Mariel von Drathen - Head, IR
Hermann Requardt - Member of the Siemens Managing Board, Healthcare CEO
Michael Sen - Healthcare, CFO
Tom Miller - CEO, Customer Solutions
Michael Reitermann - CEO, Diagnostics
Norbert Gaus - CEO, Clinical Products
Bernd Montag - CEO, Imaging and Therapy Systems
John Glaser - CEO, Health Services
Peter Reilly - Deutsche Bank
Ben Uglow - Morgan Stanley
Andreas Willi - JPMorgan
Olivier Esnou - Exane BNP Paribas
James Moore - Redburn
Gael de Bray - Societe Generale
Will Mackie - Berenberg Bank
Andrew Carter - Royal Bank of Canada
Fredric Stahl - UBS
Daniela Costa - Goldman Sachs
Timm Schulze-Melander - JPMorgan
Siemens AG (SI) Siemens AG Capital Markets Day - Healthcare Call February 14, 2012 5:00 PM ET
Mariel von Drathen
Good morning ladies and gentlemen. I would like to welcome you here in London and the ones that are watching through the webcast to Siemens Capital Market Day on its sector healthcare. We last spoke to you in detail on healthcare in September 2009. A year later in October 2010, the sector realigned its divisional structure as it stands today. Hermann Requardt, the CEO of healthcare and Member of the Siemens Managing Board will present his divisional CEOs at the beginning of this presentation.
In addition for your reference, we prepared brief biographies that you will find on the section 8 of your handouts that you should all have in front of you. In recent years, healthcare has shown a resilient business performance and continuously delivered strong results. The challenges emerged from a changing market environment with increasing cost pressure in healthcare systems of many developed countries and significant investments in the buildup of healthcare infrastructure in emerging countries.
The agenda 2013 launched in November 2011 is the sector's proactive response to these challenges. Each presenter today will walk you through what he is doing in his area of responsibility and in implementing the agenda 2013. Let me come to the agenda of today, we will start with a presentation of the Healthcare sector CEO Hermann Requardt and the CFO Michael Sen, they will introduce the sector from a sector perspective. In the afternoon, we will continue with presentations from the divisions and deep dive into healthcare IT.
Besides all the presentation, this day is an opportunity for you to get closer to the management to ask them questions, to give you feedback to the business. We've planned for two Q&A session, one at the end of this morning after the CEO and CFO's presentation and one at the end of this afternoon after the divisional presentation. This should give you ample opportunity to ask your questions. In addition, we have scheduled a one-hour lunch break and a casual get-together at the end of this afternoon and we will invite you to stay with us and spend some time with the management.
On that note, also I want to remind you that we will be sticking to the financial disclosure. As you know it on the healthcare sector level. The one exception as you're familiar with is on diagnostics. Some housekeeping items just before we start today. The event is being webcast so I'll ask you please make sure that when you receive your microphone to ask your question and before that you've to just indicate your name. Also I would like to ask you to please put your mobile phones on mute or blackberries on mute and we do have wireless LAN access for those of you that are interested to access the network and the password being Siemens 101, lowercase Siemens.
On page number two of each of the presentation you will find the safe Harbor statement, please have a careful look at it. With this, I wish us all an interesting day, some fruitful discussions and Hermann may I ask you to please kick off the day with your presentation. Thank you.
Well good morning to Siemens Healthcare, everyone here in the room and everyone outside there in the world. Healthcare is a fascinating business, fascinating and challenging these days and it's fun to be in there. It's even more fun when you're successful and I think it's fair to say that Siemens Healthcare has managed its way to become one of the leading players in our industry. Now having made that statement as a Siemens member that may sound a little biased, but if we look into the top-notch, Top league hospitals in the United States 8 out of 10 are doing their research work with our equipment and thus as we know is carried out through the opinion leaders in healthcare.
We are talking here a discipline which is still heavily dominated by experience and opinions and opinion leaders play a big role. So owning the opinion leaders is a big, strategic advantage. It puts you in a position to be an opinion leader yourself. So thus we can state we are there, but healthcare is not only healthcare. In those kind of hospitals, we find healthcare more and more in environments like that and to be a little frank here, this is the kind of healthcare that is attributable to 6 billion people worldwide.
I think it's obvious for everyone in this room and out there that the equipment that you need to put into this bus is somewhat different. It's a different equipment routed through different sales channels and meeting different boundary requirements. So something is different there, this is not a huge market, but it's a market that is rapidly growing due to political desires in all the emerging, but not only in the emerging economies.
And in order to cope with both keeping and defending and elaborating on the opposition in the high-end markets, but also somewhat coping with the challenges and the opportunities in these developing environments we have given ourselves to structure that Mariel just referred to what you find down here and which I will elaborate a little on. On top of that, you will find the numbers of last fiscal that Michael will refer to in his presentation in some detail, let me simply add that Q1 was also not too bad.
If we go into that structure, you will find five well distinguished in terms of its characteristics businesses that are somewhat represented by the management team, the majority of them being in this room and that all supported by customer solutions group which is our common face, our global common face to the customer. Starting with Bernd Montag who is running our Imaging and Therapy Systems division. Bernd has a long-lasting history within Siemens, not only in Imaging, it was also responsible for healthcare IT, he was responsible for ultrasound, so he knows the spectrum and this is important for the messages later on.
In this division, it is fair to say that we have leading market shares that we definitely have the largest installed bases and probably the best-in-class profitability. The largest installed bases also refers to that the resilience of our business is heavily dependent on having a strong installed bases and we will come to that later during the course of the meeting.
All of that is supported by what we call the advanced visualization, all of these systems have the same software architecture, the same look and feel which is nice for us because of the R&D synergies and which is nice for our customers because of crosstraining of their users. Coming to diagnostics and as the headline says already we are not where we want to be in diagnostics. But we have a good basis to start from in recovering and that is outlined here. We are a number one or number two in the majority of segments. We have the biggest install bases with respect to instruments and we have Michael Reitermann. Michael has joined the Diagnostics group about 18 months ago and he has also a long-term record within Siemens. He understands X-Ray systems and also a background on Siemens management consulting. He however has also a turnaround experience, he turned around in the mind 90s our X-Ray products businesses and in that respect we have great confidence and great expectations that he and his competitiveness program which is part of the agenda 2013 that this will give us the momentum that this business needs and deserves.
We have different timelines, we believe that short term we can fix the shortcomings of the bottom-line, the top-line will take us or the fixing of the top-line issues where we continued to lose market share over the past years and it will take us a little longer and Michael will refer to that during his presentation. Clinical products have technologically a lot in common with our Imaging and Therapeutic Systems, but the technology is not the driving element to separate this division. It is the go to market approach. We have the small tickets as we sometime called that, the products business which is routed through a different sales channels and the go-to-market approach is the major difference.
In the ultrasound, system is sold out of the trunk, it is sold via dealers. X-Ray systems are typically the first imaging device that primary care physicians buy in order to also leverage their services on imaging, on the state-of-the-art imaging opportunities. Therefore we wanted to really focus management attention on these businesses. Needless to say that in particular, the emerging markets that I refer to in my second slide are somewhat receptive to these systems, but it's not just an emerging market or entry level systems, there is high-end equipment associated with it, but the go-to-market approach is different. It's very cost sensitive, it's very say international with respect to value added, therefore we have also added our internal supplier which we call components and vacuum technology to this group.
So this is the ultimate way of addressing new market opportunities, growth opportunities in specific areas of emerging countries. As I said, we have one common CRM process and service process and it is run by Tom Miller. Tom has a long-lasting history in imaging devices, but also in healthcare IT. So he's pretty familiar with all kinds of businesses that he now has to bring to market with a worldwide homogenized processes, sales processes, customer systematics and so forth that also includes our service approach. We're definitely leading in remote control of our equipment, all of our equipment is remote controlled and these processes are owned by Tom.
A part of customer solutions is also our healthcare, health services business. This is hospital information systems and the reason for putting it here is simply due to the fact that healthcare information systems are very local, there is no real global player in HIS systems because of local regulatories, of local cultural elements and so forth. So HIS is always local and therefore a natural harbor for that is the customer solutions group. Our HIS business is run by John Glaser whom we managed to recruit from Partners, where he interlinked with HIS systems all the Howard Hospital institutions and thus has a big name in the industry and John has made a major impact by joining us already as of today.
I want to mention although we were not going to detail today, but it needs reference, our Hearing Aids business, we have here a nice and attractive business that is margin negative. It fits well into our structure and also our recent moves in acquiring a retail chain so far has worked out and is on plan. It's run by Roger Radke and we are pleased with the progress that this group is making. All-in-all, we work and we have a clear assignment with entrepreneurial accountability and responsibility, but we work together. We work together because we find value in working together and the areas where we work together are somewhat listed here, technology and innovation integrated services. I will not go through all of them because they will be covered during the course of the day by various speakers.
Let me focus on two of them. The first one being technology and innovation. We are sharing talents, we are in the translational business. That means we translate a clinical need into a technical solution. That is the core of our business. And therefore we need the right people to do that. There is no education in universities to do that, we need to somewhat educate them ourselves and 10% of workforce are medical professionals. 1% are even medical doctors and that already indicates they are not specialists in modalities, ultrasound specialists although they are specialists in practicing medicine and that is the attitude that we share among all our divisions.
We have cross functional teams because we find that the reimbursement schemes are changing that they are more related to the disease and to the service. We have disease boards for cardiology, oncology and neurological disorders. We have the Healthcare Academy to educate our people and this is also something that we are sharing on our technology and innovation part and we are sharing technology. And that's not only software, famous Syngo, famous Soarian, that's also core elements like ASICs, we are sharing our knowledge in the new materials which obviously have a big impact on the progress in medical devices.
We are sharing architecture, we are sharing design, all over systems, looks somewhat similar and some are recognizable and we are sharing reconstruction algorithm and stuff like that.
So we do work together on a technology basis, but also on the service basis. As I indicated already, the majority of our systems is remote-controlled and that means the first-time fix rate, when the service engineer goes there, has dramatically improved. The people go there, they know what's wrong with the machine, and sometimes they know what's wrong with the machine before the use of the machine would know and that is something that people appreciate and that they are willing to pay for. This somewhat condition mandatory and this is what's the service business will turn into that we somewhat do the maintenance of the machine before it is broken.
And we will apply that knowledge that has a long-term history in our imaging systems. We are applying that also now into diagnostics. We are having the first engineers that are cross trained. We are building our devices that make them remote controllable into the diagnostics machines and therefore are confident that we would have the same productivity and diagnostics and servicing our diagnostics instruments that we have and where we have a proven record for in our imaging devices.
Obviously, healthcare is an attractive business to be in because of its resilience and primarily, resilience comes from the fact that the majority of any the revenue, in particular, the majority of our profits are made with install bases. We are selling upgrades into our install bases. We are selling reagents to our installed instruments bases. We are selling service contracts and this is somewhat recurring revenue and recurring profits.
So it’s attractive but that also attracts the new players and we all know there are, in particular, the big Asian economies. They are about to also bring out healthcare device industries and we see new players. So what make us feel comfortable that we, although we appreciate the new competition that we have something to defend our position.
While the first thing, as I indicated already, we are the ones that are invited to speak to the customers. Others have to make sure that they talk to an opinion leader once in a while. So there is this strong collaborative aspect that makes us distinguished here. We can draw patent fences around some countries. We can draw patent fence around India, around China, around Korea, and make sure that although they have a big internal market that they are inroad to into the big markets and the biggest market is still the United States, will be somewhat difficult one and that they have to pay remarkable entrance fee to us.
Regulatory is something very decisive. The regulatory releases and the, say, expertise associated with it becomes more and more a competitive factor. Just to give you an idea, last year we had something like 25 to 30 FDA inspections. So this is and this is one regulatory body only, others following similar rules.
So being competent, being networked of regulatory bodies also gives you a competitive advantage, in particular, when it comes to getting your new products out on a fast track.
And last, but not least, the global sales and service organization, we are there already. We are everywhere because we are appreciated everywhere. This is difficult for other parties to cope with that. And it’s going to cost them something.
Nevertheless, we are living in a free market environment. We always appreciate new competitors. However, if we look at who are the biggest companies in China that do medical devices, well, one of the biggest is Siemens; Siemens in China. So from that perspective, we are a Chinese company, but a Chinese company with a worldwide patent portfolio.
Having said that, healthcare is somewhat at the juncture, and it’s not only but also the debt crisis that made a lot of people think whether the return for the investment into healthcare is wisely spent. That is not necessarily a disadvantage for us, but it is something that needs reflection, in particular, when we look at Southern Europe where the readiness to buy new equipment is somewhat limited by the situation of their public cash boxes and a lot in Southern Europe, a lot of healthcare is somewhat public healthcare.
Now, although, say, new equipment sales are not that easy as is these days. They’re not necessarily is only a disadvantage because healthcare is replacement business and we are replacing businesses. If we keep the old system, we keep the service contract. If we are putting a new one, we have to go on warranty. So, at least there is a somewhat balancing factor on the bottom line but the top line is obviously an issue therefore the minus.
On the other hand, we see ongoing momentum into our arena. We’re getting older. I’ll refer to that in a minute. We see bigger demand because we see that the knowledge what is possible in healthcare that this is spread via the new media and people who know that what is possible, want to have access to that.
So that is kind of a tailwind, and then we have a somewhat mix head and tailwind with moving more and more into accountable care. That means we do only these procedures which have a proven record to work, that helps for some arenas, in particular, healthcare IT, that is at least a challenge for others. So we see a mix of pluses and minuses with a little overweighting of the pluses. So let me refer to that a couple of minutes, with respect to ongoing technical and medical progress.
That means the readiness for innovation in the developed markets, if not just product innovation. So how can I do an x-ray with half of the dose? It’s also process innovation. This year is a stroke unit and the majority of this will probably knows, if you have a stroke, you have a certain time window and what you need to diagnose a stroke is imaging equipment. You will need hemostasis, and in particular, you need a work flow engine. You’ll need a very sophisticated healthcare IT; these strong units. And we can deliver them. We can design them according to the local opportunities with where comes a consulting division and then we can design it and then sell it as a total.
In the emerging markets, we realize there is a lot of money now going into the rural areas and how do we help them taking advantage of imaging opportunities is something where innovation and technology are helping.
With respect to an ageing society, well everyone knows that with ageing society, healthcare services become more, say, receptive. Elderly people need more of that. Interestingly enough, since the economic basis of the western countries, in particular, is ageing. Health becomes more and more a productivity factor because its not only that they get older, they have less children and then the combination of both means that health becomes more and more a productivity factor, which is kind of a tailwind. Once healthcare improves that it can somewhat contribute to more active working days and stuff like that.
And in particular, when it comes to ageing, Alzheimer is on your mind, a proper Alzheimer diagnosis is of utmost value. 30% of the Alzheimer patients have no Alzheimer. They are simply not correctly diagnosed, and that means they are curable. Alzheimer is not curable these days. Non-Alzheimer’s are curable or at least treated in a different way than Alzheimer’s. So you will need somewhat a fundamental diagnosis, which exceeds the typical Alzheimer diagnosis where you ask the patient about the first name of his mother, and in that regard, there is momentum also from this ageing society.
Now, that is different throughout the world, but its converging. And all extrapolation say that by 2050 the life expectancy in China and in Europe and the United States are all in the same ballpark. So, even the emerging countries, only with a delay, will face the ageing phenomenon.
We see an increased demand in the rural areas and as the graphics here to the left shows, there is a strong demand in emerging economies to invest more and more, means more than their GDP growth, into healthcare while in the, say, developed countries there is a strong desire to reduce cost. So we have this kind of a equilibrium and, say, it looks a little like we will have something like sustainable healthcare, somewhat in the lower right arena.
What does that mean? Well in developed countries, that means that more and more services go into the point of care where the triaging of the patients take places into then high specialized hospitals, while in emerging countries this infrastructure is just to be developed. And we know from the China’s 12th five years plan, that they are more than willing to build 2000 and more country level hospitals; huge opportunity for us.
The involvement of the patients also means that there is a different how our customers look at healthcare. If we look at cost distribution, patients realize well there is a lot spent for therapy. There is not too much spent for diagnosis or prevention or so, and they tend to get involved.
And they look at it and simply the fact how many people are Googling healthcare specifics in the United States, gives you already some feeling for the growing, say, involvement of the patients into treatment decisions.
All of that somewhat leads to, yes, something’s going to change. It will not change rapidly. But continuously, we will see some changes and it is somewhat, is condensed for our traditional markets, which are somewhat more related to the diagnosis from what’s wrong with the patient towards what’s going to help the patient, given his specific boundary conditions, his specific diseases, his specific metabolism but also his specific financial situation.
On emerging markets, we realized we will see new Asian competitors who will face the hurdles that I outlined, and we will see a very specific demand there, which will shift more towards value products.
This is also reflected in the business models of our customers. And if we look at, how that is developing, then we realize there was a traditional momentum where we had a clear fee-for-service arena. So where you make an image, may I, and you will get some more money, you do a lap test more and you will make an additional buck. This is now shifted. Today we see more and more diagnostic-related groups. That means there is a reimbursement for the institution, for the hospital, for a liver transplant, and it’s then up to the hospital to say how much diagnosis do I need, how much hemostasis do I need, how much imaging do I need.
The entire chain is somewhat reimbursed and this will then, on the mid-term, shift into the sustainable healthcare arena of accountable care. So we do only the things that have a proven track record that this somewhat pays off and gives you an adequate return for the investment.
So we are moving away from a tailorize, medical approach. There is prevention, there is diagnosis, there is treatment, there is ward, there is rehab, and so forth towards an optimization along the treatment chain. And the treatment chain is what is getting reimbursed. So I don’t go into the details but one thing is clear. The reimbursement gives and that the business models of our customers are changing and we have to adapt to that. And that gives us today this kind of a healthcare market out. This is our market, our market; a difficult term.
We are defining our market as something where we can measure our performance and its not defined to look good. It’s defined to measure our performance. We believe that is in the order of 64 billion and we are having listed a few, somewhat few arenas, how we see they’re distributed over our divisions and business units, and for some of the arenas, we are giving also some forward-looking statements, which we typically don’t do, but we feel in this case we should do it, meet and long-term growth.
We expect in the order of 4% to 5% for the years to come due to, say, the uncertainties that we are facing in some of the arena. It will be slightly be lower. We still expect growth. And because we have realized that there will be changes, we have kicked off this agenda 2013. So it’s addressing the changes. It’s an initiative, and it does not mean everything will be different in the future, but there are minor changes that we need to reflect, and therefore we have these four chapters that I will go through now step-by-step.
It is innovation and the somewhat different innovation expectations giving the differences in practicing healthcare is being competitive. It’s our regional footprint that needs to be adapted to the changing environment and it means that we need different people to cope with different challenges and how do we get them, how do we keep them and how do we make them happy.
When we look at innovation, I have somewhat sorted out for categories new clinical innovations and I will have some examples for all of them the clinical innovations. This is more related to the high-end, what is possible and gives you additional impetus, its high throughput, cost efficient, so the throughput engine, the good enough bread and butter as some people call it, healthcare provision is entry level products for the new players, the new physicians who go into imaging now, primarily primary care physicians in rural and other areas and its next generation healthcare IT where we believe that what is going on in IT will have a reference and an impact on how healthcare IT is practiced.
Let me start with the high-end stuff, the Biograph mMR is a machine that combines the capabilities of high resolution anatomic imaging with a molecular arena derived from PET imaging. So both arenas what is wrong with the patient and what is going to help the patient can be addressed with a machine like that.
So with the expectation is 200 million until 2013. The good news is we are alone with that product and that typically helps the bottom-line, but it’s not only that. Since we are alone we get now inquiries from institutions that would never have something single piece brought from us.
So all of a suddenly because they can get it only from us, it’s an anchor product to enter into turfs that were closed until today and we are observing that and we are quite happy with it. So that shows you the importance of still remaining in the ultra high-end.
