Based on this year’s top 30 list, this union will move Siemens Healthineers into the top 5 echelon, and the resulting integrated organization will be a dominating force within the global interventional radiology market.
As M&A advisors who focus on the medical technology industry, we’ve noticed events like this often create interesting dynamics that have the potential to produce a waterfall effect for the rest of the industry. It is always interesting to analyze the deal on its own strategic merits.
One of the first questions that must be asked is whether the purchase is an offensive or defensive move by Siemens. Considering the aggressive inorganic moves by Royal Philips N.V. in the past few years, there could be an argument made that it is a defensive transaction designed to protect Siemen’s interests within radiology and oncology.
On the other hand, given the size of Varian, it could be argued that this is a very deliberate, aggressive move by Siemens to increase its market position within multiple segments in both image guidance and cancer treatment.
Another factor to consider is whether the deal is a standalone event with no impacts or a transformative occurrence with strategic organic and inorganic aftershocks?
The top 10 medtech companies, according to MPO’s annual report, are: Medtronic plc, Johnson & Johnson, