Always read the label, doctors and pharmacists advise their patients. Siemens is marketing its Healthineers medical technology unit to investors as a growth business “well prepared to take advantage of paradigm shifts”. The small print details the side-effects.
Revenue growth in recent years has averaged a hardly scintillating 3 per cent, around the same as global GDP. At a jargon-laden capital markets day on Tuesday, it offered a similar prognosis: 3-4 per cent sales growth in 2018. The German conglomerate plans to float the unit in Frankfurt by end-June. Analysts value it at €30bn-€40bn.
The in vitro diagnostics part of the business is at a key stage. Siemens spent heavily to build it up, but it has lost market share. Much rests on a new system, Atellica, but the lab equipment is only being rolled out now; the real money will be made from 2020 on sales of consumables and services.
Beyond that, Healthineers needs to bulk up in the newer frontier of molecular diagnostics. This is likely be expensive. US rival Danaher paid 44 times earnings before interest, tax, depreciation and amortisation for Cepheid in 2016. Siemens will endow Healthineers with an improved capital structure when it separates, giving it more capability for acquisitions.
Keeping the patient hydrated in the meantime is the imaging business: number one worldwide with a large installed base of scanners and X-ray machines and fat margins from services. This will underpin profits and a proposed payout ratio of 50-60 per cent of net income. But the market for such big-ticket items is slower growing, while competition from revitalised rivals and Chinese entrants may erode margins. Promised cost savings of €240m a year may help offset that.
Healthineers covets multiples commanded by medical technology groups such as Danaher at 18 times enterprise value to ebitda. That would be within reach at the top of the range for the Siemens offshoot. But it needs to achieve a paradigm shift of its own to justify such an upgrade.
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