But this not only high end, I mean having hearing aids that you don’t have to remove when you have to swim, it doesn’t sound like top of the notch innovation, but its not available and we were the first to come out with something like that and its also something like and an anchor product into other parties turfs and other parties are trying hard now to catch up with a design like that.
Cost reduction of 30% in having a digital based X-ray equipment totally out of China and competing with the local Chinese manufacturers on total cost of ownership, because obviously, a digital system can have a better TCO because the images are stored digitally which cost you more or less nothing versus film which cost you a lot of money ongoing despite of the fact that film is very inconvenient with respect to storing and storing images.
So this here 30% cheaper made out of China for the Chinese market, but as we say the first customer was a German customer. So the tradition of distinction, the low-end stuff for the emerging countries, the high-end stuff for the developed countries this has somewhat disappear.
We are selling high-end stuff into Shanghai Tumor and the reason is very simple, the decision makers in Shanghai Tumor are all educated in the United States in one of these 10 hospitals that I referred to and they want the same equipment than they have seen during their education, while due to reimbursement schemes good enough for us more and more well received in the established markets because it enables then some customers to afford an X-ray machine where in the past they have to refer that patient to some imaging center.
And that get once more to the Alzheimer disease, the differential diagnosis, really doing Alzheimer is very, very difficult and therefore a biomarker is of the essence. We have a contract as one of the first who will get an FDA clearance for a biomarker on amyloid plaques to distribute it and to make it in our regular pharmacies and that gives us potential, it’s a test market. Our biomarkers will have its in-roads, but for us it’s huge potential and if you look at revenue expectations, $40 million in 2013, does not look too exciting; 100% growth is something that we don’t want to ignore.
Competitiveness, as the second arena of our Agenda 2013. Well, as we stated already, we have to be competitive in all of the arenas that we are doing. And in some arenas for different reasons we were not, we have cleaned up our particle therapy topic and are now confident that with what we have now, we will definitely have no more bleeding.
We have stopped building linear accelerators in the radiation oncology business, stopping a business is not always good for the top-line, but in this case it were most likely be good for the bottom-line, because there is still business for us in the radiation oncology arena, because every radiation oncology needs imaging and there, these are still there and we are confident that this will also be somewhere in the expectation of our customers that they have the strongest supplier for each of the devices that they are using.
With respect we focus for success, we have referred already to the agenda of the competitiveness program in diagnostics. We will do some remarkable cuts and we will find that Michael Reitermann will probably not be as nice as he looks like, but it’s a matter of needs and we will execute within as we speak and ongoing over the next 18 months.
Some other arenas, different R&D allocation more related to design to cost, a little less related to high-end. But all of that is related to how do we get better returns or even better returns for our invested money.
The regional footprints we have to strengthen and we see more and more countries with the attitude, if you want to sell us something give us jobs. So we need to be worldwide; on the other hand you can’t dilute yourself to death. So you need the right products that you can afford knock down kits in biggest countries.
In China, we have chosen a way that we have a strong value added chain. We meanwhile have about 4,000 people in China and then we are adding some 700 every year. So a huge increase in headcount and we realize that every second CT that we make in China we are exporting into other parts of the world and that every fourth MR that we do in Shenzhen is also sold outside of China.
So they are integral part of our worldwide R&D network that is not applicable to all of the other emerging countries, but as I phrased it already having knocked down some countries, having local say component manufacturing is a way to go on a global scale. We are global and for us it’s no real big deal to add.
And having said that, people development, it looks always a little generic if you talk about people development; but 8% turnover rate in China is an outstanding figure. So we managed meanwhile to not only attract talent, but also to keep talent and that is something that we need to further elaborate on because Siemens Healthcare is not a German exporting company, we have a worldwide presence and by the way we have much more Americans on the payroll than Germans.
So from that point of view, we are truly global, but with some say brand recognition on made in Germany which we don't want to jeopardize why should we, made by Siemens is the key and if you look into a factory in China and to a factory in Knoxville and into a factory in Fortran, they pretty much look the same. The people look a little different because we rarely have any expats any more, but factories look the same.
So people development as one of the core arenas, the last arena of our agenda and that is in summary our agenda and all the four categories and we will during the course of the day have many references to this agenda, because it is somewhat decisive elements of what we want to do over the next obviously two years.
Having said that, this transparency I showed already during the last Capital Market Day and still holds true; because I don’t want to give visions here, I want to give you some feeling how we address business. But when we look at where is healthcare going then there are few say tendencies that are difficult to ignore.
One is that even in the future and when I say future I am talking five to 10 years understanding the patient’s disease is still mandatory. And we do understand and we do better and better imaging devices and several therapeutic devices to not only understand it, but also to cure it.
But to do that on the individual basis, keywords individualized medicine, you have to understand how he, the patient is responding to it, how he reacts to medication does his tumor response to a certain medication or do we have a try and error medicine or do we have an intelligent medicine. Do we use all the intelligence that we can gather; are we the company that could put the intelligence into the system.
So understand the individual patient in order to cope with both you will need an elaborated IT and IT that copes with all with metabolic and genomic and the proteomic data and as well as with the disease data and all of that. So these three piles will be decisive and elements, basic elements of future healthcare systems and surprise, surprise these are the three piles of Siemens Healthcare. I am not saying we have it all what’s necessary, but we have the fundaments for everything that’s necessary in the future.
Now having said that, we want to execute and deliver on our commitments. We believe, we have the leading portfolio for today, but also future oriented. We had experts and I had hoped, I outlined that we, our management team consists of healthcare specialists that can talk on an honest level to each of the stakeholders in the environments out there, be it a CEO of a hospital, be it the cardiologist, be it the radiologist or the laboratory physician.
We have a resilient business model and we have high entrance hurdles for new players. We are somewhat best positioned to cope with the changing market environments. Again, changes in healthcare always take a little longer. It was also one of the experiences in the past, but we are ready to cope with them and again, that means how we want to do that is our Agenda 2013, driving global innovation and global competitiveness.
And talking competitiveness that is always reflected in numbers and our Mr. Number is Michael Sen and he will give you an update on where we stand and where we want to stand. Thank you for listening.
Thank you. Well, thank you Hermann and also a very warm welcome from my side. It feels good to be back and it’s been quite a while and I am happy to see many familiar faces. So thanks for coming, thanks for watching online, I really appreciate you taking the time.
Hermann has been outlining the changes and challenges we see going forward in our global healthcare industry and our clearway forward which is Agenda 2013. Let me give you some flavor on how we are going to execute on this agenda, how we are going to drive wining performance, wining performance in terms of discipline on capital allocation, real operational rigor and last but least to deliver clear shareholder returns.
I like to be very clear right from the outset; Agenda 2013 is a very proactive response to a changing environment. It is preemptive strike and already launched in summer of last year, early summer, Hermann and myself have been sitting together and sketching out this preemptive strike to keep us ahead of the market and we call it preemptive striking, because it allows us to protect performance, to take-out costs, to sharpen our geographical footprint and it allows us to make investments into key areas of innovation which will deliver clear returns in the years ahead.
To get us started, I would like to phrase a few pieces which might be interesting especially being in the capital goods industry and what we see on a macro firm. A number one, healthcare is a very high quality asset within the overall Siemens portfolio. We have low beta, we have high earnings and high cash generation capabilities and that is what we have been doing so far and probably we are highly committed to staying on that path going forward.
We have been solving legacy issues, the very big rocks being the termination of two particle therapy contracts in Germany and the repositioning and ramping down of the radiation oncology piece and also having a few smaller assets like exiting a business on the healthcare IT front last year in France. Yes it did cost us some money, but I guess we cleaned the deck as we speak and we are ready to go into the next era.
Meanwhile I think it's fair to say that we have a real aggressive, real culture of aggressive cost management, a real rigor on cost and the main reason for that being that we understand that going forward in our industry next to innovation this is a cost gain and while it is a cost gain we have to make sure and we will make sure that on the one hand we have a very lean operational setup for the enterprise and on the other hand we have a very high cost competitive products and services out there in the marketplace.
Next to aggressive cost management, it's also all about discipline on capital allocation and we have the clear insistence not only having a clear strategy when we make investment decisions, investment decisions also encompassing R&D, but also driving for superior returns which have to build in into the business plans followed up obviously and then executed upon.
All-in-all let me assure you that we are going to deliver stable margins, that is what I call protecting margins in what we believe near term is a modest growth environment. Here the headline number is pretty consistent year over year. Let me start on the bookings side, top left in 2009 I think we all felt the post-Lehman crisis. This is the contraction which you can see depicted on the chart, but I would like to remind you that in our industry it was not only a financial or banking crisis, it was the beginning of a structural change, most of the contraction being attributable to the US and the beginning of the introduction of the healthcare reform after coming from DRA and then leading up to outcomes like what you've heard accountable care organization or questioning the feasibility of the fee-for-service model going forward.
In 2009, we had some rebound on easy comps obviously and going into 2011 we see more stable rates of order intake growth. When we have our framework for 2012, I would like to remind you that in 2011, there is a large chunk of healthcare IT business reflected in the order intake numbers. This was basically the result of the American Recovery and Reinvestment Act which led to massive investments into IT by hospitals wanting to qualify for meaningful use and we have been getting our fair share out of that one.
For the current fiscal year, you also have to take into consideration for your models that we are deliberately ramping down the radiation, oncology business which obviously will have its effect on order intake. So these two effects together make me believe that we will see year-over-year some easing with regards to bookings dynamics.
Yet, having already two quarters of European Sovereign Debt crisis I did not see equipment orders fall off any cliff. And that is why we in our current framework, we have in place you know anticipate also a book-to-bill well above one for 2012. On the billing side you see a more stable picture, the average growth rate for the last couple of years is at around 1.8%, the stability obviously is expected if you manage a more resilient defensive asset like ours. But you have to bear in mind that in 2011, there was a portfolio effect by the termination of the two particle therapy projects which lead to a revenue reversal.
So if you consider that one, that’s roughly a 100 base point and if you then consider that in 2011, diagnostics had virtually no growth, that in essence means that the rest of our portfolio which is at 70% has been growing north of 20%, 22%, north of 2%. And given let’s say the current situation on our end markets and geographies, the framework we have in place would suggest revenue dynamics in the neighborhood of what we have been seeing in the last couple of years on average.
The underlying profit is pretty stable. It has been improving since 2008 on the back of structural cost savings which we have been executing on and which have been hitting the bottom line and I also said publicly that in 2010 we are going to have peak earnings, obviously this was the time where we had the most benefit out of the structural cost savings. The depth which you see from 2010 to 2011 is mostly attributable last fiscal by diagnostics, diagnostics contracting by roughly 400 base points last fiscal year.
And again here, the current framework we have in place suggests an underlying margin for full fiscal at or around 15%, which is also the level which we have been seeing in Q3 and Q4 in fiscal 2011 and this is what I call in essence delivering stable margins. You know this may fluctuate quarter over quarter and especially in the current quarter I expect some volatility to the down side, but in essence this is protecting margins while reinvesting into growth markets and into what you've heard competitive innovations in business that is fundamentally sound and fundamentally also medium term positive in terms of growth as Hermann has alluded to.
On the free cash flow, we are aiming to be very consistent and sustainable in terms of cash delivery. When I started the job three and a half years ago a very respected sell side investor who hopefully is viewing in online asked me, what are you going to do about the volatility of the cash flow. And well our clear aim is to deliver a stable cash conversion rate. I think we did a modest job on this one and hence we are probably a very important contributor also to the group, just think of the One Siemens framework and what is also mentioned there on the capital allocation there, you need obviously a strong cash flow contributor.
Touching on Q1 results, on the bookings we had all divisions firing on all cylinders, if you so wish and all stars aligned quarter in terms of order intake benefiting from a few very nice tenders in Russia and the Middle-East, the organic growth you know coming in at 3% probably higher than most of the constituents would have expected us to deliver out there in the market place. The revenue reported and without FX came in as expected and this is what I labeled modest growth, so no surprise with the 1% organic growth.
On the profitability side again on being based on tough comps as expected 15.2% on the average what we have been seeing also in fiscal 2011 at least in the second half of fiscal 2011, remind you again that going into quarter two we expect some fluctuations around that level. Joe already flagged that the particle therapy will have its toll on the cash flow. This was the first quarter where we had a big cash outflow of almost €300 million, obviously the charges we have been booking into our earnings in previous quarter and it had its toll in fiscal Q1 2012.
Diagnostics is a very attractive business when run at full potential. Yet no secret we are not happy with the asset, it's not growing sufficiently, also against others in the marketplace. It is a book and bill business, hence I will focus on revenue. You see the top-line development and especially last fiscal, the contraction I have already been alluding to and then leading to a contraction in bottom-line. Obviously the new diagnostics management is focused on getting back in terms of better top-line dynamics, but the company has already mentioned at several occasions that this will take some time.
On the underlying profit, the first couple of years what you see here we have been benefiting from the 550 million of synergy cost savings which we have been executing on and which have dropped through into earnings and that was the main reason why we could keep these levels of profitability even at low or modest growth. In 2011, we saw the underlying profitability compressing by 400 base points. During the summer period when we were sketching out agenda 2013, we set together with the division management, they outlined a clear plan, a clear plan how to reset the cost base and as we speak they are actually executing on the plan. They have been laying out, again the top-line will take its time on the cost side and therefore on the margin side I expect benefits to hit the books earlier.
They have launched the competitiveness program, the competitiveness program is an important pillar of the global competitiveness agenda 2013 plan and hence it is also reviewed regularly with and on sector level. From what I can see today diagnostics is well on track on executing as we speak taking out resources and the margin improvement is based on the execution of adjusting the workforce by 6% to 8% globally which will yield into cost savings of upto 300 base points over the next two years.
In Q1, we already saw a rebound of underlying margin on what I call very, very favorable mix. We have been posting a lot of reagents and there was also a positive one off in terms of an accounting topic which I guess was too small to make it in the group's earnings release. So looking ahead, looking into my supply chain, I already see in the pipeline shipments on instruments which will change the mix in the current quarter and therefore it's not advisable to extrapolate the level of margin which we have been seeing in Q1. I'd expect from volatility to the downside as we move into Q2. Based on the programs diagnostics has in place, I expect them to be at the margin level which we have been seeing in 2009 in 2013.
At the end of the day it is all about return on capital to be precise, it is about incremental return on capital and this chart displays how good of an asset healthcare really is. I think we can say that we are delivering very good returns on shareholder investment. Let me give you a little flavor on the make up of our net capital employed which you see on the left side, a large chunk is intangibles. More than 8 billion carrying goodwill and what needs to be held as purchase price allocation which will be reduced over the next course of the years. And then you see the operating assets, the operating assets here 2.4 billion. Now put that in context with the 13 billion franchise and then even at modest growth, I think it is fair to say that we are delivering huge returns with every dollar, with every euro we grow on an operational business and that is what we are driving, driving for return on capital employed and you see on the right hand side, the underlying ROCE, the trajectory is pretty nice. I like what I see here and this is what we are also targeting going forward.
And that is the main reason why we are also focusing on organic growth and investing into our owned capabilities which also is part of the agenda 2013 and will be reflected in the R&D line as we speak.
My second message on this chart is if you look at the color coding on the left hand side, you see which parts of the assets are originally denominated in US dollars. So that gives you a little bit of a flavor in terms of external parameters when we talk about recoverability of long-lift assets and it’s dependency on the development of the green bag. Obviously the low interest rates we currently have worked into our favor. Joe has been alluding to the fact that probably we will not need the initially assumed $300 million charges for agenda 2013 as we have more clarity as we go down the route, we now expect the charges to come in at roughly $200 million and the split is for trade on the left hand side.
There will be a little spillover going into 2013 which will not be material, it will more in neighborhood of $30 million to $40 million. Yet my clear message is we are not compromising on any of the targeted cost savings, the contrary is the case we are executing according to plan and we are fully on track. You see on the left hand side that 50% of the charges is severance pay and restructuring, so this will be cash out. Then another 25% which is more dealing with customer facing activities because we have to manage the rampdown of radiation oncology. We want to keep the customer base happy, so here we are talking about contractual obligations which obviously will also be cash out and then roughly 25% being non-cash items, i.e. asset impairments by taking a different strategic direction in diagnostics when we talk about products and features in radiation oncology being the big rock, but also partly in healthcare IT and on the RIS/PACS side, the product archiving site where we had some critical mass. So this leads or lead already to asset impairments and that is what I called cleaning the debt, unfortunately but very transparently legacy topics will have adverse impact on the cash flow, the big rock being particle therapy. We have been taking the charges into book earnings over the course of the last two years. Now it is impacting cash flow. This is what you need to know for your model 2012, and even 2013 will be adversely impacted.
What you see as cash outflows here in terms of agenda 2013, I consider rather as an investment because this will help drive margin and incremental returns going forward.
We have a strong order book. Even though we are not an infrastructure business, let me walk you a little bit through our backlog, the structure is laid out here. Obviously, we have to differentiate between a book and bill business and the book to bill business. Only the letter is reflected in the backlog of around about 7 billion.
You see the chunk of healthcare IT. 3.6 billion healthcare IT will only transform into revenues over the course of the next couple of years, whereas the equipment backlog, which you see here will turn into revenues pretty soon. Average lead time in our business is between 4% to 6%, obviously turning a little faster for clinical products than what Bernd Montag has for the big ticket items.
But then again, you should not forget that we have a large chunk of recurring revenue, the book and bill business. So I feel pretty comfortable with the framework I have been alluding to in terms of modest growth. This picture depicts geographies and FX comparable growth rates on what the company is reporting out on a regular basis. What you, in essence, see here is the shift of economic gravity. As you know there is growth, nice growth in Asia.
There is little growth in the Americas, including the US, and Europe has been contracting also the last two years and austerity is actually a continuation of that picture, and therefore matters did not catch us by surprise. We already adjusted resources, probably below your radar in last fiscal with 190 resources been taken out in Southern Europe. So, it did not catch us by surprise. This is the transformation we’re talking about in agenda 2013, whereas the growth platform clearly depicts it on the right hand side of the BRIC and Middle East countries, mainly BRIC countries.
Now, talking about growth platforms. You know, China is a real poster child how you grow and invest into an attractive market. Here you see the equipment orders and China has been climbing up, surpassing you know, what used to be the second largest healthcare market, which is Japan and surpassing our whole market which is Germany. And this is equipment growth. It is very nice because this is future recurring revenue. Therefore it plays a tremendous role as we go forward. And Hermann has been outlining how from an technological and innovative point of view, we are going to tackle this market, and I guess, my colleagues will go into more detail in there presentations. And you can see that the growth here on equipment was very, very good in nominal terms.
You have 29% with this growth rate. I think we can call ourselves top of the week and that is a very attractive market, a quick-a-side diagnostics has by the way similar growth rate in this very attractive geographical segment.
Now, as we talk about quality growth, we are obviously benefiting from that, do you know powerful momentum and ongoing momentum we see in China. What we’re doing here is we are comparing and contrasting the still biggest healthcare market and it’s the market which is very, very important for us, the U.S. against China. And you see that the growth in China on equipment and on the installed base will drive future service business. It does not have the proportion like you see in the U.S. where you have almost 50-50 proportion between equipment and services. And that on the other hand means that we are not putting all our eggs into one basket.
From a strategic point of view, we are running on a two-pillar strategy. Of course, we are also having a strategy for the U.S. because there we are having the largest installed base, a large customer base. So the strategy is that you need to work your installed base. You drive your installed base by going up and down the value chain, by offering -- catering new business models. Tom Miller will talk about that. This is what we do in developed economies, also in the U.S. because there are pockets of growth and in absolute terms, you know, the growth is huge because it drives earnings conversion. Whereas in China, we are placing machines, we are placing equipment which is quality revenue because there is always a service contract attached to it at least for three to five years.
In our industry, you have to go to and deploy resources where the growth is really happening, and this is obviously in emerging markets. This was a stated goal for us and we have been delivering on that one. You see here the make up of the revenue split by customer locations. You know, North America having a share now of 37%. Going back only a few years, U.S. alone had a share north of 40%, emerging markets 23%, Western Europe 27%. This is what I call a pretty balanced set up, and what makes me even more confident is if you look at the employee side, employees being a proxy for value add. It looks pretty balanced.
