Siemens and the incredible shrinking IPO
Siemens cuts down the size of its Healthineers spin-off partly thanks to market volatility, but still hopes to create a nimbler company.
The biggest-ever healthcare IPO will occur at the end of next week, but it will not be nearly as big as expected. Siemens has said it intends to spin out its Healthineers unit by floating just 15% of the business in a deal expected to raise a maximum of €4.7bn ($5.7bn).
This still outstrips the previous record holder, Otsuka’s $2.4bn IPO on the Tokyo exchange in 2010. But it is a big drop from the €10bn figure previously suggested, and industry watchers have put this down to a lack of investor enthusiasm amid market shivers that have been almost as pronounced in Europe as in the US.
Siemens had originally intended to list 25% of the shares in Healthineers on the Frankfurt exchange. This proportion has been cut down – and the listing price has been reduced too.
The calculation back in November was that floating a 25% stake in Healthineers would raise €10bn, giving a conjectural price per share of around €40 (Siemens goes Deutsche on medtech business, November 30, 2017). Siemens has in fact set the price range at €26-31 per share.
The deal will therefore value Healthineers itself at a midpoint of €29bn and a maximum of €31bn.
|The expected value of Healthineers, then and now|
|Previously suggested||Confirmed (midpoint)||Confirmed (max)|
|Total number of Healthineers shares||One billion||One billion||One billion|
|Proportion to be floated||25%||15%||15%|
|Price per share||€40||€28.50||€31|
|Value of offering||€10.0bn||€4.3bn||€4.7bn|
|Value of Healthineers||€40.0bn||€28.5bn||€31.0bn|
Sales of Healthineers’ core imaging technologies are stable if unexciting, and with estimated sales from imaging products of $9.3bn in 2017, according to EvaluateMedTech – Siemens does not split its Healthineers revenues by division – the group is the world’s largest imaging company.
It plays in two other segments, diagnostics and advanced therapies. The latter consists of equipment used in minimally invasive procedures, such as interventional cardiology and radiotherapy. But it is the other business, diagnostics, that potential investors in an independent Healthineers may be finding a bit offputting.
Healthineers is no slouch when it comes to diagnostics, with sales of $4.4bn in 2017, putting it in fourth place in this market, behind Roche, Danaher and Abbott. However, the business has a profit margin of just 14%, according to Bernstein analysts, compared with 20% for imaging and 22% for advanced therapies.
Siemens’ projections for this segment are perhaps optimistic, relying on rapid uptake of its newly-launched Atellica machines. Mid-term guidance for the diagnostics segment targets a 16-19% margin, with management targeting 7,000 installations of Atellica systems, Bernstein analysts say. But it is not clear what these machines offer over rivals’ competing products.
For instance Atellica can perform 170 different assays, and Healthineers hopes to expand this to 210. As a comparison, Roche’s range of Cobas analysers, around 52,000 of which are installed worldwide, offer a menu of 220 tests. The market is largely saturated and switching from one provider to another is a costly process for labs and hospitals, so some potential investors are likely to be taking a wait-and-see attitude to the Atellica business.
But it is market volatility that is the main reason for the shrinking offering. The DAX index of 30 leading companies, including Siemens, on the Frankfurt exchange is down 7% so far this year.
Still, the purpose of the IPO is not to raise the maximum amount of cash; Siemens is already well stocked in that regard.
The point of the exercise is to realise Healthineers’ standalone value, removing some of the conglomerate discount that weighs on Siemens’ valuation – though whether this will actually happen, since the group intends to retain a majority stake, is far from certain – and to produce a more agile company that can compete better with its peers, not least through acquisitions.
There are a number of areas in which Healthineers might want to strengthen via bolt-on deals. Despite the company’s prominent position in imaging it is relatively weak in ultrasound compared with GE Healthcare and Philips. Growing its advanced therapies unit might also be a smart competitive move: Philips and Varian Medical Systems are two imaging companies that have shifted towards intervention via acquisitions with their purchases of Spectranetics and Sirtex respectively.
The IPO, scheduled for March 16, is an opportunity for Healthineers to reinvent itself. That the size of the offering has shrunk does not necessarily mean that the move is unwise, or will not be a success.