Siemens Healthineers Acquires Varian Medical

Siemens Healthineers and Varian Medical announce $16.4B deal in all-cash transaction on 2^nd August 2020
Deal expected to close in 1H 2021
Varian Medical will maintain brand name and operate “independently”
Siemens AG will drop holding in Siemens Healthineers from 85% to 72% as part of transaction

News of the deal between Siemens Healthineers and Varian Medical will have caught many industry onlookers off guard on Sunday evening. Flotation of the Healthineers business segment on the German stock market raised a few eyebrows back in 2017, but with Siemens AG retaining 85% of the stock, many observers postulated little change to the fortunes of the well-known business; an unwieldy technical hardware leader facing an uphill battle in an increasingly digital market.

However, the Varian deal has just made it very clear that Siemens Healthineers has emerged from the IPO with big ambitions and firepower to match. So, what does this mean for the future?

Win-win?

Three benefits of the deal are clear at first glance. Firstly, Siemens Healthineers will be adding an additional mature product set to its already strong modality hardware line-up. Radiation Therapy hardware (linear accelerators, or linac), is the lion’s share of Varian’s business, for which it is market leader holding over 55% of the global installed base in 2019. Combining this with Siemens’ extensive business in diagnostic imaging and diagnostics will create a product line-up that no major peer can today match. It also opens up opportunity for providing “end-to-end” oncology solutions (imaging, diagnostics and therapy) under one vendor, a strong play in a market where health providers are increasingly looking to limit supply chain complexity and explore long-term managed service deals with fewer vendors.

Secondly, Varian is operating in a relatively exclusive market, with its only main competition coming from market peers Elekta and Accuray Inc. Demand for linacs has been consistently improving in recent years, with Varian suggesting only two thirds of the Total Addressable Market (TAM) for Radiation Therapy has been catered for so far. The acquisition therefore opens a new growth market for Siemens Healthineers to offset the gradual slowing demand for its advanced imaging modality (MRI, CT) business, a more competitive and mature segment. The adoption of Radiation Therapy in emerging markets such as China and India is also well behind advanced imaging modalities, offering new greenfield opportunities near term, a rarity in most of Siemens Healthineers’ core markets.

Thirdly, Varian has grown to a size where progressing to the next level of growth will require substantial investment in operations and new market channels. Revenue growth over the last five years has been patchy, though gross margin remains strong for this sector. If Siemens can leverage its far larger operational and sales network and apply it to Varian’s product segments, none of Varian’s current main competitors will have the resources to compete, unless acquired by another major healthcare technology vendor.

The Digital Gem

While the Radiation Therapy hardware business has gained most attention for its potential impact on Siemens Healthineers’ business, Varian’s software business is arguably its most valuable jewel, hitting almost $600m and 18% YoY growth in FY19.

Many healthcare providers have become increasingly beleaguered by the challenges of digitalisation today, especially in terms of complex integration of diagnostic and clinical applications across the healthcare system. This frustration is especially common in Oncology, which sits at the convergence of major departmental and enterprise IT systems, including the EMR, laboratory, radiology, and surgical segments.

Changing models of care provision towards multidisciplinary collaboration for diagnosis and care have only intensified focus on fixing this issue, with some preferring single-vendor offerings for major clinical or diagnostic departments. The Varian software suite is one of the few premium full-featured oncology IT portfolios available today, competing mostly against main rival Elekta, generalist oncology information system modules from EMR vendors (few of which have the same capability) and a host of smaller standalone specialist IT vendors.

For Siemens Healthineers, the Varian software asset is a great fit. Siemens has for some time been gradually changing direction in its digital strategy, away from large enterprise data management segments towards more targeted diagnostic and operational products. This process began with the sale of its EMR business to Cerner for $1.3B back in 2015, with notably reduced marketing focus and bidding or deal activity on big imaging management deals (PACS, VNA etc.) in North America in recent years.

Instead, Siemens Healthineers has channelled its digital efforts on three main areas where it has specialist capabilities: advanced visualisation and access to artificial intelligence for image analysis; digitalisation of advanced imaging hardware modalities, including driving efficiency for fleet management and radiology operations; and lab diagnostics automation. While still early in this transformation, this approach is tapping into the main challenges facing most healthcare providers today; improving clinical outcomes at net neutral or reduced cost, better managing and reducing Total Cost of Ownership (TCO) and implementing autonomous technology to augment clinical and diagnostic practice.

Assuming integration with Siemens’ broader portfolio is not too bumpy, it is already clear how the different software assets of the Varian business sit well with Siemens’ digital strategy. The Aria Oncology Information System platform will provide an entry point for Siemens to build on clinical outcome improvement in Oncology (along with Noona/360 Oncology) while also integrating diagnostic content from the Siemens syngo imaging and AI-radiology applications. Further, with growing attention on operational software to support modality fleet services and radiology operations, Siemens could translate this business into RT linac fleet management, an area currently underserved.

With no competing vendor today able to match this capability in Oncology IT, the potential long-term benefits for Siemens’ digital strategy with Varian far outweigh the risks of integration.

From Morph Suits to Moon-shots

As alluded to in our introduction, perhaps most intriguing is the bullish signal Siemens Healthineers has made to its customers and the wider market about its future.

The Healthineers 2025 strategy identified three clear stages of transformation, with “reinforcing the core portfolio” the key aspect of 2017-2019 post IPO. The second phase “upgrading” the business focused on pushing up growth targets and earnings per share across all segments while adding capabilities in allied markets.

Judged against the criteria for the “upgrading” phase, the Varian deal has ticked all the boxes, perhaps clarifying why Siemens was willing to pay a premium.

The scale of the deal has also reinforced that the gradual untethering of Siemens Healthineers from its corporate parent Siemens AG is bearing fruit, both in terms of flexibility to deal-make and ability to use the financial firepower of its majority shareholder for competitive gain.

The deal, once completed in 1H 2021, also now puts Siemens Healthineers in an exclusive club of medical technology companies with annual revenues above $20B, with a potential position as the third largest public firm globally (based on 2019 revenues, behind Medtronic and Johnson and Johnson).

It is therefore hard to argue that the Varian acquisition can be viewed as anything but positive for Siemens Healthineers. Given the current impact of the COVID-19 pandemic and expected challenging economic legacy, the growth potential of Varian will help to smooth the expected mid-term dip in some core business over the next few years.

Yet it is the intention and message that Siemens Healthineers is sending with the Varian acquisition that has is perhaps most impressive; despite the turmoil and challenges facing markets today, it fundamentally believes in its strategy to reinvent its healthcare business and target precision medicine long term.

Its major competitors should sit up and take note; Siemens Healthineers is fast re-establishing itself as a leading force within healthcare technology. The morph suits of the “Healthineers” brand launch was just one small step on this journey; the Varian acquisition is going to be one great leap.

By Stephen Holloway, Principal Analyst