We are having resources where the market is having the dynamics so we can capitalize on the market momentum. You see we have a lot of resources in the U.S., in China and that small tilt to Western Europe can be explained because we have our headquarters in Germany.
The picture also tells you that we are having a far better natural hedge than we had years ago. Yet I want to tell you that net-to-net, I am U.S. dollar along. So we have net currency exposure in U.S. dollar, and on the right hand side you see how we have been driving the shares of emerging market revenues. 800 basis points over the time period depicted on that chart and we are going to continue to drive that one going forward and then you see what we have been doing on the employee side. The employee side also grew by 500 basis points. This means you have to deploy resources there and not only have low cost back-end factories there, but you have to have product definition there, product management and this is what we are doing here. Last fiscal in China, net-to-net, we have been absorbing 500 people. This also tells you something about organizational capabilities because we didn’t, you know, distract our growth agenda by absorbing into the organization net-to-net 500 people.
One particular focus, very important focus for me as the CFO is to continuously keep up the efforts to structurally lower costs. Especially in 2010, when I talked about peak earnings. We have the most benefits of what I call the operational rigor. You see the development of the SG&A ever since the group started its initiative. Interestingly enough, when the group started its initiative, healthcare didn't even have a target, but as soon as Hermann and myself joined the sector, like three years ago, we had a tight grip on SG&A and thereby delivering 270 basis points to the bottom line.
And also on R&D, I can tell you R&D is also watched carefully. Yes we are innovators. We want to keep being innovators and hence we also will spend money but we have a clear agreement within the leadership team that we are aligning financial merits with strategic benefits and we are investing in advancing technologies in areas which we know well. We are not putting our bets into any super, frontier projects where risks far outweighed the possible returns, and by having a tight grip also on R&D, we delivered 70 basis points to the bottom line.
Now going into fiscal ’12, agenda 2013, we will moderately grow OpEx also in terms of revenue. You already saw a pick up in Q1 and that is what agenda 2013 is all about. It is accelerating, accelerating the efforts for the transformation for a limited period of time in a very, very controlled manner. So we are investing into R&D. We are investing into market coverage to be prepared when growth picks up for a growth that is structurally different in parts what we use to see.
Going forward yet, we will turn into a more normal regime again with having our operating leverage and OpEx growing below top line. When we talk about resilience, especially in the current context of capital goods, I think it’s worth highlighting that we have a very, very lean manufacturing set up.
So we are not highly, vertically integrated. This is more an assembly type sort of business you see that 80% of our production and manufacturing cost is the bill of material. So we are not missing out on operating leverage also in a modest growth environment, and clearly you see the bill of material not being so much of raw material but more system and component is also the biggest lever to drive productivity.
Hence it is a very important to have professional procurement, strategic procurement, procurement engineers, early involvement. We’ve been, you know, speeding up efforts there, become better in the last couple of years by early involving supplier if and when we develop new platforms. We let suppliers compete amongst each others and for our new platform even can come up to cost saving of 30%, you know, from generation to generation.
And therefore even on the right hand side you see, while having modest growth, we were able in a price competitive environment, to keep the gross margin pretty stable.
On top of procurement improvement, its also about speeding up our efforts on low cost country purchasing. And that is what we have done. You see the growth rates, the share now at 20%, then the growth of 250 basis points. But this is not only about low cost country sourcing. This is building up the supplier network in the markets where it is happening. So if you have factories there, if you have production sites over there, if you have an R&D and a product team over there, you’ll need to have a stable supplier network around it and quality is of the essence because you do have to keep in mind that we are in a regulated industry, where we need, you know, for example, FDA clearance.
Therefore, it is important that we are also having and building out that supplier network. We are hitting the pedal on this one. But also on R&D, the share in emerging markets is 30%. For example, on our healthcare IT business where John is going to talk about, probably again, not on the radar of last fiscal, we have shifted jobs from the U.S. to India, for example, in the neighborhood of talking about 200 people, which obviously helps you on the cost mix going forward. This is the perfect example how we drive vigor.
You know, how we drive vigor by taking down costs and concurrently, improve business facing impact i.e. the service business. Tom Miller will talk in a couple of minutes about the nice service business which we all love and how we are driving productivity to get better margins, squeeze the margins by the same token, increase customer satisfaction, and that’s what we did if you look at the right hand side at the bottom, NPS, net promoter score. We have been hiking up on customer satisfaction.
The service margin, which you see there, has been increasing by 500 basis points and the real backbone behind this one is our levers like the remote service platform where you can make preventive maintenance or when you drive the efficiency of service technicians by giving them a mobile front-end, and the actual backbone behind this is our in-house IT. Behind all of this is a very sophisticated IT and IT infrastructure. So our in-house IT not only serves our own purposes in terms of ERP and whatever the applications, but also is the backbone for the service and you see on the left hand side what we have been doing.
We have been taking out costs, driving it down a 100 basis points by concurrently increasing the impact and that is what I call operational rigor.
Cash is king, queen and the whole royal family. Three years ago, we introduced the cash plus initiative. Meanwhile this is a brand and it is embedded through out the organization, driving continued progress and it’s also part of our incentive system, and this goes down to the sales force. There, obviously, we talk about collection when we talk about the field. So it is part of the incentive system driving continued progress on free cash flow. On the right hand side, you see the pattern on a 12-month rolling topic, and you see the hike obviously being driven by peak earnings. But if you see the cash conversion rate, I think it’s fair to say that we did a modest job and delivered on what we have been promising and this is also what we are going to do going forward. I have a tight grip on asset management, though being low on an operational basis, still a tight grip on capital expenditures, and obviously squeezing working capital.
When we talk about resilience, let me update to you on a chart I have been showing last Capital Market Day, which is this one. You see the different revenue streams we are talking, the different business models we actually have across our portfolio. We have the imaging modalities, which is big tickets and small tickets, and from a customer perspective, if they buy a machine this is OpEx and this CapEx, which is an investment decision. Yet, after that, we have OpEx, which is service and nobody is compromising on service. So this is a stream of recovering revenue. Then we have the healthcare IT business, which is mainly licensees and also service. Again, recurring revenue, and in diagnostics, we have a razor-razorblade model, where you place the machine or you have an embedded lease, and then you get a annuity stream of reagent. Again, recovering revenue.
With that, the make up of our portfolio is roughly half-half. So 50% of my revenue is recurring, and 60% of the gross margin, which is highly accretive, is also recurring and even more accretive the bottom line since this business is less SG&A and R&D intense.
To sum it up, we are relentlessly driving Agenda 2013 to strengthen our competitiveness and to keep ourselves in a leading position. Near-term we are prepared for a modest growth environment in a business which we believe is fundamentally sound, where the growth rates are intact driven by procedure growth.
Therefore, near-term Agenda 2013 prepares us in a very accelerated way for what we see going forward and yes we are opening up to tap a little bit on OpEx, but in a very, very controlled manner. Be rest assured that I personally will have my foot on the brake. We will be in control while we reallocate money, while we take out cost savings to prepare ourselves what lies ahead.
We are managing a very resilient business with strong fundamentals; Hermann said high barriers of entry and a robust and growing share of recurring revenue. We are committed to delivering stable margins by having costs under control and again with relentlessly executing on the agenda we have been laying out, we are looking forward to delivering incremental shareholder return. Thank you.
Mariel von Drathen
Thank you, Michael. Thank you, Hermann. We have about half an hour for Q&A. Please keep in mind that we have a long Q&A session also this afternoon, so any specific divisional questions please hold them back and wait for the divisional colleagues to give you the comprehensive answer in the afternoon. So we will start with Q&A. I have Peter Riley here on my left.
Peter Reilly - Deutsche Bank
Good morning it’s Peter Reilly from Deutsche Bank. Just one question, Michael in your presentation you talked about taking SG&A and R&D down by 340 basis points serves over the last three years. You talked about the service margin going up and you talked about half the business being recurring revenue streams and yet the net margin is done almost nothing over that time.
So the obvious conclusion is that pricing equipment is horrible and its deteriorating. If we count these events by 10 years now, and which you showed in the past that deflation of equipment was running about 5% to 6% per annum, is that still the case today or is it actually getting worse or are you saying an increasingly aggressive rates price erosion for equipment?
Yeah and thanks Peter. Let me first of all come back to the pricing question. I mean the framework we have in place suggests for a price pressure in our price sensitive environment of what you have been hearing also from others in the marketplace, so at around 4%. What we did not model into our framework is any suicidal of pricing behavior from any competitor.
So our assumption it is not getting worse; price pressure is something which we are used to in our industry, it did not incrementally go up during the course of the last two years. So it stays around about at the level I have just been alluding to.
Now to your absorption which was very good, the main reason for that one is not pricing. So if you take the SG&A which was in that time period from 2008 to 2011 which was 270 base points then another 70 base points on R&D which is 340 base points.
Now if you look at the chart very transparently in 2008 there is sort to say a one-off because there have been OTC’s or chargers into 2008 which account for roughly 70 base points, so we are back at 240 base points. And these 240 base points have been hitting the bottom line yet diagnostics in that timeframe came down by more than 500 base points. That is the main reason why and then the bulk of the contraction of diagnostics have been in last fiscal.
So therefore you see from ‘10 to ‘11 the contraction of 400 base points in last fiscal or if you go from eight to 11 it is 500 base point and then take the share of diagnostics which is roughly 30%. Then you end up at the margin which you see being rather flattish.
And that’s why, that is why you need to understand that Agenda 2013, we don’t have a general cost problem. This is not a restructuring asset. The bulk of the assets are very, very healthy and we want to keep them healthy and that’s why we also decided to make some investments where we saw we cannot catch up, for example on radiation oncology, we took actions or on the RIS/PACS business in Bernd’s arena.
And diagnostics is a separate issue; thereafter that performance we have been seeing last year, yes the growth takes time. We said together and said they have to reset the cost base. So you have to go portfolio element through portfolio element and then you come to the picture.
Mariel von Drathen
Okay, we will continue on that side with Ben Uglow please.
Ben Uglow - Morgan Stanley
Good morning. It’s Ben Uglow from Morgan Stanley. Can we talk about the emerging markets margins, when I look at the slide on page 13, 81% of revenues in China are coming basically from equipment and to go to the pricing point, the growth that you are seeing in China is that the big opportunity here you have to have your equipment in Chinese hospitals not just high-end stuff in Shanghai, but throughout the country Tier 2 and Tier 3 specifically part of your next five year plan.
So why do we not have scenario where GE, Siemens and Philips deliberately go for substantial market share in China, because ultimately you have to have the service revenue. So why do we not see intensified pricing pressure in the emerging markets distorting your overall margin picture? That’s question number one.
Question number two is, this idea of the patent fence could you elaborate on what you mean by that Mr. Requardt and obviously as a key technology officer for long time at Siemens you must have seen this across multiple industries; could you just give us the benefit to your experience particularly in the Chinese context in terms of protecting your patents?
Well, answering the first question, again it’s a wrong assumption to say that China is an emerging market; it’s also an emerging market. With respect our products there, we have variety of our profit distributions throughout our product line, but I cannot confirm that there is a clear say spectrum with respect to emerging markets is low profit and elaborated market is high profit; that is not the case and that is also not the case in China.
We see some low margin businesses and then established work and we see some high margin business also in the emerging piece of China as a market, so from that perspective its not a patent.
What we have to deduct is that the percentage of service in some markets is different than if you build something up, the majority of equipment in China goes into where there was previously nothing. Obviously, there you have a different calculation because of warranty and so forth, but also the capture rate with respect to capturing a service contract is in the same order.
With respect to our competitors, I don't comment on them, but I am not at all under the impression that we are falling behind them in what you call emerging markets.
Ben Uglow - Morgan Stanley
(Inaudible) 70% market share together in global imaging, so there is going to be a [land grab] so you guys are going to be very aggressive towards each other. Is that a fair assumption or not?
We are going for it; we are not going for growth per se. We are going for profitable growth. So we don't want to run into the situation to be the price breakers, but we will take our fair share and we do.
With respect to the patents, I mean we had launched the patent initiative about 10 years ago and when you look at that typical time constants of happens until you’ll probably stand and so forth it takes you a while and therefore that was also the timeframe that we started filing in China. We meanwhile have some 800 to 900 patents, healthcare specific patents in China that protect us.
Now just counting patents is probably not the ideal way; what you need is strong patents, what you need is at times ignore patents and we have plenty of them. But the patent portfolio in China is relatively new, because patenting in the 80’s in China simply make no sense.
And therefore starting when the Chinese authorities also somewhat discovered the value of patent protection because they wanted to protect their own industry, the Huawei’s and others to come, that was the time when we step in and since we are patenting there somewhat with a strategic impetus. Overall, we will manage to protect in particular the established markets within the emerging markets we have a portfolio on par.
And Ben maybe a few comments from my side. First of all, if you have a look at the Agenda 2013, we told you where are we actually doing the investments going forward; it is actually exactly in entry level products; it is actually exactly in making our products more cost competitiveness, because we want to gain our fair share on that you know highly attractive market going forward. Therefore you need to invest a little bit into R&D because that then glides your gross margin when you talk about design-to-cost, when you talk about service ability when you talk about logistic ability.
Now let me also maybe clear a few others myths. The emerging market share has been growing very nicely as you saw, yet you did not see our margin contract heavily, so that it’s a little bit of a myth that emerging markets is only low-end. This holds true actually for many industrial companies, not only healthcare or Siemens; everybody is growing emerging markets, I did not see any industrial company following off the cliff in terms of growing, in terms of earnings growth.
Then, if I look at my global profitability on the product level, I have at my fingertips so called global profitability, wall-to-wall profitability. What I see in China, I really like, it is higher than the two countries they have been surpassing.
Mariel von Drathen
Okay, we will continue here in the middle with [Mark Troman] in the back?
Yes. Thank you very much. And I’ve got a couple of questions on radiotherapy. I am just interested why, all the real reasons why Siemens decided to downsize that business; is it really just a lack of scale. I mean the market looks to be growing pretty well, there is equipment installed base type market and margins of the competitors look to be around 20% and rising so sensibly it looks like an attractive market. So I wonder why Siemens think they can’t make good returns in that industry?
And second on diagnostics, can you just provide a brief overview of what you saw the real problems to be and what you have learned from them? I am trying to understand what you are really trying to fix, trying to get those returns of growth in particular higher and I guess ideally margins? Thank you.
With respect to a radiation oncology, as I outlined radiation oncology is not just linear accelerator business. It is a complex environment. It’s IT, it’s imaging. It’s other stuff. We had never been in all of them. We had never been in [backache] therapy.
We had never had our homemade oncology information system. So we were there as a supplier, but not as a full scale supplier, and this tendency has one additional element. We want to be the imaging device deliverer and there we are quite good at and we are well respected.
With respect to the LINACS, I mean, we had plans to turn that business around. They didn’t materialize and therefore we put the rough decision to stop it. I think that was given the fact that we need the money elsewhere as I try to outline the right decision.
With respect to diagnostics, I would suggest because your question will be answered by Michael that we postpone it until Michael has come. Thank you.
Mariel von Drathen
We will continue with Andreas Willi on the third row please.
Andreas Willi - JPMorgan
Andreas Willi from JPMorgan. My question is also on diagnostics, but the bigger picture is on strategy, and you’re doing kind of all the homework now and what's the risk that that business in two to three years, when you are thereby you want to be on productivity of the machines and throughput and all of that, that competition has just moved on in terms of what Roche is trying to do with Illumina on gene sequencing, with kind of the moves at the molecular level. What's the risk that in two to three year’s time, you have spent most of your time internally fixing the issues, whereas others are making very expensive moves to go for the five to 10-year opportunity?
It’s interesting, because now particularly we are accused that we think long-term. But having said that, this is a very stable business; so from that point of view, I cannot see that we will somewhat see dramatic changes in the character of the business over the years to come. We do however monitor these technical developments and when you refer to a next-generation sequencing also, that is something that is of interest to us and obviously we have already published some activities along those lines. The interesting thing about that is that it seems to somewhat focus that molecular is becoming an IT business because if you do the sequencing then you are simply confronted with the terabytes of information that you have. And in order to extract the clinical value, you will need dramatic IT.
Our assumption here is more towards, well maybe we do the clinical portion of it and that is you need to provide the correct sample because you can only sequence what you put into your machine. So a sample preparation is of the essence, so you'll need the tumor cells or the viruses or the normal tissue cells and then the IT gain. And the sequencing per se where today you have 36 various methods of doing sequencing, that is in our view treated as a black box and I consider that an opportunity for us because we hadn’t, we were not competitive in all arenas of molecular, but when it turns into an IT gain, we have a big reset with a strong boundary because we are operated good in IT. So from that point of view yes, we are monitoring it, we are also looking into mass spectrometry and that kind of stuff. But for the time being we don't see dramatic changes and that is one of the characteristics of the business. So I think we don't miss something.
Olivier Esnou - Exane BNP Paribas
Two questions please. First maybe marginally on the growth environment. As you see it, is healthcare still a portfolio that can grow mid-single digit over the next three to five years or are we now step back and it is just 1% to 3% environment for you. And second question on China, I mean you sort of indicated that the margin of that can be really good. Question is with the Chinese government now talking about a five-year plan where they want to see emerge local competitors of significant size, could we be on the verge of what we've seen in transmission i.e. you know could be a step down in profitability as China organizes a much more competitive environment for the players?
Well with respect to growth I try to outline that we see a mid-term growth in order but we see some effects of the boundaries that we showed again somewhat decoupled from the general GDP, more related to that you have cost-cutting initiatives in various countries, a big deficit reduction act in the United States or now the Accountable Care legislation that you find everywhere. And you will find in Southern Europe debt situation, where we would expect that we see some say effect on the growth pattern which long term seems to be in order.
With respect to China, we see that, that we have a good starting position for that race to be launched. The starting position is that we are one of the biggest local manufacturers with total local value-added and therefore we know what to do. In particular, when it comes to we are not just making boxes, so we are not of that kind, we take an ultrasound machine of some vendor, trying to make it cheap in local China production and then sell it to the boundary border of Mongolia.
The idea is that you need different equipments for these buses that I showed because people, they are practicing in healthcare, they will not be able to just go on a three months course where you are taught to run your machine. And this is the traditional business model in the established markets that the business model of our biggest customer base is that they run our machines. This will not be the case in these general practitioners who also do imaging. So we need much more clinical intelligence in these machines as they can really utilize the images that they make and there we see advantage for us rather than a disadvantage because we have the expertise to design this clinical intelligence into the machine. Be it that the machine per se provides clinical intelligence or that the machine is talking to an infrastructure which provides the information both is more playing into our field, than into say new companies fields.
Olivier, let me maybe qualify a little bit the growth again and we said that we are going to have a modest growth environment, but this is not only, only market driven. Last year, there was 2% growth. Within that 2% growth was the particle therapy impact a 100 base points. Then diagnostics did not grow at all, but it is in a growth market. That means the rest grew by 4%. This year there is the radiation oncology impact which is also taking its toll on the growth, but deliberately because we want to have a capital efficient and profitable growth and diagnostics, yes it will take its time, so it will not grow overnight but market is still a growth market and that again tells you that the other parts are growing nicely.
James Moore - Redburn
Two questions if I could. If you're not going to cover audiology, I wondered if you could talk a little bit about profitability there and whether that's now back above or below the sector level. And the second a question about that the US margin generally, you talked about the Chinese margin, why we should worry less than perhaps we do. But on the US front, I wondered if you could talk about the structural changes and in particular the MRI business and am I right in saying that the MRI business is in a big profit pool and is that a risk? I think basically has MRI penetration which is twice that of Europe peaked out and is that a margin risk?
With respect to the hearing aids, I think at least I wanted to say that the margin of hearing aids is accretive to our overall margin. I believe I didn't say that, I apologize, it was on my concept. With respect to the United States we don't see a real separation, the MRI business is a replacement business like the majority of the big tickets businesses and so from that point of view, it is still active as long as say additional clinical benefit comes with the next generation. So we are still replacing and more and more other parties systems. I think the details of the answer should be given by Bernd Montag during his presentation.
