technology

Europe’s Next Big IPO Is a $35 Billion Gamble on Blood Science

Updated on
  • Healthineers is betting on its new diagnostics line Atellica
  • Getting labs to move away from rivals will be a challenge

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, 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.

Big Picture

Imaging drives most of the profit at Siemens Healthineers

Source: Siemens Healthineers IPO Prospectus

Siemens has been preparing to sell shares in Healthineers for more than a year as Chief Executive Officer 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’s just launched a new diagnostics brand called Atellica, aimed at replacing older products that have trailed the competition.

Joe Kaeser

Photographer: Christophe Morin/Bloomberg

“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 due to market volatility and uncertainty about how well Atellica will perform. An update Thursday on the stock sale seen by Bloomberg pointed to a likely price of 28 euros a share, meaning Siemens would raise 4.2 billion euros ($5.2 billion) after selling a 15 percent stake.

By its own admission, Siemens has failed for years to gain the upper hand in diagnostics, which makes up just over a third of Healthineers 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 euros, 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.

Market Slide

Siemens Healthineers lost significant market share in diagnostics between 2007 and 2015

Source: Siemens, Roche

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 U.S., 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.

The Healthineers factory in Forchheim, Germany.

Photographer: Krisztian Bocsi/Bloomberg

’Mission-Critical’

“Atellica is claimed to be more efficient than its peers and is aimed at larger, automated labs,” Jefferies analyst Peter Reilly wrote in a note. Sales and margin goals make the business “potentially the largest single profit growth driver” at Healthineers.

The magnitude of the health-care company’s ambitions were outlined in the IPO prospectus. Healthineers wants to replace its legacy platforms within three or fours years, knowing that contracts with laboratories for these types of systems usually run between five and seven years. It will take “several years to achieve a sizable installed base,” the document states. As of the end of January, it had sold 110 analyzers, toward a goal to ship 7,000 by 2020.

Getting labs to switch over to new systems and equipment is the biggest part of the battle, with incumbents often starting in a position of strength. “As a lab director, changing a supplier can be a career-destroying event,” Stettler said. “It’s mission-critical.”

While Morgan Stanley analyst Ben Uglow said Atellica has “closed the gap” with competitors on performance in laboratories, he’s still not yet convinced it will allow Healthineers to regain lost market share because the costs of switching systems is so high.

— With assistance by Ruth David, and Aaron Kirchfeld

(Updates with details about share price in fifth paragraph.)
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