Scandal-Hit Camera Maker Olympus Tries to Re-Focus Five Years Onby and
CEO Sasa eyes acquisitions to tap new markets, rev up growth
Company faces lawsuits related to endoscopes and ex-CEO
Five years ago, Olympus Corp. was caught up in the oddest of corporate scandals. Its then-CEO, Michael Woodford, uncovered an accounting scandal at the company that went undetected for years, besmirching the name of a once-proud Japanese maker of digital cameras and medical equipment.
The challenge of getting the company out of the penalty box, restoring investors’ trust and expanding again has fallen to Hiroyuki Sasa, who took over as CEO in 2012. “It’s an endless effort,” Sasa said in an interview in the company’s Tokyo headquarters.
Though the company’s stock is priced about eight times higher than the lows of 2011, Sasa has his work cut out for him. Governments are curbing health-care expenditure and competition is rising. Meanwhile, some of the company’s medical devices have drawn scrutiny from U.S. regulators regarding an issue of bacterial contamination, and it faces lawsuits from patients.
Since Sasa’s taken up the top job, one of the former medical marketing manager’s priorities has been to drive up sales, and recent numbers have been encouraging. Annual net income hit a record at 62.6 billion yen ($590 million) for the year ended March, driven by revenues from its medical business, which sells endoscopes and other devices that help doctors see inside the body.
Now, Olympus is eying acquisitions to strengthen that position, Sasa said. Olympus hasn’t made any acquisitions since late 2011, when the accounting scandal broke, data compiled by Bloomberg show. “I think there will be two perspectives" when it comes to acquisitions, Sasa said. “We might do some M&A to expand our business coverage in existing areas and do more business, but the second possible way of thinking is to go into a completely different new area."
Sasa said there are a number of ways it could fund deals, and that the company has a internal budget but didn’t specify the amount.
Olympus had 45 percent of the global endoscopy market in 2013, according to Wenlu Hu, an analyst at London-based research and consulting firm GlobalData. Other key companies in the space include Japan’s Fujifilm Holdings Corp., the U.K.’s Smith & Nephew Plc and U.S.-based Stryker Corp.
For Olympus, M&A is a "good strategy" to increase sales and profit, said Yukihiko Fukunaga, an analyst for Tachibana Securities Co. "It would take a lot of time if Olympus tried to grow it from scratch."
Back in 2011, the stock plunged almost 60 percent as Woodford raised questions about inflated takeover payments from before he took the role. At the time, there were concerns that Olympus might miss a deadline to report earnings and could be delisted from the exchange.
Olympus admitted that some of its executives had helped conceal losses by paying inflated takeover fees. The company went on to correct several years of financial reports and in July 2013 was fined 700 million yen by a Tokyo court.
In Sasa’s first few years the focus was on addressing the crisis. He forged a partnership with Sony Corp., sold new shares in the market, increased the number of outside directors, and concentrated on growing the medical business. But he says the company is no longer in survival mode and “from now on the real focus will be on the business.”
An engineer at the Tokyo-based company for more than two decades, he held a variety of positions before becoming CEO in April 2012. His 2016 corporate strategic plan, released this March, targets a more than 30 percent increase in revenue by 2021 – especially by expanding the company’s early diagnosis and minimally invasive products.
As governments in Olympus’s key markets – the U.S., Japan and Europe – seek to curb medical costs, the company can gain an edge by developing more efficient devices that reduce surgery times or are less invasive, Sasa said.
In addition, Olympus, which started as a microscope maker before selling its first camera in 1936, is attempting to turn around its camera business. After a number of losing quarters the camera business is now in a position to turn a profit, Sasa said.
Last year, some U.S. hospitals reported “superbug” outbreaks linked to the cleaning of scopes from Olympus and some of its competitors. Olympus said there are about 20 related lawsuits in motion. In an e-mailed response to questions, Olympus said it is "taking the issue very seriously" and working with the U.S. Food and Drug Administration to resolve the matter.
“Because of the complex structure, the device might not always be easy to clean or easy to disinfect,” said Sasa, stressing the need for cleaning, disinfection and sterilization, a sequence known as reprocessing, by health-care professionals. Sasa said that Olympus will continue to review the instruction manual and provide training. He said the company doesn’t think there was a problem in the design of the scope.
Fukunaga, the analyst, says he doesn’t think the impact of the suberbug contamination lawsuits will be that great, and that the situation “has settled down.”
Meanwhile, Woodford who was fired in 2011 after he revealed the fraud and questioned inflated takeover payments, remains in a dispute with Olympus. Earlier this year, he sued Olympus in the U.K. for breach of contract. Woodford, who settled a 2012 employment suit with the firm, filed the new claim in January, court records show. Woodford declined to comment on the latest suit. "No claim has been served yet and therefore we would like to refrain from making any further comments," Olympus said via e-mail.
Sasa declined to comment on the specifics of ongoing legal cases. He said, separately, that the company has been looking at its internal controls, resulting in proactive disclosures to regulators.
Meanwhile, the company has sought to put some other worries behind it. In March, it agreed to pay $646 million to resolve U.S. probes into kickbacks paid to doctors from 2006 to 2011. In a statement at the time, its president for the Americas said, "Olympus leadership acknowledges the company’s responsibility for the past conduct, which does not represent the values of Olympus or its employees." The company said it has been making compliance improvements.
Maintaining trust and re-building its reputation will continue to be on his agenda, Sasa said, pointing to the appointments of some outside directors, while acknowledging they won’t be the sole answer to any governance concerns.
“Can we truly prevent another scandal? No one can claim they are 100 percent protected,” Sasa said. “At the end of the day as managers we’ll put in 100 percent effort – and aim that it will come down to every employee being compliant.”