Gael de Bray - Societe Generale
My first question is related to the imaging and IT business. You have today the largest installed base worldwide. But you are not claiming to have the number one position in the service business. So I would like to know the reasons for that and possible whether you could have a possible timeframe to give us to reach the number one spot in the service area.
The second question is about the competition in China, just coming back on that, are you really able today to participate in the bulk tenders that are currently happening in the rural areas and just to give you to give us a feel off I don’t know in terms of market share and the largest bulk tenders in China over the last three years in these areas, how much was it, if you could say something about it. Thank you.
Well with respect to service businesses related to installed bases and although we don't disclose details, our installed bases is dramatically increasing and in many arenas have surpassed the primary local hero, so from that percentage we are pleased with our business and we see it online with what's the general same model would suggest. So service business is also not something separate. You have to design serviceability into your products, so really therefore we are not showing service as an independent business and we allocate it to the business units that deal with it. What they do in service is that the service processes are under special control of Tom because dispatching people and being productive and educating them in these program, this is obviously not in the scope of a business unit.
So with respect to accounting, we have somewhat a virtual P&L for service which has some question marks and we don't see much a value add in really growing that through because a lot of allocations are part of these assumptions. When it comes to China, we don't see many tenders that we cannot serve. I know what you're referring to, this has not really reached our product offerings. But we are say heavily awake about this general development in the place there.
Will Mackie - Berenberg Bank
A couple of questions, firstly on the strategic structure of the businesses within your portfolio, you have very different business models with audiology and even with the clinical products group and perhaps limited synergies to your core diagnostics and IT imaging. How do you see those businesses playing out in the portfolio longer term especially with regard to capital allocation which you referred to earlier as an important opportunity, perhaps to release capital. And the second question comes back to Siemens Financial Services and your interaction with them. It seems certainly a lot of your customers in the hospital sector are looking to release tied capital and your imaging machinery may provide an opportunity for that.
Do you see going forward a shift in the interaction between Siemens Financial Services and Siemens Healthcare particularly on large modularities which may provide you a competitive advantage versus your competitors, perhaps one of your competitors not using the same technique?
Yeah I have some idea whom you are referring to. When it comes to the business models, yes we have a very different business models in our portfolio which I consider an advantage given the resilience of our business. We have the real book of bill business and then the fastest turning business is obviously hearing aids and then when it comes to establishing an infrastructure for a Healthcare IT solution, we have orders booked and then getting returns over years or the filing or allocating the revenues over years with a license. So very different lead times in our businesses which helps us to somewhat predicting our business because we always have a nice balance. With respect to the capital stuff I think I will refer to Michael.
Yeah well actually you are absolutely right but we are working together with Siemens Financial Services for years. Actually you know that their charter is to enable the industrial businesses we have in our portfolio. Guess who the biggest customer of Siemens Financial Services is, it is healthcare. So a lot of our lease portfolio is run by Siemens Financial Services especially in the US where they also have a legal entity and then yet in markets like India for example where financing is always the key element of tenders also public tenders but also private ones because these are funds investing, you always have a financing piece. Siemens Financial Services opened up an office in India. We are working very well together.
I actually initially wanted to show a chart but out of time reasons I didn't, where a customer in Russia needed financing and by working together Siemens Financial Services and Healthcare with the domain knowhow we have been able because we are able to judge the risk, we were able to you know increasingly gain share of wallet with the respective customers. Yet we are also prudent when it comes to risk management and we all know that we didn't you know finance every community hospital during the Lehman era which I think was very good for us. Yes we are working very nicely together with them.
Mariel von Drathen
Okay so that will end the first Q&A session. We have one other long one in the afternoon. So for those that could not raise their question yet, we will have time in the afternoon. We will go for lunch now and reconvene into this room at 10 to 1 with the customer solutions presentation from Tom Miller. Thank you.
So we will start of the afternoon session with Tom Miller on Customer Solution. Tom?
Good afternoon. It's a great lunch wasn’t it. Did anyone eat the nut loaf. I didn't quite know what the nut loaf was either. But my name is Tom Miller, I am from Customer Solutions, joined Siemens in 1982 after studying for my degree in medical physics from the Harvard MIT joint program. And well let's lunge right into customer solutions. What is customer solution anyway? It’s comprised, Hermann described, it has three pieces, global sales, global service and IT. John Glaser is going to talk about the IT piece. So I am just going to talk about the sales and service organization, which is actually unique in the industry. We are the only folks with a truly integrated sales and service organization across the globe of over 20,000 people covering 50,000 customers, 180 countries, and I've put agenda for 2013 here, primarily because in terms of people development, it’s my primary contribution of people development.
We are a people business. Basically, all of these folks touch customers everyday. They sell to them, they service them, they fix their equipment, they train, they do consulting etcetera. And basically the hiring, training, incenting and motivating those folks that occupies the great majority of my day. The context within which we do our business is a context which I would like to summarize for you. Hermann went over it, I am going to try to condense it, and that is first a converging world, a world that looks like its converging anyway.
Biologically, people are getting more similar. That was only in April of last year that the World Health Organization first announced that for the first time in the history of our species, more people died from chronic, non-communicable diseases than from infectious diseases. These diseases are by the way more expensive to treat. So we are biologically converging.
By the way, we are demographically converging. Large amount of the world is getting older. As one thinks of this as a developed nation’s disease, but China, through their one child policy, will also go through their age wave and older people simply consume more healthcare. In fact, if you look at people between the ages of 45 and 55, or 55 and 65, the difference is a factor of three in healthcare consumption.
And the economic trends are conversion. Shapes of these curves all over the world are the same. It’s not a healthcare minister on the planet who has been able to decrease as a percentage of GDP the amount spent on healthcare. So it all sounds like the whole globe is getting to be the same, becoming more homogeneous, and that is the context within which we do what we do until you look at the country. And the minute you look at a country, everything becomes totally different.
So it’s almost silly to speak of Europe. There is, in healthcare terms, no such things as a Europe. It’s a fantasy in the mind of some bureaucrats in Brussels. It’s no Europe because healthcare systems in Sweden or Norway have nothing to do are not at all similar to healthcare system in Southern Italy, and healthcare of Asia, Japan, India, China, nothing like one another. And therefore, looking at each of the countries individually is in fact what we must do and that describes our setup.
Our setup is something that allows us to act locally, but apply global processes and global infrastructure. So in fact, we spend a lot of time worrying about, primarily, 29 countries which contribute to about 90% of our total revenues. And those countries are run by local leaders. In fact, four year ago if you went to the countries of, for example Russia, Japan, China and the United States, you would have found four German’s running those entities. Today, Obata San runs Japan and Wu runs China and Greg runs USA and we have locals running all of the local countries as it should be.
Markets are uncertain. By the way, it says here temporarily uncertain. I think they are always going to be uncertain because what happens is that healthcare is subjective to disruptions caused by a politician, from one day to another new legislation can happen, which totally changes how we have to act in the market and so keeping on top of those changes requires local folks connected locally and local folks that know healthcare. And because we know this, because we have been involved in many of the legislative changes, we have been able to react and adapt our resources very quickly.
Layered on top of this however, we have a global IT system which allows us to globally look at things, for example, as Michael Sen mentioned, measuring and incenting cash in different ways with different strengths across all of the countries, and keeping in touch with how our businesses are running.
So, let me go through some of these countries, some of them more important ones to give you a flavor of why we think we have a model for success in many of them. Let’s start with United States. A lot of confusion about the United States. I wanted to start with a simple, singular statement. Fee-for-service is not dead. It’s not going to die anytime soon. Yes, people talk a lot about accountable care organizations, and in fact, as of 2014, some will be set up. They will cover a minority of the American population and this legislation which is causing lots of hospitals to get prepared for this. That said, fee-for -service will continue and it will continue for the next five years unabated.
However, the fees per service will be reduced, and there will be applications of incentives looking at outcomes. What does this mean? It means very simple that the customers of United States need to get productivity and they need to get scale. And therefore, they are emerging.
At the end of 2011, there were 86 fewer hospitals in the United States than they were at end of 2010. In 2010, we were 77 fewer than they were in 2009. This consolidation is going do continue. Customers are simply converging. They are getting bigger and this plays to our strength. You might have remembered Hermann Requardt's slide that said we are in eight of the top ten institutions and dominate their programs. By the way, they are net consolidators.
So the fact that we have a very high market share in those places that are consolidators to market means that we can leverage our position. And we do so across our divisions. So the example I have here of Mountain States Health Alliance, they are a long time IT customer. There are an IDN covering the states of Tennessee and Virginia. We had up until recently very little market share, almost none, in the imaging business. We’re able to leverage one to getting out, displace our competition in that account. And that’s a trend we see that will continue to happen and we will leverage in consolidate towards in the United States, our very good market position, to displace in our competition in places where they may have a higher share lower in the market place.
Germany. You might imagine in Germany that well, we have a pretty good market share, very high market position. It’s not a place that you’d associate with dynamic growth. So therefore, again, job here is to move beyond the transaction and move to something which looks like forming solutions across the enterprise. Once again, success story, for example, in Hamburg. Here we have Europe’s only filmless wards, the only level 7, HIMSS level 7, IT hospital in Europe, running, soaring. Until recently, they used the competitors, the ex-equipment, and we were not an even dominant in the imaging side either.
However, one of Michael Reitermann’s largest orders last year in Germany came from this account, and it was because we were able with this integrated service and sales organization, to leverage relationships and strengthen one to gain the other.
People don't talk about Japan much anymore. If you flip back to Michael Sen’s presentation on the geographical breakdown of growth, you might notice that Japan has a surprisingly robust growth. It’s not because the market actually is incredibly robust we are gaining share in Japan. Japan is a very nice market for us and one in which we are increasingly trying to do the same thing what we are doing in the United States and Germany, leverage on the top and to exploit throughout the market chain.
And the Japanese government has recently, for example, inaugurated a very large research program for long-term study of the radiation effects on humans in Fukushima Medical Center. The primary supplier of all of the diagnostic equipment across the spectrum for Fukushima Medical Center is Siemens.
China. I probably don't need to say a lot more about China. Each and everyone of you, I am sure, have read Chapter 36 of the 12th Five Year Plan, which outlines healthcare initiatives and specifically outlines the emphasis on building infrastructure for rural care. That said, there's a secret about the Chinese market that no one talks about and that is no Chinese patient wants to be treated by a low-end system. They in fact look towards the higher end in order to aspire to the care they want and one of the challenges in China is that patients in rural places typically go to the cities in order to get their care because they believe the city deliver better care.
Therefore, once again, we have outgrown our competitors, five quarters in a row, in China. You don’t do that without also addressing very well the rural end of Chinese healthcare. At the same time, however, we will continue to play very hard on the high end. For example and this example is a wonderful example in China. You’ll see this trend is well in a few of my slides. This is the Shanghai Fine Medical Center, established as a private institution of looking to the higher end of the Chinese market. The idea is to get your entire medical work up done before you go to hospital. There you need both diagnostics and imaging. They bought both only from Siemens.
United Kingdom; back to maybe not so robust growth. The UK has been a very difficult market to predict, putting healthcare in the hands of private physicians and a little bit on again, off again with an IT program. That said, we have been leveraging something we’ve been doing now for almost a decade in the UK. And that’s having a dominant position in public private partnerships. We have about 51% of this market in public-private partnerships. They are continuing to grow. And it’s been a long-term stable, robust source of, both, revenues and profits in UK and the trend that we hope to leverage.
Brazil. Brazil is a fascinating market, not just because of dynamic growth that you would expect. It’s a fascinating market because it also exemplifies best and may be as at the leading edge of a trend that we see globally, and that’s a trend of keeping people out of hospitals. How do you keep people out of hospitals? First, you do the entire diagnostic work up before you admit them, and there in Brazil we see companies, Brazil is mostly about 60% private market. We see companies like DASA, big customer of ours, who does this entire diagnostic workup and by the way what do they have primarily, they have two big sets of equipment. In it they have in vitro diagnostics and imaging, by both from us.
By the way, the logo of the customers we see here is, yet another, a brand new, they didn’t exist a year ago. This was four different companies in Brazil. They had medical imaging centers they merged. They wanted scale. To get scale what you do? Well you want the exact same vendor, one vendor providing you with all of your equipment. You want them servicing all of your equipment. And in fact, this ended up being the largest order in the history of Brazil. They bought all of their imaging equipment from us. Their next stage is to consider how they are going to grow as well, same company in in vitro diagnostics.
Over and over again, we see certain trends that although they are implemented, uniquely in different countries, actually are somewhat similar. Customers are getting bigger. They are combining diagnosis from in vivo and in vitro side in order to gain efficiency. We are seeing trends which are either infrastructure trends, like in Russia, where they have the large amount of investment ongoing right now to fill out infrastructure to fill a need, or India, which, at first glance, sounds like China. Half a billion under served, 5% of GDP is spent on healthcare but is totally unlike China, because it is not driven by the government at all but driven by the private sector.
Or ASEAN, where in both in India and ASEAN, we are seeing the emergence of companies, private companies, Brazilian like companies, which are looking to serve and leverage scale across nations and are looking of a single vendor who can supply all of this and supply across the geography. And that’s where our organization comes in and does well.
Where does service come in? Over the last, I would say 15 years, we have been building a service infrastructure and you can almost separate it into three stages. Stage one is building global infrastructures, service depots, warehouses, call centers, everything you need, ever to delivered 24/7, sun never sets on our service infrastructure. You always can respond to customer needs.
And this is behind us. In phase two, we leveraged that infrastructure to increase our productivity. So, now, everywhere, our instruments are instrumented. They are connected electronically. We can start to dispatch electronically. We multi-train our people so that you can have a first time, fix avoidance rate. You don’t have to send people there at a high first time, fixed rate.
But it’s the third phase that gets more interesting. And the primary key performance indicator of the third phase, the primary metric that we look at is a very simple one. Do we grow the revenues for service faster than the installed based gross? Because only if we grow the revenue faster than the installed base are we actually increasing the footprint of services in the installed base and leveraging it. And there we are using now our electronics to my knowledge to help our customers.
I will give you an example, logo here for the customers on the screen. Here we basically looked at these customers’ MR systems. We determined that these MR systems were underutilized. We sent in some consultants. We looked at how they were underutilized. With absolutely no costs to the customer, I have been paying for our consultants by the way they were able to increase their throughput and thus revenues by 10%. When that customer goes to buy again, most likely they are going to buy from Siemens.
We are taking this one step further. One step further is next generation IT systems in which we will leverage the ability to look at systems worldwide, you can dispatch from your computer, see when your service person is going to arrive, track your spare part, check off your bill and pay it, all from your computer, increasing customer satisfaction and decreasing costs at the same time.
Services created centrally and distributed locally as purchase decisions get pushed up, customers are looking for services that meet their needs, services like do they have environmentally friendly hospitals, which we’ve leveraged here in our customer in Cyprus. Do you have clinical output that well which we did at the University of Utah in their cardiology center or are there radiology province efficient.
These are things that CEOs are looking at, they might not care which MR or which CT is bought, but they certainly care about whether their outcomes are high, where their audits will be passed and whether they are efficient and these things are leveraged everywhere.
And all of this comes together in our PPP projects. We are winning the majority of those across the world, not only are we winning them, we are managing them well and the margins of these projects are accretive to the sector margins.
Therefore with this portfolio we achieved the simple objective that Michael Sen put in the characteristic of our business and that is continue to increase the footprint of installed base, generate incremental value from that footprint and lengthen and retain the customer relationships overtime to give that recurring revenue and make that an even larger part of our entire portfolio overtime.
Again, we drive the management of global sales force single CRM, global transparency; service is a key differentiator which generators revenues as well as customer satisfactions and we have the ability to execute globally and quickly. Thank you very much for your attention.
Mariel von Drathen
Thank you, Tom. We will have a Q&A with Tom after having heard the presenters. And I’ll ask Michael Reitermann to come on stage and present diagnostics.
Good afternoon, microphone on. Good afternoon everybody my name is Michael Reitermann; I am responsible for Siemens’ Healthcare Diagnostics. Hermann introduced me quickly, but let me say I am more than 20 years with Siemens; has been about 12 years in healthcare and since 2002 other than the US where I was responsible for the molecular imaging business also integrated acquisition. And then was briefly responsible for our North American imaging business before in the mid of 2010, I joined Siemens Healthcare Diagnostics.
Now lets talk about Siemens Healthcare Diagnostics, and I think one thing is clear, we are not satisfied with where we are today and everybody within Siemens Healthcare Diagnostics knows that. However, what I also want to say is that we have the right building blocks in place to be successful. That we have identified the reasons why are in the situation that we are in and have initiated actions and plans to get out of that situation.
And that’s what I will be talking about this afternoon to you and that we will also be talking about timelines, Michael mentioned some of them already, but I will detail, give you a little bit more detail on that.
Clearly, from a revenue perspective, we are disappointed. We are not where we want to be and also last year especially from a profitability perspective, we took a dip, that’s not satisfactory to anybody within Siemens and probably also within the group.
Having said that, let’s not forget Siemens Healthcare Diagnostics is a big global player in in-vitro diagnostics. We serve many customers around the globe, many patients. And the markets we play, we have the largest installed base and we are the number one with respect to lab automation and that’s important and I will get back to that later on.
Now from a market positioning perspective, here you see our position. We are strongly positioned in certain segments of the IBD industry. We are the number one in the Immunoassay, we are the number one in Hemostatis and some of the other segments, we are number two in point of care segment and we are also well positioned in some of the other segments. From a regional perspective, we are growing faster than the market in the emerging markets and then just by a pure math you can add up that we are not growing as fast as the market and the developed economies.
We are an effective market. When we look at it there are clear growth drivers, some of them were mentioned. We talk about the growing in Asian population around the globe. We were talking about the increase wealth in the developing economies which of course creates demand for healthcare and then more specifically for diagnostics of course 2% of the total healthcare cost is consumed by diagnostics, but we contribute to more than 60% of the critical clinical decision making and that together with personalized medicines, we are confident that this will continue to fuel the growth in diagnostics.
The market we play in is about $23 billion and two of the fastest growing segments are point-of-care and molecular. So we are operating in an attractive market, but we haven’t been performing. And the causes are pretty clear from our perspective.
On the revenue side, product gaps in fast growing segments, disruptions, contraction transfers and launch issues, R&D was in harvest and sometimes in the maintenance mode and the integration of three organizations into one, and then the integration of that organization into Siemens Healthcare also caused us to focus a little bit more inwardly than we would have liked.
From a profit perspective, and look at especially at last year and here we clearly say we didn’t have a positive contribution from a profit conversion perspective. Our productivity and cost savings measures didn’t compensate for price erosion. In fact the cost increases and then last but not least I had mentioned some issues with respect to disruptions which we had addressed and which caused in different segments of the value chain, whether its R&D, whether its manufacturing or also whether its our service organization.
Having looked at these challenges, we developed a clear plan going forward. When I arrived it was apparent that we had to fix and address some basic issues and this is reinforcing customer confidence, setting up the organization and also setting the innovation priorities right. We have done that and I will talk about that in a little more detail in the next two slides.
Going forward, its clear in the framework of Agenda 2013 we have to drive margin improvement and we have to turn the momentum on the revenue growth side. And I am convinced when we have gone through those two phases we will contribute healthy growth to Siemens Healthcare.
Now in more detail, what have we done? Reliable supply, good uptime and fast responses to customer concerns are clearly the drivers to reinforce customer confidence. From an organizational perspective, we set-up the traditional Siemens business unit organization, have integrated Siemens Healthcare Diagnostics on the country and regional perspective into the Siemens Healthcare structure and last but not least when I came on board we also interviewed a lot of our large global customers.
In fact, what do we need to do better in Siemens Healthcare Diagnostics to earn more business, so we interviewed senior executives in all of those 10 or 11 large customers and we got a clear feedback; dedicated account organization plus dedicated support infrastructure. We have established that last year.
