When the head of health care at Siemens AG went before investors in January with a sales pitch for the division’s initial public offering (IPO), he raced through a description of products like scanners and x-ray machines. Bernd Montag was out for blood.
The executive was on a mission to promote a new line of equipment to analyze medical samples, and his strategy to speak mostly about that business hammered home an important truth about Healthineers. The future success of the $35 billion company slated to make its trading debut on Friday rests partly on a bet it can gain heft in diagnostics, a market in which it has long struggled.
Siemens has been preparing to sell shares in Healthineers for more than a year as CEO Joe Kaeser hives off divisions and chips away at the German engineering firm’s sprawling conglomerate structure. Yet, the listing comes at a delicate time for the health-equipment maker because it has just launched a new diagnostics brand called Atellica, aimed at replacing older products that have trailed the competition.
“The question is, does the market believe they can improve,” said Barclays analyst James Stettler. “2020 is when they really want to show the real growth and margin improvement. If you look at the time scale of the typical investor, it’s quite a while away.”
Failed for years
The IPO value slipped from early estimates partly because of uncertainty about how well Atellica will perform. Terms seen by Bloomberg on Wednesday pointed to the likely price for shares between €27.50 and €28.50, toward the lower end of a range given by the company of €26 to €31.
By its own admission, Siemens has failed for years to gain the upper hand in diagnostics, which makes up just over a third of profit. “We didn’t have one streamlined platform. We didn’t have one competitive product,” Montag told analysts. “Sometimes, we needed to offer several products, which made things complicated.”
Siemens first began moving aggressively into the market more than a decade ago when it made a rapid-fire string of acquisitions worth billions to gain a leading market share. In April 2006 it bought Diagnostic Products Corp. for about $1.86 billion and, just two months later, added Bayer AG’s diagnostics division for €4.2 billion, and then Dade Behring Inc. for about $7 billion. The frenzy ended with a big writedown in 2010 and fed into the ouster of former CEO Peter Loescher.
“They were left with three platforms, sub-scale and very hard to bring together,” Stettler said.
Meanwhile, rivals like Roche Holdings, Abbott Laboratories and Danaher Corp. were catching up. In 2007 Siemens had a diagnostics market share of 17 percent, compared to Roche’s 16 percent and Abbott’s 11 percent, according to a Siemens presentation. In 2015 Roche had climbed to 20 percent, Abbott stayed at 11 percent, while Siemens declined to 9 percent, according to a Roche report. Siemens says it now has 15 percent, without providing details about rivals.
By developing its own platform with Atellica, the German supplier has changed tack. Sales of the products got underway late last year in Europe, the United States, South America and Asia. The plan is to derive 90 percent of revenue from higher-margin reagents and other supplies used to prepare samples of blood, urine and tissue rather than the actual diagnostic machines. Montag has said Atellica will give Healthineers accelerating growth and higher margins over time.