and an unwillingness to spend on capital equipment were to blame. Adding to the spending paralysis is uncertainty about healthcare reform.

Oppenheimer analyst Amit Hazan said his firm's own surveys of hospital chief financial officers reflect continued caution about capital expenditures and this will likely continue to hurt makers of other big capital equipment such as Siemens AG (SIEGn.DE) as well as smaller ones, like Varian Medical (VAR.N).

"VERY FLUID"

"The situation is very fluid and has gotten worse in the last few months even from late last year. This visibility issue they're all talking about means there's no end in sight and my expectation is that this carries through 2010," Hazan said.

Hazan said the weakness could spill into makers of lower-tech products like hospital beds, including Stryker Corp (SYK.N) and Hill-Rom Holdings Inc (HRC.N).

Medical device suppliers to the orthopedic and cardiovascular device specialties, including Medtronic Inc (MDT.N), St. Jude Medical (STJ.N), Boston Scientific Corp (BSX.N) and Zimmer Holdings (ZMH.N), may cut prices to move inventory.

"When I talk to hospital CFOs, they say it's going to require strength in the balance sheet and a better cash position to change things," Hazan said, adding that could take 12 to 24 months.

Morningstar analyst Alex Morozov said weakness in stocks of medical equipment and devices will likely result in a wave of consolidation. He sees GE as an aggressive acquirer once the dust settles.

"GE is not going to sit on the sidelines for too long," Morozov said. "I expect them to be very acquisitive once the environment is more calm. Right now, their biggest presence is in imaging, but I believe they might expand into other areas.

"Immelt came from a healthcare background. I don't think he was brought into the top job to expand GE's footprint in capital equipment," Morozov added.

(Editing by Brian Moss)