And then on the innovation side, we looked at where are our priorities; so we revaluated our spend and basically decided we got a little bit towards growth oriented opportunities and we can do that because we have fixed some of the basics.
And last but not least what we did we also looked at where is the in-vitro diagnostics industry going; more from the five, 10 plus year perspective and together with our colleagues from Siemens AG Corporate Technology we interviewed a lot of players, a lot of the opinion leaders out there whether its clinical, whether its technological and developed the roadmap for ourselves and now we are pursuing that roadmap going forward.
Immulite, this was one of the franchises affected by our production transfer of assay production and here from a back order prospective we are now close to zero again and this is actually a better performance than before we transferred the production from California to the UK.
The second element here is I mentioned, launched related issues and here we improved the performance of our Vista system in the field considerably. We reduced the service cost by more than 50% on an annual basis and also the unscheduled services which are big disruption for our customers are reduced to close to 60%.
Another important element is how do we address issues that our customers bring to us. And that was also a clear focus in the last 18 months becoming more responsive and actually reducing the time it takes to answer more typically questions by almost two-thirds. So after coming on-board, we identified those issues and we quickly addressed them.
From the organizational perspective, as I said, four dedicated business units with the BU CEO’s clear top and bottom line responsibility and of course the compensation is also tied to that performance.
On the right side you see, we basically October 1st, 2010 integrated Siemens Healthcare Diagnostic on a country regional perspective into Siemens Healthcare. There is now one person responsible for the healthcare business in the country and this allows us to actually exploit the synergies that Tom was referring to. From a service infrastructure perspective in the countries but more importantly also from a cross-selling perspective.
And R&D is one of the key drivers in our industry. If you want to be successful in our industry, you have to innovate. You have to bring new products to market and this is why we also have shifted our R&D from a maintenance transfer percentage, high percentage to a focus on growth oriented opportunities. We will be increasing our R&D spend a little bit in 2013, but the major contribution will come from that shift.
So to sum up that section, we have restored customer confidence. We introduced an organization with more accountability and faster responsiveness and we have set our innovation priorities straight again.
Of course, when we look at the next slide, it’s clear that we also have to deliver results and the first one is of course driving margin improvements and this is what we are going to do here reducing work force, relaying our organization, having a strong focus of procurement because and here we weren’t world class.
Hermann pointed out that one of the procurement levers across the different divisions will be utilized, we are doing that, we have now e-biddings within diagnostics; actually in the next two weeks we will have two e-biddings for two material groups and that has already shown that we have potential in this arena, and last but not the least we also will reduce our global footprint and I will show a slide on that side.
So here we are confident that we see an improvement from the margin perspective rather sooner than later. On the revenue side, here we got to turn the momentum and that will be more of a mid-term effort. We are strong in the emerging market as I pointed out and we want to utilize that strengths and continue that strength. We got to get more out of our innovations that we introduce into the market and this is a sales organizational topic and also an R&D topic.
We are sharpening the positioning of our chemistry immunoassay portfolio where we also leverage our automation strengths and our strengths in informatics to actually respond to the customer trends that are out there. And last but not the least we will enter new growth arenas through partnerships, because that allows us to get a foothold in those segments much faster.
Now a little bit more detail. Here you see what we are going to do from a headcount reduction perspective, by the end of this fiscal year we will be around 5% lower from a headcount perspective than we were in the mid of last year and we will have achieved the 6% to 8% which we announced in early December, by the end of 2013 which is the time horizon agenda 2013.
From the manufacturing and logistics perspective we will reduce our footprint by about 20% in the next 24 to 30 months. Taking that together with the procurement side we are confident that by the time horizon of the agenda 2013 we will get back to margin levels of 2009. Michael pointed it out, that's about 300 basis points.
Now when we look at the revenue side, we have some strong points. And everybody talked about China and we have seen the healthcare diagnostics also have been very successful in China. When I look at it from the partner of choice status, we are the partner of choice for the number one university hospital, Beijing Union. We are investing in our infrastructure in China. When you look at it from a headcount perspective we have tremendously for almost 40% increased our headcount last year and when you know that it takes about 12 to 18 months to make those resources effective, we believe that we also have a good base for growth in 2012 and 2013.
What we also are doing we are a building a strong installed base and have started to have assay penetration programs, disease oriented and they are also paying off. So when I look at it in the last three years we have outgrown the market, we actually have improved our profitability in China and we have moved from a number five to a number three position. And taking that into account I can only say the Chinese team has done a tremendous job and we are supporting them that they can continue to drive that.
Innovation is one of the big success factors in our industry and when we look at from an innovation prospective, there are two things that we look at. The first one is what we call clinical excellence, this provides clinical information to a physician that he didn’t have before or he didn’t have to that extent. So this is an innovation where we really advanced healthcare. The second one is more when we talk about focus on productivity throughput dealing with the pressures in the healthcare system, then we called it workflow excellence.
And those two areas we are innovating and one is of course then on the left side as you can see the focus on assay development. And here I just wanted to highlight two of the assays, one is enhanced liver fibrosis which is an assay that allows you to actually to assess the degree of liver fibrosis at an early stage and that is an early indicator for severe liver diseases such as cirrhosis or liver cancer.
Another big assay that we are introducing is Vitamin D and this is one of the prime candidates also to train our capabilities on assay penetration and we’re seeing good first results with that as well. On the right side now you see what I’ll be doing with respect to workflow excellence and here we are improving our systems, launching new systems in order to allow our customers to become more efficient and of course also translates into us into placing more systems and having then the base for more assays. One of our clear strengths and I pointed it out in one of the first slide is automation.
We have the largest installed based of track based in automation. And this is the clear growth opportunity for us and we are continuing to developing that and actually introducing a new system in order to enhance and further our position there. And when I take also our strength in automation and informatics, then we also were able to actually sharpening our product portfolio and the clinical chemistry and on immunoassay side. When you look at it from 2008, we had 19 platform variations, 2010, 17. Today we are at 13 and when we go to 2014, we will reduce that to about 10. That of course without reducing the coverage in the addressable market and this is good for our sales force because it is easier to position and also good for our customers because we have fewer platforms to invest and can of course then also invest more in those platforms.
As I said, we are also improving or entering some of the fast growing exciting market segments in diagnostics and one of them is companion diagnostics and we basically have concluded two agreements. One with ViiV which is a global AIDS pharmaceutical company founded by Pfizer and GSK and we are developing a diagnostic test that helps there with the patient selection so that we understand this patient actually responds to this AIDS drug.
The second one is with Tocagen which is a company that is developing a viral gene therapy for primary brain cancer and here we are actually developing a companion diagnostic that allows the dosing of that drug and we are supporting them in the clinical trials.
Last but not least, I also mentioned earlier that we have some product portfolio gap and here together with our partners, Universal Biosensors, an Australian company, we are closing the product gap in the handheld point-of-care coagulation segment which is a fast-growing segment which we haven’t been present. Now putting that all together for you. When I look at it, we are not where we should be or where we want to be and I and the management team and the employees of Siemens Healthcare diagnostics know that and are aware of that.
So we as an organization are committed to improve in margins, back to level of 2009 within the timeframe of the Agenda 2013 and we are turning the momentum on the revenue growth side and will return to market growth rates by the mid term and last but not least, a strong focus on innovation to bring exciting innovations to our customers. So all in all diagnostics is focused on succeeding in this market and on our vision which says we shape and transform the practice of diagnostic medicine. Thank you for your attention.
Mariel von Drathen
Thank you Michael, we will have you back on stage for the Q&A and I am sure there will be a couple of diagnostics questions, but in the meantime, let me introduce to you CEO of Clinical Products Norbert Gaus.
So thank you Mariel. Welcome, good afternoon it's my pleasure now to present on the Clinical Products division, it is the first time that we talk about CP and it's the first time that you meet me. Therefore I would like to start with a very brief introduction of myself. It will be in two weeks that I been for 21 years with the company. I joined as an engineer in the Corporate Technology department in 1991. Two years later I moved on to the telecommunications networks division, into product management, marketing. Then I became a VP in Sales and built up a new business segment, before in 2001 I became the CEO of Siemens Corporate Research in Princeton New Jersey.
In 2005 I came back to Germany to become the CEO of our Angio business unit in the healthcare sector and in 2009 I moved back to the United States to become the CEO of our Ultrasound business unit in Mountain View, California. Last year or one and a half years ago in 2010 when we formed a new division structure, I took over CP as the CEO of the Clinical Products division.
Now let me explain what CP is. It’s the first time as I said we are talking about this. In CP we really do cover patient care in all phases of patient care, from early detection with for example prenatal ultrasound which is basically as early detection as you can get to just x-ray and mammography screening, diagnostic imaging for radiography, fluoroscopy and ultrasound. In radiography departments, cardiology departments, obstetrics, gynecology so the whole, all departments basically and you can also find our mobile x-ray equipment, the C-Arms for example in basically all surgical environments.
So we do cover the whole breadth of the clinical environment and the clinical department. But it's not only the breadth we cover, we also cover the whole depths of clinical care. You can find our equipment in the most simple of settings all the way up to the university hospitals. And this really is the case in every country. So from rural clinics in the emerging markets of private practitioners in the developed markets, community hospitals and university hospitals, we cover the whole depth of clinical settings with our environment, with our products.
In order to cover both breadth and depth, we do offer a very broad product portfolio from entry level to mid range and to the most advanced systems covering price points from €10,000 or even less sometimes all the way up to almost €500,000. So this is what CP is, from early detection to therapy, from rural to urban areas, from entry level to high end systems and this really is the breath and the depths I get to see whenever I travel to meet with my customers or talk to my sales people, regardless of if I travel to China or if I travel in Germany or in the United States or in India or in Brazil. Wherever I go this is the breadth and the depths I get to see.
CP as a division is new, but our business for ultrasound and x-ray is not new. My installed base is more than 170,005 systems worldwide. A little bit more than half of this would be in the European region, 26% or 27% in the Americas and just above 20% would be in Asia-Pacific. Every year we sell more than 13,000 systems ultrasound and x-ray, a typical life span which is the replacement cycle for x-ray is somewhere between 10 and 13 years and ultrasound is a little shorter, five to seven years would be there the average.
We manufacture and develop our equipment in 17 locations worldwide, in China, in the United States, in Germany, in India, in Korea, in Brazil, in Spain just to name the most important countries. The whole team worldwide is more than 8000 employees. It is about 12 to 1300 engineers, more than 2500 people work for CP in production and logistics and about half of the 8000 would be in sales and service worldwide. So this is what CP is. Now let’s look at what we are doing.
Let me start with the market which basically defines the boundary conditions. Ultrasound and x-ray worldwide has been and we think will be continuing in the future, a very stable and steady growth market. The underlying fundamentals are also stable, for example 90% of all hospitalized patients even today still get an x-ray exam. If I look at the United States alone, 70% of all imaging exams would be either ultrasound or x-ray. So that’s why we see the global market grow midterm by 4% to 5%.
If I now look at the emerging markets as well as the developed markets, I do see different dynamics. The developed market still is the largest portion of the market with about two thirds roughly give or take.
At the same time I do see the emerging markets grow much, much faster about three times the speed. The driving force there definitively is that if I look at the world, more than half of the people in this world do still not have access to x-ray and basic healthcare. And there's a lot of activities from many governments to change this and bring access to healthcare for these people. And this definitively is driving the business and it's good for the business. If I look at the countries, the two largest single markets are the United States and China. Today the United States is still the larger market, but in a few years we expect China for CP market, China to be a larger market for equipment than the United States.
In the developed market and Hermann mentioned this already as well as Tom, we do see huge pressure on the healthcare cost systems, healthcare systems in terms of cost pressure. This drives two things, the one is a shift from high end, from the very highend systems to mid range at least for the CP market and for the high end we see a clear demand for workflow solutions that drive efficiency and throughput, so these are the market conditions that drive and define the CP market.
Clinical product is an exciting market, it's a very dynamic market, but I am not the only one who thinks that is a very exciting market and therefore in CP there is a lot of competition in this market, competition for small companies, from larger companies, companies that cover a part of the market or companies that cover all of the market. This has always been the case even though the landscape I have to say is very dynamic. So it's a very competitive market with a lot of price pressure.
My priority for CP as a division are very clear, it is all part of the Agenda 2013 topics and it's four pillars that drive my strategy. Expanding our product portfolio, the focus on mid range and entry level products, building up new sales channels to address a broader market, expanding engineering and manufacturing in Asia and of course constantly improving our cost competitiveness.
Now let me quickly go into all four of these pillars. We are expanding our product portfolio, for example in the high end with a new ultrasound system which we launched at the RSNA in Chicago in December with a new generation of transducers that allow deeper penetration. So why do we need deeper penetration? Patients worldwide get bigger and bigger. Bigger patients organs sit deeper and bigger patients also have larger organs. That’s why we do need this. It's sad for the patients but good for the business. And the system also drives new applications that allow automation of at least part of the work flow to drive efficiency and throughput. We've launched a system at RSNA. You see how it looks like here. The booth was busy all the time. This is the system. The booth was busy and crowded all the time. The feedback has been phenomenal and we will be starting to ship the system in the next quarter.
Now let me talk about another system in fluoroscopy. Luminos Agile fluoroscopy system that is specifically designed for the United States market. This is how a typical waiting room in front of a fluoroscopy machine looks like at 2 o’ clock in the afternoon. It’s empty. That's not what the hospital administration wants to see and it’s empty because every hospital needs these machines.
At the same time hardly any of them can fully utilize what these systems can do. So all the patients get treated in the morning and the waiting rooms and the rooms are empty in the afternoon. The system we have does allow dual use and that means in the morning, with this machine, the patients get fluoroscopy treatments and in the afternoon, the same machine can be used as a radiographic machine. So it’s a dual use fluoroscopy and radiography and now its fully utilized in their rooms.
We are selling this machine in the United States since about August-September last year and in this time alone, we've been able to gain 2% market share in the fluoroscopy market, and this is how the waiting rooms look like when they have a machine like this at 3 o'clock in the afternoon, not empty anymore. But we've also been expanding with high priority our product portfolio for the mid-range, entry level markets. We use the three examples, all products develop and manufactured in Asia, China and Korea, ultrasound as well as x-ray, strong cost position, high reliability are the key to success and growth in this attractive areas.
And what you can see also from the Multix Select DR, which has been mentioned already by Hermann in his introduction. 30% lower cost fees but also 50% lower dose against the predecessor. And 50% lower dose is also very important in the emerging and entry-level markets, not only we have those discussions not only in the high-end markets.
So this is how we expand our product portfolio to address a larger part of the market of our potential customers. But we also want to and have started to open up to new sales channels to not only address a larger part of the market from the portfolio perspective but also in reaching these customers.
I mean when we are covering a huge variety of clinical specialties. The breadth, we are covering the whole depth from the very simple setting to complex to very complex and sophisticated university hospitals. And the third I mentioned is that in many countries we see a lot of initiatives to bring healthcare to more people in order to really cover all this complexity, we also need to have a very complex setting in the sales channel to tackle all the opportunities we have in the market. And that makes Tom’s life a little bit more complicated because now he also gets to deal with the complexity in CP. What you can see here is we’ve been increasing the number of sales channel in the last two years significantly. This helped us where we did it to grow.
The focus in the coming years will be to continue to build up new sales channels and at the same time managed the performance and optimize the sales channels we have in place.
The third pillar I mentioned was expanding our global footprint. If you would have taken a look at my business 10 years ago, it would have been very easy and I would’ve have to go to Germany and the United States and then you would have seen what we do and what we develop until we sell in what the strategy is.
You would have also seen at that time around that we have starting to build up new footprint, for example, especially in China but also in Spain at that time, we started to do things. If you look at my business today, it’s very different. I mentioned earlier we are developing a manufacturing at 17 locations world wide, strong focus of course is Asia. In a couple of years, we will have about a third of our people in production, logistics based in Asia. About 30% of our engineers are also being based in Asia.
Let me comment quickly about two locations in Asia, China and Korea. Different motivation for these two countries. China, I think is obvious customer proximity market size. It’s going to be the largest single market in just a few years; local sourcing, low cost labor as well.
If I look at the Korea, at the same time this is a very developed country. So we do have access to highly trained engineers. We have a strong local ultrasound industry. At the same time, we also have local sourcing available and low cost labor, at least not as low as China would be or India but much lower than European or North American countries.
What we do in China and China the focus is on developing, manufacturing x-ray equipment and components across the sector, for example, x-ray tubes or electromechanical components. In Korea, at the same time, we do manufacture a sizeable piece of our ultrasound portfolio and develop it and we do manufacture and develop all of our ultrasound transducers even for the systems that are not being developed in Korea.
So these would be two examples of what we do in Asia and why we do, what we do in these countries. So the fourth pillar; continues improvement of our cost position, especially important and crucial for being successful in the CP environment.
There is three levers we have to tackle. The one is design to cost. So an increasing part of our R&D allocation goes in to designing costs out of our systems. One example Hermann mentioned and I’ll talk about this before is 30% lower cost against the predecessor of the Multix Select DR entry-level DR system coming out of our China organization.
Of course, we continuously, every year have to manage to get productivity gains out of every location, not only from Asia but also out of our European and American locations. Productivity gains is a must and we also, of course, involve our supplier to get their contribution to the annual cost decrease and price erosions so that we can match this.
So working with our suppliers so that we gain our annual cost savings are also higher priority. So these are the four levers broadened our product portfolio, building up new sales channels, increasing our global foot print and continuously improving our cost position. This is, these are the four pillars for the CP strategy.
Hermann said in his introduction already that beyond driving and serving the ultrasound and x-ray market, CP has also the responsibility to drive commonality and efficiency on a component level across the whole sector and this would be electromechanical components and x-ray tubes where we develop and manufacture systems, subsystems and components for the whole sector.
Today, mainly for the imaging and for the CP division of Bernd’s business and Hermann but we have started with the teams already to work with Michael’s teams to help also DX, and I think he will get support from mechatronics, electronic components and power electronics. We haven't found really yet where we can use x-ray tubes in DX.
CV, that's the components unit, drives commonality and efficiency through the whole sector but at the same time this unit is fully competitive in the marketplace. So no business unit is forced or obliged to work with this unit. Only where they can provide value and cost efficiency and competitive solutions against what is available anywhere in the world market with the business units work with this internal unit and I think that's a healthy competition and it helps them to stay on their toes and remain and be competitive.
So this was a quick rundown through the clinical product division, broader global profile, new phase initiatives and innovative products is what we are driving. We are active at CP in a healthy and exciting market even though it’s very competitive. We have programs in place to drive this healthy business and drive growth and the four priorities I laid out are fully embedded into the agenda 2013.
So thank you very much for your attention.
Mariel von Drathen
Thank you very much Norbert. We will move on to Imaging and Therapy systems with Bernd Montag.
So welcome to Imaging and Therapy. Hermann opened his talk by saying that healthcare is a fascinating business and I will of course have to say that imaging is a very exciting business, very fascinating business and not only because we, as visual beings, are attracted by images and because we are always fascinated by looks in the inside of the body but because imaging has become an integral part of modern healthcare.
Imaging is not just another test, telling you what’s wrong with the patient. Imaging -- modern imaging is about directing care. It is about what to do next with the patient or guiding treatment in the sense of interventions or surgery and in these pictures, you see imaging is about is this stent placed correctly. Is the bone fracture fixated or about should we do surgery or chemotherapy in this case.
So images in healthcare are leading the way and we are leading the imaging industry. We hold clear number one position in all modalities, in all businesses. We are in the ranging from intervention x-ray to computer tomography, to magnetic resonance, to molecular imagining and we have the number one position in the rapidly growing field of advanced visualization.
We are clearly web partner of choice in all segments of the market. We are undisputedly the partner of choice for academic institutions what do they want, access to cutting edge technologies, enabling new clinical standard of care and that’s what they get from us like Johns Hopkins in this example, who operate alone 21 high-end systems from us.
We are the partner of choice for buying groups and for long-term contracts with individual and institutions. What do they want from us economically viable solutions, fitting via long-term business plan and their clinical needs and that’s what they get from us like the Alliar group which already has been mentioned by Tom and we have signed just recently a contract for more than 50 scanners with this group in Brazil.
But we are also the partner of choice in the entry level for the first-time users in the emerging countries, what do they need, cost efficient, affordable solutions, easy to operate, easy to site from a company, understanding their local needs, and that’s what they get, like 150 hospitals in China alone who bought their first MR or CT from Siemens in the last year, and I think we have touched China a lot. China, in CT, already is the biggest market on top of the United States, in both units and dollars.
We are, without doubt, the clear innovation leader and undisputed trendsetter in the industry. For more than a decade, all disruptive innovations in our field have been introduced by Siemens, whether it is open bore MRI, 3D imaging during interventions, robot guided imaging in the OR, dual source CT, sub-millisievert cardiac CT driving the wave towards dose reductions or the unique MR/PET solution. They all have been launched by Siemens. Most of them are still unique. When it comes to the others, it took our opposition more than five years to copy and when they were there, we already launched the second generation.
And we look at products like the MMR, the first MR/Pet. It is great technology, setting us apart. It opens new clinical applications like low dose screening for metastatic disease. It even triggered FDA which normally is a very conservative agency to notify Congress and to issue a press release because of the innovation and the new field which is coming from this, but on the other hand it is a business in itself and Hermann mentioned the 200 million in the first two to three years.
But it helps to tip the scales in competitive deals and in large modality deals like in the case of the Parkway deal that we signed just recently at $20 million, multi-modality deal and the MR/PET was the product setting us apart.
With our syngo.via software solution, we offer a unique platform for radiologists, referring physicians and patients to visualize, interpret and share imaging information. We’re pioneering mobile applications of imaging on iPhone and iPads and similar devices. The enabled time savings and reading cases of up to 77% and we own and operate the biggest app store, quote-unquote, of the specialized imaging applications and we are currently operating at a run-rate of winning 75 institutions per month for this software solution.
When it comes to rapidly growing new segments, we are in the pole position. There is a huge trend worldwide towards hybrid ORs. This is surgery rooms in which surgery gets replaced by image-guided interventions. What’s the benefit? The benefit for the patient is a much less invasive procedure than if its on the healthcare institutions and healthcare systems, it’s a much more cost efficient way because a patient is hospitalized for a much shorter amount of time.
The key to it is imaging and that is what we provide as the pioneer in the field and as the clear market leader in hybrid ORs. And when you look at the pie chart here there are 100,000 surgery departments known worldwide. So this is a virtually untapped potential for growth in imaging.
Similarly on the right hand side, Hermann already mentioned new degenerative diseases which have not been touched yet by imaging, but there are new markets on the horizon there for visualizing Alzheimer’s disease starting with imaging amyloid plaques and we are at the pole position by being the market leader in molecular imaging, being unique offerings of both PET/CT and MR/PET. We have a syngo.via-based application for quantification and we own the biggest distribution chain of radioactive tracers. So when this comes we are in the pole position and within this year the first tracer, specific tracer will start to be commercialized.
We are constantly working with our luminary partners for the next big thing in imaging. The example here is very exciting, the Human Connectome Project that we work with institutions like UCLA and MGH and it is aimed at uncovering the structured diagram of the brain if you wish, very exciting project. We have a lot of attention in the press.
I have heard that this is the wrong meeting to get carried away by science and research, so in order to express our leading position I switch to some numbers. We operate from a 36% growth market share, so we are the clear growth market leader with 37% market share in the developed countries 36% in the emerging countries and 39% in the very important second wave of emerging countries the company has defined and all the emerging economies have contributed solid double digital growth in the last two years to our top-line.
We have created and are constantly improving a unique integrated global set-up. Giving us access on one hand to more than 1,000 research partners worldwide and on the other hand to the most balanced footprint when it comes to value add on the other hand. We are the undisputed leader in the high-end with products from Europe and the United States and we are proud and unique in covering the whole global entry level segment with products from China.
What’s behind this is a long-term strategy; a consistent strategy and our unchanged formula for success, so some of you might have seen this slide before. The engine driving our magic circle is innovation leadership, but innovation leadership in the sense Michael Sen has described, it is innovation leadership targeting at new things in the high-end, but it is also innovation leadership end at taking out costs and making things more efficient for customers and putting us into a leading cost position. Innovation leadership translates into market share gains and translates into growing equipment business.
Market share gains translate into growing and growing installed base and it generates a highly profitable recurring revenue streams from service and upgrades and the two together deliver the high returns and allow us to reinvest in the organic growth of our business. And we are proud that we hold number one positions in all the aspects of this circle.
So let me now comment on where we go next and how all this ties into Agenda 2013. It is not a new statement, but a very true statement from Thomas Friedman, The world becomes flat. When you look at the right hand side of the slide, this has already been touched by Hermann and by Tom, we see converging needs and challenges in healthcare worldwide. We see the same disease patterns. We see chronic diseases worldwide and we see the same pressure on healthcare systems. Yes, so it is about either improving quality while keeping costs under control or maintaining quality while reducing costs, yeah. So in the end they all work towards the same point of sustainability.
So when you look at the left hand side, you can see the landslide in world market in the last years showing that we are really on the way to it, when it comes to the imaging market. Five years ago, the hey-days of the US market accounted for more than 45% of the growth market and we had a financial crisis uncertainty around healthcare reform. And so five years ago 45% today across the quarter of the market, five years ago China a distant number four today at number two.
In this time we have significantly gained share and you can see on the left hand side that our order volume reflects the development. But what is also interesting is to look at the right and this shows how our units are distributed in orders and you see two messages basically; on the one hand the unit mix, the product mix in emerging and the developed world is not very different and which plays to our strength, because we have the scale and Hermann and Tom mentioned yes that is high-end in China and there is high-end in US and yes there is low-end in India and there is low-end in Spain and so the growth becomes net, it helps us.
But the other message is because the emerging are growing faster there is more growth in the midrange and in the entry level and this is where we focus with Agenda 2013, we are constantly investing into our main locations for imaging in Shanghai and Shenzhen by improving on the one hand headcount, in R&D and production, but we have also achieved a lot many terms to what we can achieve in this locations.
When you look at CT, 10 years ago, it was about assembling entry level products. Now we can initiate, develop and manufacture competitive midrange products like 128 slides CT scanner out of Shanghai. As a result, today 25% of our MRs which we sell globally are produced and engineered in China and more than 50% of our CT scanners are produced and engineered in China. There is so much on spirit, entry level CT scanner is also from China, its the best selling CT in Brazil and the Magnetom Essenza, first high speed MR out of China is the best selling product and our product in India and we sold 11 of these units alone in the month of January in India.
So to look at one example, this is the one of the most recent examples launched 10 weeks ago so much on perspective a 128 slides CT scanner. So five years ago this would have been looked at like a spaceship at RSNA, produced and engineered in China. We saw it in cost reduction for both us and of course our customers and when you look at the customer benefits in the lower right, optimized total cost of ownership and a state of the art application a new price point, a special mode to save energy and service costs here simplified for lower, this is what we mean with Agenda 2013 and our focus on high throughput cost efficient product.
And I am very proud that this story continues, and two weeks from now we will have the European Congress of Radiology Meeting, the ECR I Vienna, second biggest trade show after the RSNA and we will introduce a product actually this is for the first time that we speak a lot here, a product called Magnetom Spectra key to 3T which is another of this cost efficient high throughput devices.
Let me guide you a bit why this is exciting. 3-Tesla MRI of higher resolution that comes in a much higher cost and a normal field strength is 1.5 Tesla, so it is quite a piece of technology and when you look at what this technology went through in the last years, you’ll see on the one hand on the upper left a very fast take in demand in the world for this type of technology because the clinical benefit are obvious.
And also very rapidly the world market for 3-Tesla grew to 500 units or more than 500 units which is more than 20% of the world market and this is the high end segment or used to be the high end segment. You can see in the upper right how the technology started in research environment and then quickly went into the clinical arena, because of the obvious clinical benefits, but at the same time there were significant reimbursement cuts like in US and we saw the importance of the emerging markets for the MRI market grow as of the task we had is how can we leverage our global set up to come up with a cost efficient, easy to operate and affordable solution for our 3-Tesla.
And this is what we are introducing; again, it is a product engineered and produced in Shenzhen, in China as a simplified workflow significantly has taken out costs and when you look at where we started the 3-Tesla and the operating costs not only the CapEx for our customers but also the operating cost cut in less than half by focusing on no helium consumption, less cooling power cost and so on. So it is really high end, low cost, yeah another example of this cost efficient high throughput product.
So let me summarize, in imaging and therapy we are the clear market leader in all modalities. We are the partner of choice in all segments of the market. We are and will remain the clear trendsetter and innovation leader. We have created an integrated global set-up which is ideally suited for driving the shift towards the emerging countries and we are just about to launch two more exciting high throughput cost efficient products to serve global demand and there is more to come. So thank you very much.
Mariel von Drathen
Thank you, Bernd. Let me ask John to join us on stage for the last presentation.
My name is John Glaser and before we get into the always popular PowerPoint slides I wanted to do to do two things first. One is, one of the newer members of the Siemens leadership team that’s been in front of you today, I have been in my role as CEO of Health Services for 18 months and at Siemens for 18 months, I thought it was appropriate that I will give you some of my background.
Prior to coming to Siemens, I was the Chief Information Officer of Partners Healthcare which is a large health system in Boston founded by the Brigham & Women's and Mass General and I did that for 22 years and before that I was the Head of the Healthcare IT consulting practice for Arthur D. Little. And during this also of period of time 2009-2010 I was on loan to the US Federal government where I was part of a team that wrote the regulations and rules behind meaningful years in the high-tech program you may be familiar with that that’s $30 billion to $40 billion of Medicare money moving into the healthcare industry to accelerate the adoption of electronic health records.
So in addition to this perspective of our customer, a consultant and a regulator I am also an academic, sooner or later I’ll have to focus on one of these things. I am on the faculty of the Harvard School of Public Health and a faculty at the Wharton Business School at the University of Pennsylvania. And I teach courses at both institutions and also I am co-author of the most widely used text book on healthcare IT across the worlds, so anyway that’s a bit of a background.
So that’s the first thing, the second thing is to actually to do a very little of variation in the visual part of today; I was going to show a film. And a reason for showing the film is my understanding this is the first time in these forms that we’ve had a separate conversation of healthcare IT and I suspect that that means that a lot of you are not as well converse or as converse with healthcare IT as you are with other aspects of the portfolio that we have discussed.
So the general education, we are going to run the video and then we will go back to the PowerPoint, so I am not sure who does it, but now is the time to do it. So just to be a little bit more specific than that video was, what health services does at its core is to develop software applications that are used by hospitals, physician practices and health systems to improve the safety of care, the efficiency of care and the quality of care. And our flagship product is called Soarian, but there are other products that we have and to give you an example of what Soarian and these other products do, they service electronic health record, physicians use them to write orders such as medication orders. They are used to schedule patients and they make sure the billing process is efficient and finally they provide analytics that help those who deliver care, understand their costs, their quality to a degree they follow the evidence or not.
So it's the core of what we do with these software applications and also just you know two numbers to make this whole conversation that we had over the course of today and within that video about quality, safety and efficiency a little bit more blunt. Half of the personal bankruptcies in the United States last year were due to the person or the family being overwhelmed by medical bills and this is a rather dire personal circumstance. The second if you look at the number of deaths that occurred in the US due to medical errors, it is equivalent to a 747 crashing every other day. So we have some real problems that need to be addressed and obviously our intention is to provide those software products to enable them to do that. But we also complement that with services of which there are three kinds.
There is a set of services where we are fundamentally your IT group. We will outsource your staff to us, you can take your applications and rather than running them in your computer room you can run them on our cloud, but where we are in adjunct or full or in part to your IT group. The second category is where we help you do the process change, process re-engineering implementation work necessary to get the maximum yield out of these systems when you put it in.
It's not just IT, it is a related series of changes that have to occur in order for the organization's performance to increase and then the third is where we engage you in strategy discussions. So what if the change in the reimbursement environment look like both in the US and elsewhere, what does this mean for products and services and what you have to do if you deliver care, but also to help you understand technology, what is the effective social media or likely to be on the healthcare setting in what we do here today. So we do those two things and we cover a range of customers and here is some examples here.
On your left is El Centro which is a small community hospital in rural California, that's down the San Fernando Valley and they are our customer. The far right is Partners Healthcare which is a large academic health system which is also our customer and in the middle is the Main Line Health which is a collection of four hospitals that have come together to deliver integrated care. So we cover that spectrum, we cover the spectrum of rural to urban, we cover the spectrum of community to academic, we cover the spectrum of freestanding hospital to large integrated health systems.
So that's the diversity that we cover. Also you can see on the bottom of that arrow is sort of a typical example of the contract values. So $12 million for El Centro, these tend to be several years because it sometimes takes several years to put these systems in place all the way up to the Partners Healthcare which is a $110 million which is one of our, on the higher end of the deal structure that we have here. And then also last point here is you will see Main Line Health 1971 they have been a customer for 40 years.
It's reasonably common to have customers for one, two, at times three decades long and we will come back to that point and the importance of that point in a little bit here. What we find and our customers find is that given the amount of money they invest and if you have ever been through these systems since they are agonized, to go through I've been through 11 of these EHR implementations and I'm still walking thanks to modern medicine as we know these things, but they are expensive and difficult. And you better get yield, you better see those kinds of gains in quality, safety and efficiency that led to you to making this decision to work with us in the first place.
And here are some examples where we see the gains occurring. You know take the middle, Mather Hospital a reduction in the hospital acquired infections leading to $2 million worth of savings, the top right UHS, a readmission reduction and the readmissions often occur because they didn't do the right thing when you're in the first place, so you bounce back within 30 days. That is increasingly going to be penalized financially, so you see they see gains in quality and safety.
On the bottom and particularly the far left and the far right is gains in fiscal performance because of the cleaner claims, cleaner bills going out the door leading to reductions in days and accounts receivable, but also increase in additional net revenue. So the customers are seeing real gains, real value, really yield out of their investments and their work with us. This has lead to some good scores, you may not be familiar with KLAS. KLAS is an independent organization in the US but also known in Europe that it is like a consumer reports of healthcare IT. And so they survey customers about their satisfaction, their scoring of collaboration and implementation in software and all that other stuff.
On the far left we are the third most highly ranked software suite in the industry in the US. Now to put this in a little bit of perspective if you go back to the mid-2000s. So the 2004-2008 timeframe we were actually number seven and frankly health services was going through some challenges and difficult times with that. So what we have seen in the last couple of years is a really nice rebound and a really nice recovery from some of the challenging times that we have had to the point where it is now ranked number three in the industry and I believe will be ranked number two before the fiscal year is up.
On the far right is a KLAS score of our services in hosting and this is where rather than you run the applications on your computers and your datacenter, we run them for you on our cloud and as you will see in the slide to come, we are the largest cloud in healthcare in the world today and these are the ratings that we received from customers about the quality of the service, the uptime, the reliability, the cost et cetera and clearly we are number one in the hosting capabilities across this range of competitors that you see in healthcare.
This is translated to for us into some nice growth. You can see the year over year growth in orders, 2009 to 2011 and most important, well certainly important is the graph on the far right which is a nontrivial jump in new business fiscal year 2011 over fiscal year 2010. We will come back to white space comment in a couple of slides here but nonetheless this achievement of value, these class scores are we are seeing in our order uptake in our new business uptake.
These are examples of some of the organizations who we brought on board in 2011 again reflecting the diversity of our customer base. Hawaii Health Systems Corp is eight hospitals and the fourth-largest public health system in the United States, New England Baptist is an orthopedic hospital. Those of you who follow American football will know that this is where the New England Patriots receive their orthopedic care and then Arnot Health is a small community hospital up in upstate New York, but again numbers of our family and again reflecting the diversity.
Now a key part of our model, the way we make money and the way we serve customers is it often starts with a software license. They license to do our revenue cycles or they license to do our electronic health record. They then buy from us implementation services and then they might buy from us the hosting service and then we provide additional consulting services to help them look at their care and look at their processes, look at their strategies that often leads to additional software recommendations and additional implementation and additional hosting.
So this becomes once you have a footprint, a nice set of called white space opportunity to then continue to leverage that relationship and as a rough rule of thumb, you often find that the software license revenue, as you take that revenue, the stuff that follows is 6 to 7 times the factor of that. So that one investment is leveraged by factors six, factor seven. And is a subsequent generating revenue generating opportunity and again the length of this customer contract can be decades, decades plus.
So that's a little bit about kind of history and where we are here and now a little bit of about what is to come. As has been mentioned more than once during the course of the day is that there is a lot of anxiety about healthcare globally and there is a center of this on cost and quality and efficiency in a number of countries that are centering on access. And as Tom Miller pointed out obviously there is a range of approaches that countries, governments and institutions use to address these challenges. But that being said there is almost universal agreement that healthcare IT is necessary if we are to address these challenges here.
One of the things I do in my copious free time is I'm the co-chair of the Digital eHealth Council, the World Economic Forum looking at healthcare IT challenges across the World Economic Forum's purview and again there you see the universal interest in electronic health records, scheduling systems, personal health records and a wide array of the technology is being necessary to address the challenges that we collectively face. Now to help the world understand about the significance of this, we have talked as a sort of sound byte accountable care and this is what it looks like. This is a range of federal government, state government and private sector initiatives that are and will continue to go on within the United States over the course of the next several years.
We are not going to go through them in detail, we don't have time and it's probably not a lot interesting for you anyway, other than to realize that that there is a high likelihood that these programs will amount to by the end of this decade a plus or minus 10% swing in the operating margin of most hospitals. And if you see they are at 2%, now this is a very significant reimbursement challenge that they all will face. It adds up all of the stuff collectively into the broad statements, some of which you have heard up to my comments here.
It's you who deliver care, hospital physician practices long-term care, sir you're just going to get less relative to inflation by the end of the decade. So for example as Medicare expects that its reimbursements will increase for hospitals 12% between now and the end of the decade, your market basket costs or cost of your nurses, your power et cetera will go up about 26% and so one year at a time you're going to fall behind on your ability to fund and operate the organization.
In order to get paid you will increasingly have to prove that you deliver care according to the evidence, that your quality was good and now you have to report measures, you going to have to follow the evidence on diabetes care, total hip care or AMI care and things like that and last but not least your care will be more holistic. In other words you are going to need a chunk of money to take care of all the care a diabetic needs in the course of your and you have to fit within that, a certain amount of money and still deliver high quality of care.
So when you look at both the specifics of the healthcare reform in the US and the general statements that elicit here, it is not possible to respond to this well without very sophisticated IT and I think that is clearly broadly understood by the market. As a result of that, expect that it will be good growth in the healthcare IT business, both in the US and globally. One of the interesting facets and something that makes healthcare IT somewhat distinctive from some of the certain materials my colleagues covered is the US dominates the healthcare IT market and is expected to do so for the duration of this decade.
So it now accounts for about a little over 70% of the total global HIT spendings in the US and that may dip into the high 60s by the end of the decade but will still be dominant. So we expect that this will be a growth market because of those pressures that are broadly come under the umbrella of Accountable Care and is not as if that's the only growth that will be occurring. Clearly there will be growth that is and will continue to occur in emerging countries such as India, such as China, such as Mexico, Turkey et cetera and so will see double-digit growth, significant double-digit growth there, but coming from a relatively low base and obviously Europe is flat because of the Sovereign Debt Crisis although there are certain variability there.
But we do see the net of it is a growth market still dominated by the US with opportunities nonetheless that exist in other parts of the world. Now to make sure that we are in a position to capitalize on that growth and to help those who deliver care to continue to achieve the kinds of gains that you had sort of shown earlier, we have a very aggressive investment campaign to invest in products and to invest in services. So we are investing in creating an ambulatory electronic health record, investing in next generation of physician documentations. Acquired a company last fall, MobileMD to provide health information exchange and this means that as patients more through healthcare settings overtime, their data is transmitted from hospital to hospital, physician practice to physician practice so that what you don't do is take care of someone and be missing key piece of data which are essential to make sure that the care is safe and non-redundant et cetera.
