Siemens AG, Europe’s largest engineering company, plans to cut as many as 1,600 jobs at its health-care division and will scale back the business after falling behind competitors including Roche Holding AG.
The planned cuts amount to as much as 8 percent of workers at the diagnostics subsidiary, said Michael Sen, the chief financial officer of the health-care operations. Another 400 jobs will go as Siemens stops making linear accelerators that create radiation for cancer treatment.
Chief Executive Officer Peter Loescher is embarking on the unit’s second major overhaul in less than two years, after Siemens spent more than 10 billion euros ($13 billion) since 2006 bolstering the diagnostics business. Order intake and sales at the health-care unit failed to grow in the most recent quarter, and profitability at the diagnostics business has slumped to less than half the rate two years earlier.
“We want to become leaner, while investing in a new platform of products,” Sen said in the interview in Erlangen, southern Germany, on Dec. 15. “In diagnostics, we don’t want to remain at the level of profitability that we closed at last year.”
Diagnostics, which accounted for 29 percent of Siemens health care’s 12.46 billion euros in sales in fiscal 2011, posted an operating margin of 6.7 percent in the most recent quarter. That’s down from 14.7 percent in the first quarter of 2010. The division, which sells equipment to test body fluids for diseases, employs almost 15,000 people globally.
The focus will be on reducing costs and shifting production to lower-cost countries, a strategy that will prevent the unit for some more years from growing at the speed of the market, estimated at 3 percent to 5 percent, Sen said.
“We need to manage expectations,” he said. “It won’t happen in 2012. Diagnostics is not a quick fix.”
Siemens built the business by purchasing Dade Behring Holdings Inc., Bayer AG’s diagnostics unit and Diagnostics Products Corp. between 2006 and 2007 as it sought to narrow the gap with General Electric Co. Siemens wrote down goodwill accumulated with the acquisitions by 1.15 billion euros in November last year. Goodwill at diagnostics remains at 4.78 billion euros, or 30 percent of total at 15.71 billion euros.
Another focus will be increasing research and development, Sen said. Siemens spent 3.93 billion euros, or 5.3 percent of sales, on R&D last year, and about 1.1 billion euros of that, or 8.8 percent of sales, in health care.
“This is an investment program, not a restructuring program,” Sen said. “The fundamental trends are intact. We just want to approach challenges more aggressively”
No More Accelerators
The company will phase out linear accelerators, while it will continue to serve its equipment in operation, Sen said in the interview. The company won’t sell the installed base, he said. The move will result in almost 400 job cuts in Germany over two years, the majority of which will be in Erlangen.
The company said in November that an overhaul will cost about 300 million euros in the fiscal year that started Oct. 1. Sen said while the program will run for two years, it won’t weigh on earnings next year. Siemens stopped commercially offering particle-therapy systems earlier this year.
“From today’s perspective I see no further costs next year,” 43 year-old Sen said.
Sen, a Siemens employee for 16 years, took over financial responsibility for the medical units at the end of 2008, after heading investor relations and working on corporate strategy. Hermann Requardt assumed leadership of the division, previously among Siemens’s top performing areas, in 2008.
Requardt initially coupled the job with his role as chief technology officer for Siemens, a position he handed over to Klaus Helmrich earlier this year. A lack of management focus, and “poor execution” integrating the purchases resulted in a loss of more than 6 percentage points of market share in the four years following the acquisitions, with Roche overtaking Siemens for the top spot in the industry, Morgan Stanley analyst Ben Uglow estimated in a Nov. 28 note to clients.
“We may have been focused internally too much, while our competition was out in the market,” Sen said.
Siemens says its imaging business, which makes scanners to detect cancer and other diseases, has defended its top spot in magnetic resonance imaging and angiographic systems. In computed tomography, Siemens edged past GE, and Sen said more than half of its scanners are now manufactured in China.
Increasing revenue and profit with ultrasound equipment has come into focus, and the business will push into “many new areas” of application, Sen said. Siemens separated the business from its larger imaging modalities in 2010 and bundled it with x-ray offering to better develop cheaper models and expand into emerging markets.
Siemens’s health care operations had 51,000 employees as of Sept. 30, making it the smallest of Siemens’s four so-called sectors. Siemens last year generated 35 percent of health-care sales in the U.S., its largest market, and 22 percent in Asia. The installed base of imaging equipment in China stands at more than 4,000 units, Siemens said in June.