Editor's note: Originally published on July 8, 2014
by Brian Langenberg, CFA
Two significant developments recently in global healthcare, and both emanating from Europe.
Philips (NYSE:PHG) pre-announced disappointing 2Q healthcare results (down about 50% y/y) and the departure of Healthcare CO Deborah DiSanzo. At the March 19, 2013 Philips Healthcare Investor Day Deborah was the poster child for a strengthened management team having been promoted from successfully growing Patient & Healthcare Informatics. The unit will now report directly to CEO Frans van Houten.
Bloomberg reports that Siemens (OTCPK:SIEGY) is considering a sale of its hospital IT business for over $1.4 billion. Notwithstanding its recent "pretend bid" for Alstom (OTCPK:ALSMY) assets, Siemens continues to retreat from, sell, or dump anything that is causing problems. Which means a key asset (healthcare IT) that is at the center of healthcare innovation could be available.
For reference here are the "big four" oligopoly (there are others) in global healthcare equipment (imaging, IT, etc):
$18B - General Electric (NYSE:GE)
$18B - Siemens
$13B - Philips
$4B - Toshiba (OTCPK:OTCPK:TOSBF, 6502 JP)
Long-term this is a 4% core growth business with potentially attractive margins. GE is consistently profitable while Siemens has struggled and Philips, until recently, has been on the upswing. Hiccups aside we think they will get back on track. Toshiba is smaller but well respected.
Thoughts and implications:
1. Siemen's' IT business would be attractive to both Philips and Toshiba.
2. Even mulling a sale confirms that Siemens will seek to exit healthcare in total. You don't sell the "brains" if you still wish to grow the body.
3. Siemens has been selling some assets cheap.
4. Philips should go after this - it is strategic, consolidates the industry and the price will be right. GE probably can't bid.
5. Toshiba should also put down a bid. Toshiba is of course big in Japan but respected globally. Obtaining the technology and installed base would provide potential growth synergy. And we note that Siemens and Toshiba management have seen a lot of each other lately.
What this means for investors:
1. GE's competitive position would be negatively affected, albeit slightly, by successful combination / consolidation between Siemens IT assets and Philips.
2. Siemens - confirms their simplification path. But value continues to be destroyed by cheap asset sales in lieu of improving inherently good businesses.
3. Philips - today is a bump, not a mountain.
Disclosure: No positions
Editor's Note: This article discusses one or more securities that do not trade on a major exchange. Please be aware of the risks associated with these stocks.