A lot of investment in business intelligence and analytics, both things will help you negotiate with managed care contracts and get a good return but also to help you predict who is likely to be sick or who is sick and likely to be sicker because now you're going to get a fixed fee for them and you have got to manage them, so that they don't get sick or get sicker. And then we go down not only in the products but also into the services improving in installation time so implementations are quicker. Less expensive for customers, improvement in our cloud capabilities such that our cloud continues to be cost-effective or continues to be agile with a phenomenal pace of IT innovation which shows no sign of slowing down for the next decade.
And then also helping customers who if you go back to that diagram of these dots and initiatives, they don’t know what's going on. They don’t know how to address these things and so that we have consulting services that help them deal with specific programs such as value-based purchasing or hospital-acquired conditions to know what the program requires in order to be reimbursed fairly and what IT investments are needed and what other changes have to be made if they are to thrive or at least take as much advantage as they can out of changes and reimbursements and new initiatives coming down.
In addition to investment there we will also leverage our global footprint as the thing here, about 25% of our workforce is being transitioned overseas largely into two major development centers, one in Bangalore and one in Calcutta, but other development centers across the board. This transition is expected to be completed by the end of this fiscal year and what this allows us to do is several things. One is obviously to lower the costs that we have and improve our gross margin et cetera. The second it allows higher throughput of development because development now can go around the clock, better support because support can be around the clock and perhaps most important over the long term is the ability to draw on the global talent because a lot of what we need is not inherently US-based talent.
So people who can do those very sophisticated analytics to help understand disease patterns and who is likely to be sick, who is not likely to be sick, whether this treatment works or that treatment works, that's talent that exists across the board and we can tap into as a result of this large and multifaceted presence. We will continue to lever another asset that we have, we mentioned our cloud. One of the interesting things to me is last year 81% of our customers who bought new software said would you run it on our cloud, I don't want to run it in my computer room.
This is a sea change in healthcare, frankly it's a sea change across all industries. If you go back about three years ago, that was about 20%. So leveraging that asset of people saying it's becoming too complicated, it's too mission-critical and increasingly too regulated such as privacy regulations, that I want people who know what they're doing to manage this part of the infrastructure for me and to make sure that I am up all the time and compliant as I need to be across the board.
And this is also quite profitable business for us. Running at the corner here is an addition to portfolio expansion, leveraging the sort of round the world footprint that we have in the cloud is to go after additional markets, one of which is the community market. In the US there are 5000 non-federal acute care hospitals, 50% of them are 100 beds or smaller. So it's kind of a pyramid that you see out there. Traditionally, that market has been very underserved because they couldn’t afford what we had or couldn’t afford what one of our competitors had. Because of our ability to run it in on the cloud and defray that expense, turn it into an operating expense, mean they don’t need a computer to run, they don't need the IT staff et cetera. But also because of our work to shorten the implementation, where it's frankly more cookie cutter, so we can get these things in rather than two years to put them in place we can put them in, in two months.
So to shorten the implementation, to shorten and lessen the cost to host it, because the community hospital with 25 beds, wants to deliver the same care that the Johns Hopkins delivers and the same care that the mass general does. So we are able to go after that market because we've been able to rightsize the offerings that we have and put it within the reach of those such that we can broadly help those who deliver care in the US but not just in the US, this is also a model that works quite well in India and a wide variety of other countries, where still the cost of computing is a major consideration, a much more significant consideration than you at times see in the States.
And then last point wrapping up as we all have wrapped up with some summary here. We see these pressures on cost, quality and safety across all caregivers, across the world. It's been mentioned by across all the presentations you've heard. Our particular business is to deliver the software applications and services necessary to help them respond to that work. It is a growth market. We will do well in that growth market and to make sure that we are doing well, we will continue to make significant investments in products and services to leverage our global footprint, leverage key assets such as the cloud and also position our products to after the range of healthcare providers, not just the medium to large-sized ones. So with that, I thank you.
Mariel von Drathen
Thank you very much John. Now we've heard the five presentation. We thought well just maybe only the small break before we then go into the final Q&A session for which we have planned one hour. So hopefully enough time for you to raise all the question. So let's reconvene at a quarter to three. Back into this room, so just a 10 minutes break. Thank you. Okay, very good. So let's start with the Q&A session with executive team. Don’t know who wants to start. I can’t see much with the light but I see Peter on my left and then we will continue.
Peter Reilly - Deutsche Bank
Hi, it's Peter Reilly from Deutsche Bank. Two questions please, on the diagnostics and imaging and therapy. Firstly on diagnostics, I would like to know a bit more about what’s happened over the last years in terms of launching your new platform, the divested platform. You obviously talked about loss of market share, various problems with customers service and so forth. How many of the problem are things you inherited where platform or products weren’t working very well and how much of it was self-inflicted injury where you launched things, but weren’t ready or where there was a lack of functionality. Just to help us understand where you are on that whole process of recovery.
And secondly on imaging and therapy, for sometime now healthcare has been talking about the shift towards a some cheaper, more efficient, more productive machines, what does that do for the overall growth rate. Can imaging and therapy still grow in value terms if you got effectively you’re cannibalizing your own business by offering checking more cheaper and more productive machines or is the volume growth you can get from those more productive machines offset by the loss of revenue.
Clearly as I pointed out, some of it was self inflicted, we transferred some assay or assay production site from Los Angeles to the UK, that influenced our Immulite performance which definitely also showed up in the revenue shortfall. Secondly, we launched our integrated immunoassay chemistry platform too early and that basically caused the growth pains that we had. We invested now heavily in addressing both. I think I pointed that out. From a back order perspective, we are now better than before we transferred the production from Los Angeles to the site in the UK in Wales and also we have made tremendous strides on the Vista platform with respect to stability and with respect to service costs. So I feel comfortable that we actually are now in a position to, as I said earlier to turn the momentum again back to growth.
Peter Reilly - Deutsche Bank
And do you think Vista is now fully competitive with other companies or is it still someway behind its competitors?
Actually just to quote a couple of numbers. We have more than 1300 systems installed. We have many happy, satisfied customers. They are actually customers who basically went through the early pain with us. They have resigned up with us on Vista, so they brought more or renewed their contract and then we just got back a survey, at the beginning of January which actually looked at customer satisfaction, across the integrated chemistry platforms in the United States and Vista had the highest repurchase likelihood, repurchase likelihood of any system in the market. So that gives us a clear indication that we have made tremendous strides and that it's a valuable element of our portfolio.
But Michael, I think it's fair to say that we had somewhat re-positioned the Vista. It was when we first had it, it was somewhat and we were under the impression as to one size fits all machine that will somewhat make it and conquer of the markets and now we see that we have a very nice market segment that we can address with it, but it's not the ultra high throughput and it's not the low throughput. It's somewhere in between portion where we are positioning it now and I think that also needed some clarification.
I think I showed that earlier when we said we repositioned our chemistry in the immunoassay platform and Vista is one element in there and before that it was positioned too broadly.
And to the imaging and therapy question, I mean maybe, let me answer first with a view on the market and so we currently I would estimate that the market growth in the current years, in the recent past and in the near future is about 2% to 3% in value add and that shows that despite the mix shift here, there is growth in the market and we have shown in the past to outgrow the market and we have of course the ambition to continue to outgrow the market. So that means that when you look at a product mix, the high end remains at least stable, but we see the biggest growth coming from mid range and entry level product and our ambition is clearly to protect margins despite that mix shift and so far we have been very successful with it and this is what we do with the initiatives I talked about with Agenda 2013 and all the cost efficient products we are launching from our Chinese operations.
Mariel von Drathen
I think we have a question here, Andrew Carter, in the middle. Do we have a microphone in the middle?
Andrew Carter - Royal Bank of Canada
Thank you. It’s Andrew Carter from Royal Bank of Canada, two questions please. The first was just on diagnostics again. And I guess in terms of some of the explanations as to what the business has been growing how much. It struck me as perhaps surprising. You didn't talk a little bit about the sales by geography because it does appear obvious that the sales by geography of diagnostics is a big different compared to the rest of the division. I wonder if you could just comment on that. And then the second was in terms of the healthcare IT piece. I wonder if you could just help understand a little bit more about perhaps some of the financials of our business and perhaps understand whether the sales have now of course to the backlog and will be -- sorry orders that will be coming sales in the coming years. Are those sort of off the shelf type products? Or are they sort of highly customized for the customer? I am trying to understand the risk I guess on those contracts.
And then perhaps also just in terms of the actual profitability of that work. Could you help us understand whether its sort of a software type business models. So relatively high margin on licensing or is it sort of a razor/razorblade model like you got in some of the areas in healthcare?
Andrew, so basically we are growing, when I look at it from a geography perspective in the emerging markets, we are growing above market and then of course, the mathematical risk, we are growing below the market growth rates in the developed markets. And of course this is something we are going to address from an innovation perspective, from a pipeline perspective but also from a sales incentive perspective.
Andrew Carter - Royal Bank of Canada
Could I just then ask what was sort of a split systems really in the emerging market and in the developed markets?
I think about 80-20 for us.
Yeah, in response to your question, in both cases the two questions you raised on HIT, both answers are hybrid. So it is off-the-shelf software, and so it comes, business software platform, turnkey system etcetera. Still there is a lot of configuration you can do. You can decide, there is a work flow engine and so you can have certain work flows for managing in fractures or managing discharge and you work with the provider organization to customize those to fit their work flows and their strategic intense.
Similarly, you can code customized implementation. U Mass Medical Center two weeks ago, went up with four hospitals all in one day, big bank. Other organizations are much more methodical in role out. So there is a customization of the way you introduce it along with a customization of certain aspects of it. Although, at the end of the day it is a, you know, it’s a standard software package that goes with it. And I think the model is not pure software. It’s got part of that like a Microsoft, you know, Excel or Office. It’s a combination of pure software and service. So there is a service element they goes with it. And so you see this hybrid margins that you might see on software with margins that you might see on the service. It’s not the razor/razorblade thing where there is this consumable set that goes on.
There clearly is wide space opportunities, but not necessary the same where we use up or in region you need another set, you need another set and you need another set. So, it’s more of a blend out classic software and classic service that come together.
Mariel von Drathen
Okay. If you can just talk on the microphone just behind you, Fredric Stahl.
Fredric Stahl - UBS
Yeah, hi, it’s Fredrick Stahl from UBS. I had a question on R&D. You spend about 9% to 10% of sales on R&D, which is fairly significant number on both of them in relations to sales and to your profit, and I was wondering if you could gave us an idea how you evaluate the success of your R&D programs?
Yeah, let me answer it from a financial point of view and Hermann can give you his view on the strategic and technological side. But first of all, yes, we are R&D intense and we have a big line item there. But then again this is, at the end of the day, the source of our competitive advantage. I told you that we have very stable margins, gross margins. One reason being, lean manufacturing set up. The other reason being that we already spent on the gross margin in R&D on serviceability so that when you deliver service, when you cater service, you are very efficient and very productive.
So you got to look at these two in conjunction and you have the seamless service margin also going up quite nicely by 500 basis points. So in design -to-cost, this is the efforts where it is going to and clearly we have a very strict capital allocation process. I told you that I would like to see clear returns when you make big R&D efforts and clear returns in the next two to three years to come, i.e., I would like to see how is the gross margin and development against price pressure we assume in the market place.
You know, there is only little to add. R&D is not just making the next super-duper machine, more and more R&D and that is part of the agenda goes into design-to-cost, design to serviceability and in these kind of processes, and because this is where the beef is and then this is where the return really is. That does not mean we will stop the entire thing but a slight shift towards meeting the new requirements of these growth markets you can expect from us and we are monitoring it. And how do you measure the design-to-serviceability a success? Well, obviously, ultimately with their service margin which we are doing and which continues to improve and how do you measure design-to-cost? Well, obviously if you compare equal performance and then with the cost and then you have quite easy KPIs to do somewhat leveraging or determining the success of your R&D efforts. With respect to investing into new stock or in the traditional innovation, there is always some risk, whether the market accepts it and or does the market accept and MMR, and if yes, to what extent? Yes, there is a remaining risk. I think we have learned our lesson and we are somewhat tightly monitoring this risk is under control but it cannot be eliminated. Innovation risks cannot be eliminated. They can only be controlled and I think that’s what we are doing.
Mariel von Drathen
Okay we will continue in the same row on my right, Daniela Costa.
Daniela Costa - Goldman Sachs
Daniela Costa from Goldman Sachs. Two questions, the first one going back to the margin on diagnostics. You referred, both in now and in the presentation in the morning about margins going back hopefully by the end of agenda 2013, 2009 levels. Why not to 2010 levels? Is that just a growth element? And then second, in the growth and end-market share element on diagnostics, if you don’t recover quickly, would you consider any organic options in or out? Thank you.
Do you want to answer that, Michael?
Yeah, the first one, on the profitability. I think we have a starting point in 2011, which makes the 2009 already an ambitious target, especially in the time horizon of the agenda 2013. So in the two years, we clearly want to improve the margin by 300 basis points. I outlined some of the actions that we are taking in order to get there. And then the second question with respect to organic/inorganic growth, we’re clearly turning the momentum on the growth side.
We have new innovations. We are focusing from asset penetration perspective on the installed base. Its an attractive asset that we have at Siemens Healthcare Diagnostics, so I don't see any need for any inorganic addition to that growth at the moment and maybe Michael do you want to…
Yeah, let me chip in. In general, I told you that the focus is on organic growth, the reason being simple that with organic growth and therefore you also have to consider the R&D investment in that context we are delivering high return on capital on an operating basis. I told you $2.4 billion of operating assets in the context of a $13 billion franchise. This tells also how we allocate R&D money.
Now on the diagnostics front you've got to see where they are coming from. They have a margin last year of 13%. You were referring to 2010. In 2010 the growth was at 3%. Now Michael has been alluding to that it will take near term i.e. three to five years which is more three to four years to catch up being at market growth again. That means in turn that in the next couple of years we expect to grow more than what we have seen last year because it was zero, but it will not be market growth. So it has to come out of resetting the cost base.
Now resetting the cost base also takes its time, the 300 base points over the next two years and I said up to 300 base points will be more backend loaded. Why is that so, because as we speak we are taking out resources; when you take out resources the full annualized impact can only be felt in Q3, Q4 or in next fiscal, so from that 300 up to 300 base points in your models you have a tail towards 2013 if you look at diagnostics.
Mariel von Drathen
Okay. The next question comes from the last row, Timm Schulze-Melander.
Timm Schulze-Melander - JPMorgan
Hi, good afternoon its Timm Schulze-Melander from JPMorgan. Just a question on diagnostics again, so back on page 24 of your presentation just looking at it, it look it should be maybe the highest strongest long-run priority of the business; its about 50% bigger than imaging; the growth outlook is better, the revenue mix is obviously strong biased towards of the market. And so it is that a fair way to characterize the priorities given that maybe imaging has been the low cost model of the low cost product range?
And then secondly over ‘12 and ‘13 what benchmarks what can investors outside of the company use to judge that turn in your diagnostics business; if I understand just reference it will take three to four years to get back to sort of market growth roughly. What it means, can we use other than just revenue talking about and see whether that’s working?
To your first question, yes it is an attractive business and we say we are not too pleased that we didn’t really keep it to the pace that was the initial expectation when we put a lot of money on the table. And so from that perspective it has all the management attention and I personally would argue that I’ll spend about at least one-third of my time with diagnostics we had a lot of the deep dives and when we defined Agenda 2013 also there with a competitiveness program within DX that was the major portion.
So we realize the potential, we realize the attention that our dealing with that asset causes in the capital markets and I think with respect to our activities we are reflecting it. So there is potential, but honestly speaking and I think we definitely try to hide, it’s going to take our sometime for various reasons that we elaborated on. But the bottom line topics we can address to the extent as outlined in our presentation.
Maybe again Timm on that one, I think first of all, it is much better to have this issued and the other way around, the market as such is very attractive that’s why I also said it’s very attractive business come up at full potential. So again, as Michael Reitermann has been telling you something about the speed in that business.
And also Hermann alluded to the competitive dynamics and what he expects during the course of the next years and how can you measure success well, probably not only looking at the next two quarters where I already told you that there will be some volatility to the downside, but for the full year at least I would see some incremental improvement on the margin and then next year going up the ladder to those up to 300 base points on the margin.
And concurrently, gradually you would also expect to see, it will not be a straight line, but year-over-year you can make a line on the top-line because we don’t expect them in, when I said near term in year four, suddenly go up straight line and being at 4%. So this is the way you should judge it and again I think we made it very transparent also to manage expectations that it will take sometime on the cost side, a little earlier than on the top-line.
Mariel von Drathen
Okay, we will continue on my left with (inaudible).
Hi, thank you. I had a question about financing. I think you mentioned earlier that the healthcare business was one of the largest customers of the Siemens Finance operation. I just wondered how material is that finance option in terms of contracts that you are signing, so the proportion that you are seeing with financing and if you had any statistics on maybe how that had gone over the years and whether there had been any particular regional features over the last few quarters?
Obviously, I am not in a position to disclose the asset number of SFS in breakdown of divisions or groups, but financing is becoming a more important part in decision making that’s why I was also alluding to developed economies business models in part is changing; we told you about PPP; we told you about other transaction theme structured in a way where financing plays a role and there SFS is always a reliable partner.
In the past and there you see a shift in the past, it was more plain vanilla leasing, so we are the biggest customer on plain vanilla leasing. There is nothing complicated about that one; it is also from a risk perspective you need to manage SFS can take it on their books and then manage it taking it from there.
So in developed economies you see more and more this new business models coming in, also in emerging economies I gave you the example of India almost no tender out where they are not asking for any financing. That is the main reason why SFS also has set up next to lets say growth you see in the other sectors, a legal entity within India.
Nevertheless, from today’s point of view I would not argue that it is a mission critical element in the decision making; yeah, there might be a lets say smaller community hospitals, but there the risk is also bigger where you may try to persuade the CFO rather than the radiologist making the decision by also offering the financing. There we can also play a role, but again we will always be prudent on risk.
It is becoming more important, but its not a mission critical element in decision making. Its still what we deliver on innovation and on actually total cost of ownership, because at the end of the day they look at it, what is the OpEx going to cost me and in all fairness, it’s a little different than what we've been seeing after post Lehman where the markets were pretty frozen, but the big institution still had money and smaller risky institutions may need it some financing where we were a little prudent, so today its becoming important, but mission critical.
And if we were sort of quantifying the delta we’ve seen over the last 12 months, I mean are we looking at…..?
Mariel von Drathen
Okay. And we will continue here in the middle with Andreas Willi, third row.
Andreas Willi - JPMorgan
Thank you. Its Andreas from JPMorgan, a question on clinical products in terms of what you see there in price erosion and pressure just on basically hardware getting cheaper every year. Samsung has made some bold announcements about what they wanted to just probably most relevant for your division and the other divisions within Siemens Healthcare and also just bringing kind of cheap, powerful, consumer technology almost into the healthcare space, what do you see there, what do you expect those assumptions to do, what are they doing now and what do you expect then where they will get to in the next few years? Thank you.
Okay. Let me start with the price erosion what we see in terms of price erosion in the CP arena is probably a little bit more than what Hermann has been showing for the average of the sector, but not really much, a little on the higher end of the scale, but not significantly.
Looking at Samsung; Samsung entered the healthcare market maybe five, six, seven years ago when they became a supplier for X-ray detectors, since then about two years ago they have acquired medicine which I mean its all public information, and are Korean ultrasound manufacturer. What their next move will be? We don’t know; we are carefully watching Samsung; I think it may become a serious player, but we will have to see what they moves are; I mean they have made a lot of statements what their priorities are in the healthcare, how much they want to spend, but it has to be seen what really happen.
Especially, CP arena has always been when it comes to competitive landscape, a very dynamic environment. Newcomers coming up, others are disappearing, others are being acquired, others are merging. So the game is not new, the players are changing and some certainly is in the game to become a player.
Andreas Willi - JPMorgan
And maybe as a follow-up if you just give us kind of maybe some growth revenue number for your business. I know you don’t give – if you kind close idea, if you have kind of an idea of maybe that some of the other within healthcare in your business look?
I am sorry, we can’t; we’re not disclosing divisional numbers expect for DX.
Mariel von Drathen
Okay. I think there was a question just behind Gael de Bray.
Gael de Bray - Societe Generale
Thank you, Gael de Bray from SocGen and one question again diagnostics; the 16% margin target for 2013 we went way below that, the level of profitability of some of your competitors. So once you have reached the 3% to 4% market growth and once you’re out at market growth in lets say three to four years time.
How quickly could you catch at least this rush in terms of margins and maybe get back to the 19%, 20% margin level you were used to and maybe your sales three to four years ago. And I guess my question is what’s the typical upward in leverage for diagnostics; can we assume 50 bps margin improvements once we get to a 3% to 5% organic sales growth in a few years time?
And the second question if I may is, correct me if I am wrong, but I think the number of scanners people in Europe is well below the number of scanners for people in the US it went twice below that of the U.S. So do you think there could be a catch up effect at some stage or may be more input on, do you see it could provide some simples to the European business in this current difficult times?
I mean my answer to the first question is clearly we focus on the next three years in order to achieve what we just outlined. After that with revenue growth and further margin improvement or further productivity improvements, we assume that there will be continued improvement on the margin side, but I think right now our clear focus is on the next two years to deliver what we just said.
Yeah. I mean it comes to the scanner topic; I mean one way to look at things is the density. How many CTs, MRs or whatever (inaudible) and I think what we have seen is that, US has found a new normal and that utilization in Europe is still higher, yeah. I think the right way to look at it is that there is one secular growth driver in our business which will be there independent of whether there is healthcare reform, financial crisis or whatever and that is procedure for.
We see on worldwide basis people get order, we see chronic diseases, we see more people getting access to imaging or modern healthcare in the emerging countries. In you can roughly estimate that this is in the area to 6% to if some modalities to 9% procedure growth. This procedure growth can be absorbed by better utilization of the installed base and to some extend with our innovations which focus on productivity we help our healthcare providers to be more patience on one system unit.
So the procedure growth does not translate at the same point; so the market growth is not at the same level but in the end towards the time utilization in US is going up and so there is a huge installed base and people are now moving up utilization. The utilization threshold where you simply cannot put more patients in your CT or in your MR, like what we said it will be reached earlier in Europe simply because the utilization is a bit higher and it is highest in China and so from that point of view, Europe there will be growth in Europe simply because of utilization point.
Mariel von Drathen
Okay. We’ll continue with James Moore on the right.
James Moore - Redburn
Three questions, a couple of headcount questions. You gave a headcount for CP and I wondered if you could give the employee count for HIT and audiology, the number of employees just to give us a rough feel and secondly could you say how big the component business is, I have not heard about that until today which you are sharing across [IM] and CP and I suppose it to be DX.
And then thirdly, a bigger question on margins really you said up to 300 basis points of margin increase in DX, I wondered if you could and I know you don't disclose numbers, so without any numbers could you talk about what the other issues of margins are across the other units of which there are a lot, as Imaging CP, HIT, Audiology Solutions, you haven't really talked much about what the margin stories are in the other business units, so without numbers could you say where you see the best surprises and the biggest headwind risks across those other units.
On the CV which is the components business unit inside CP, we cannot disclose the number of internal revenues. Unfortunately so I can't really help you on this one.
Maybe on heads so we have 51,000 employees for the overall sector and then I told you what is 6% to 8% of the global workforce of diagnostics is roughly a 1000 people, so you know what the diagnostics numbers is and that's about it with regards to disclosure. But what I can tell you though is if you look at whatever 20-F and whatever we disclose is that the headcount productivity in the last couple of years has been going up.
The headcount productivity revenue per head has been going up over the course of the last three to four years. There was a little dip again from 2010 to 2011, that's okay, but if I then again look at sales head productivity, sales people, revenue per sales people, this is also going into the right direction. The trajectory is also developing nicely. Nevertheless James also keep in mind that, that is not the biggest lever we are talking about when we talk about margin improvement. I told you that 80% of the manufacturing costs is bill of materials. So I am not keeping my eye off that one, but it's also nothing which keeps me up at night.
Now on the margin, let me repeat what I said this morning. The 300 base points over the course of the next two years more backend loaded was diagnostics. Then I said going into fiscal 12, you expect a margin underlying operational at or about 15%. Concurrently, we do expect diagnostics to gradually improve year-over-year last year being at 13%. So they must be better than 13%, that means that in the others, we are investing and that’s we said that is Agenda 2013, investing in a very controlled, in a very controlled and targeted manner into OpEx. OpEx being SG&A and R&D I would say half-half, roughly half-half into SG&A and to R&D into growth markets which has been showing a lot of growth markets and into R&D on cost competitiveness.
Then I said going forward more medium term, long term anyways, medium term after Agenda 2013 I expect to come back to a more normal regime where OpEx growth is obviously beneath topline growth. That is what I said and then one quick aside for fiscal 2012, on an underling basis if you take out the charges, diagnostics is actually not hiking up to R&D because we have a clear agreement that first of all do the job of resetting the cost base and executing now on taking out the resources and in 2013 hiking up the R&D as a percentage of revenue. So that means the rest, the rest is good at 70% is investing and I wouldn’t say across the board because that sounds like a lump sum, targeted investments in all divisions.
In Bernd's division, again also the question on R&D because obviously you can make, do the math, Bernd has a very, very, even highly accretive margin though being R&D intense. That is actually the source of his competitive advantage, he was talking about innovation. Norbert is investing and even John is investing actually in relative terms, we are placing the biggest bang into John's business in terms of relative improvement or relative increase on R&D.
James Moore - Redburn
Sorry just to be clear, you are saying that the other 70% is going to increase its R&D investment 50/50, but if you look across the pieces, is there an intensity of investment increase is greater in a particular area?
I said the biggest one is in John’s area in relative terms.
Ben Uglow - Morgan Stanley
So actually a question for John, given your background as a regulator in the academic world et cetera, when you look at the reimbursements environment in the United States at the moment, how would you feel it compares with DRA a few years ago and is it going to be as tough or tougher than what we saw back then, is it a repeat or even a worst thing at DRA and that was question number one.
Question number two and it is kind of connected to that, when we look at the reimbursements on big modalities like CT and MR where Siemens had a profitable run in the last decade, do you feel that the reimbursements that are coming through already in the United States could lead to peaking of your growth in both big modalities, not the smaller stuff, not the service market, but the new equipment sales of MR and CT in North America?
And then my final question and I hate to flog a dead horse on diagnostics but Mr. Reitermann you've shown an interesting chart in terms of the reduction in your platforms from 19 to 10 and what I wanted to know is, is that new number of platforms, is that comparable with Abbott and Beckman and Roche et cetera or are you still operating off a much broader basis of products than your key competitors because the feedback is that, that is what has confused the market and so in connection to that, the whole list of products here between Advair, Clinitek, Dimension et cetera I mean it's a mind-boggling array, do you intend to narrow that focus even more or have you got the product right now, the product issue, the platform issue is done.
If I can start with the Budget Reconciliation Act which was much more blunt object than what we are seeing unfold now. First of all and the Budget Reconciliation Act was a one object sort of in a very narrow piece of time. What we are seeing now is under the Affordable Care Act a series of rules and regulations you know bundled payment, episode payments, accountable care, you know just the series of things that roll out over the course of multiple years. The other what's different about the Affordable Care Act is it has a phenomenal complementary series of private sector initiatives, so United, WellPoint, all of them are moving in parallel in this thing.
So one was a blunt object, a very short period of time almost mono actor, the federal government. This is over a long period of time multiple pieces with broad private sector participation in this thing. The other is that when you look at sort of across the board you know the BRA was larger, we are just going to cut your funds, you know and that's kind of a blunt object part of this thing. Under a lot of what is being proposed and then playing out you can actually make more in years ahead than you do right now.
So it could be a value based purchasing program, which is if you demonstrate good quality scores in your treatment of people with heart attack, your treatment with people of pneumonia, you can make plus 3% revenue. If you demonstrate [economy] scores you are down minus 3%. So if you execute well, demonstrate good quality you can come up relative to where you are, but if you don't you are down the high. So this is actually a much more, it's much more challenging operational issue for the provider.
You know if you have a blunt object, you just turn around the tables and say oh everybody 5% off. You know you do all the kind of blunt you know things that you typically do here. Now you've got to say, well I still have to do some of that because I want productivity and want efficiency but geez I have to revamp my clinical processes such as my heart attack care is a lot better and I got to get the quality scores and I got to do pneumonia, plus I am going to be incented to deal with people with fragile diabetics et cetera.
So it is a much more complicated response on the part of those who are provider. If you respond well, you can actually do better, it doesn’t mean you can fully mitigate the tide of some of the reductions that are coming up. If you actually might do better than your colleagues or so it is a much more sophisticated response and a much more evolutionary response that is going to come through here. Under BRA, you didn't need a whole lot of IT, you know under the Affordable Care Act and its sequelae, you will need an amazing amount of IT just to make sure your practices are standard, your docs get the right data, the data flows between organizations, you got your metrics and all this kind of other stuff here. So I think it’s a very different sort of approach on the part of purchasers of care in the years ahead and that which we saw under the BRA in a much more sophisticated approach and a much more nuanced set of responses will have to occur.
So the complexity of the legal landscape is still increasing, maybe you want to comment briefly.
Just two other comments augmenting John’s comments, I think we have not seen however the end of blunt objects being used to attack the imaging business or even the diagnostics business. There are four pieces of legislation proposed in the last budget around where the Republicans and Democrats try to do something, none of them came to fruition. They all sort of fizzled and that said they haven’t died. There are on the other hand also things like Medical Device Tax Act which is supposed to hit at the beginning of 2013. There are two pieces of legislation which are floated to actually repeal that.
So as many things are have, so number one we are not over the era of blunt objects. Blunt objects will happen, they will be applied et cetera and that said I totally agree with John that more than likely we will not see the United States come to a imaging system per capita of Europe and for a very simple reason. The cost of physician time in the United States are much higher than the cost of physician timing in Europe. Imaging, if you lazy is one of the most productive things you can possibly do in the medical system. You can either you know look at the patient, ask him lots of questions, send them home, give them something, try and take a blood test for use and put them in an MR scanner and you get your answer.
And if you want to save money holistically imaging is cheap. Therefore all the stuff that Bernd is doing in order to take high tech imaging and actually make it cheaper would probably be market expanding, independent of blunt objects. But that is a prediction, who knows.
Forward looking statement, I shouldn’t use them.
You wanted to comment on the platforms.
I mean, Ben there were a couple of points, some of the names you said are basically separate product lines and if you would take them out, we wouldn’t be in that product line anymore. So I think you are probably referring to our chemistry immunoassay platform which is the bulk of our business and here we clearly have reduced considerably the amount of elements that we had in our portfolio, actually with our automation and our informatics strength, we basically can tailor now some of those products even nicely. We have talked about Vista as being over positioned. We have that now in right size and basically address the sweet spot where Vista with its productivity features, with its four detection technologies is nicely positioned.
Are we now basically saying this is the end of our portfolio evolvement, no of course not. I mean I pointed out earlier that we also looked at 20-20 with a diagnostic goal from a technology perspective, where does it go from a clinical perspective and of course this is what we are striving for eventually. And this is of course then next generation platform which we look towards it and elements will supplement what we have today. So it’s an evolving strategy clearly, but we have made tremendous progress.
I believe we still, I don’t know the exact number and still we have a couple of more portfolio elements, but some of them are very targeted. For example the Immulite which is one of the franchise is clearly now targeted towards emerging market and also towards allergies where we probably have the broadest portfolio, so taking that out would probably reduce the complexity, but will also deprive us from market opportunities.
I can give you a bit of another view on it. You have to see that when someone buys or invests into a CT Scanner, yeah it is a decision for seven or eight years and yeah on MR it is potentially one to two years longer. And so if you know, look at what happened in the last year, so if you make an investment decision in 2006, then you witnessed BRA, financial crisis, hospital consolidation, Obama care. And so there is lot of uncertainty and I think what is currently happening in the minds of most of our customers, they sit on an installed base which is the product of past investment decisions and what I feel is they have stopped looking at politics to get to new certainties. So for them somehow uncertainty, we don’t know what reimbursement will be. I mean I know it this year but I don’t know for the remaining seven years. So uncertainty for them is the new normal, they stopped buying for a while because of uncertainty and they waited for certainty and now they start realizing there will never be certainty.
So they look in their individual institution, they look at their installed base, they look in their patient volume and then make individual investment decision, so I don’t see large trends you know where reimbursements sparks something also. So it has somehow become a very individual discussion and I think that is also better for the system.
Will Mackie - Berenberg Bank
A couple of questions actually. Firstly, could you quantify for us the impact of the revenue line from a full withdrawal from the PACS and Linacs business in terms of how we should think of that as being a revenue drag for the next two years or so.
Secondly on imaging, if I come back to Bernd, to what extent do we see the potential growth wave within the developed markets as you see a pick up in service and retrofit I mean for example in the UK we spend about 50 million a year and yet I think the projection is we will need to spend about 450 million over the next three years just on upgrades across the various hospitals, is that true of many of the other developed markets you are targeting?
And then going back to DX, again just to perhaps touch on, try to understand a little more of the issues, could you give us a sense of the growth in the installed base of machinery that you've seen over the past two years, it's averaged 4% to 6% a year. Did that slow down and particularly within which market segments have you perhaps lost share or identified the need to catch up share beyond the point of care that you've highlighted and then should we still think of this as a 10% from equipment and 90% from assay type business?
Well, let me start with the top line question which I have been alluding to also during the course of the presentation. I said going into 2012 on the order intake, we should see some easy year-over-year driven by two effects, the rampdown of radiation oncology and also having the large chunk of IT in fiscal 2011. But I also said book-to-bill will be well above one for 2012 according to our framework. On the revenue side the repositioning of radiation oncology will also have its toll in the neighborhood of roughly 100 basis points. So in 2013 obviously then if you don’t have it in 2012 anymore, in 2013 there will be no effect.
Let me briefly refer to your statements on PACS and Linacs, we clearly stated we are not moving out of it, we are reducing and we will stop production of Linacs, but we will stay and remain in the imaging arena and obviously we have expectations that this amount will increase because we have a different competitive landscape with the imaging devices if the radio oncology suites. So yes we will see less revenue in the next because if you don’t sell them you don’t make revenue, but it will be compensated. And with respect to PACS, moving out PACS is somewhat repositioned technologically. If you have an Adobe photo print at home this is PAC System and you can downloaded it for free of charge from the internet. And from that point of view, we are simply reflecting that technologically something is going on with image post processing also and that needs somewhat reference, but in the end we still be partner for somewhat imaging processing. We call it differently and it’s somewhat sold differently, but that is nothing but a recognition of a changing technology environment. Bernd?
Well, my point to this, I mean we see, I emphasized very much in my presentation things which are close to the core imaging and which have global scale. What does impact, this starts not to be very close to imaging anymore because it has a lot of capacity turned into an IT, yeah. And very often there are, despite I mean there is not much differentiation as Hermann said, but very often it is a game of customer specific solutions. So I want to be a global product business where we don’t have too much of complexity of individual customization of the product. We focus on IT imaging on syngo.via which is close to our strength in the modality.
So we also talked about the MR/PET for example or imaging in the operating room or cardiac CT things like that cannot be visualized on PACS, because the PACS system is just doesn’t do anything else but what a film sheet does, so PACS is not ready to cope with the data.
So syngo.via is the link of visualizing what our innovations bring on top of PACS. It can be on hard on top of we will loose with our focus strategy on PACS as we focus on the product type business, we will compensate with the syngo.via product and this will not be -- it will not be visible there on the top line.
Now you had a different question, the second question was regarding the detention for ways of retrofit follow through service growth in developed markets in terms of aging and…
I mean this is certainly a topic here and I want to draw your attention back to the one slide and show about the US and not the UK. There in 2006, 45% of the growth market was in the US. So these scanners are now five to six years old, the scanners which have been bought by them, so at some point of time we will see in various developed markets a replacement rate, which is some kind of sustainable growth driver and you will see consolidation in every CT scanner will be replaced and the institutions who replace regional CT scanners with refuse CT scanners not so, but in the end there will be a replacement real which we have support our top-line. Michael?
Yeah, the installed base question, I showed that we are comparably a $150,000 compared to the 2009 April market rates were just rough growth of installed base between 5% and 6% and this is something of course in our business we have to place the system in order to then get the reagent revenue stream and here the 1910 is probably a good operating number; it fluctuates and that influences of course also our quality results.
Clearly, would be having done has getting enough creation stream through this installed base growth and this is on the one side of course focus of the sales force; we found that in some of the countries a 100% of the incentive was on instrument placements, not on reagent growth.
So we are shifting that or we have shifted that already for this fiscal year and then of course you've got to have attractive assay pipeline in order to offer your customer that has brought your systems attractive assays that they add to their menu. So in both things we are working, so that's why we say its not necessarily or its not a problem of the installed base, it’s a problem of attractive assays and getting the sales force to focus on it.
What proportion of the installed base have closed systems and what proportion are typically open to competition providing assays?
I mean more than 95% are closed. So basically in our industry it’s therefore, I should speak for us and so there is a small percentage that actually can use reagents from somebody else.
But you have to bear in mind these are small CapEx decisions and that might have different machines so you just shift to the other one although having a machine from another company. So it is because its not a big CapEx decision like buying an MRI machine.
Mariel von Drathen
Okay. Do we have anymore question? I don't see anything. Hermann would you want to give a final statement?
What we wanted to bring across is that we are all convinced that we have a unique portfolio in our industry and that this bears in every of its element huge potentials in making progress and leveraging on it and in particular it bears also huge potential in cross fertilization.
We tried to give you some hints that we are moving from an imaging or diagnostic imaging company into a company that somewhat controls the treatment chains that imaging and diagnostics and biomarkers and so forth that they are utilized more and more to cope with what I called in my introductory remarks the diagnostic shift, so what is wrong with the patient toward what helps the patients.
So in today’s environment and ready for tomorrow’s environment, we feel we have something unique which is hard to be beaten. We tried to bring across -- we are experts in healthcare and our customers appreciate that and therefore we have through our knowledge, our clinical knowledge, a comparative advantage which goes on top of the resilience of our business resilience with respect to installed base business which is somewhat less sensitivity to financial and other crisis, but also that puts the strong hurdles for our new players that happen somewhat indicated also during the course of the discussion and players that want to eat the food from our table. They are welcome but they should pay an adequate entrance fee.
When it comes to the changing market environments, I think we are well positioned through what we have already elaborated on well positioned food our worldwide value added procedure, but also of our position through our mindset and this mindset how to tackle with the changes in healthcare is best reflected by our agenda.
The agenda is a program, the agenda indicates a mindset how we want to tackle other challengers of healthcare and in the end how we want to deal with the money that is given to us in order to make something out of it, it is related towards making the maximum of the challenges that come from state of the art of modern healthcare systems worldwide.
Our main lever technology, but not for it’s sake of brining what is technologically doable, but from a sake of what is technologically given be adequate return for the best of our customers and there is an investment that they get from reimbursement schemes and the investment from our shareholders which then plays into our cash.
I hope we manage to convenience you that we represent an asset that is worth investing it. I want to thank you also on behalf of the entire team here for your contributions and we wish you a very nice trip home after we have had final get together at least part of us. Thank you very much for coming.
Mariel von Drathen
Yeah, thank you Hermann. This ends the official part of this Siemens Capital Market Day. You all are invited to join us in the executive team for a causal get together. Thank you very much for being with us today, and safe trip home and see you soon, bye.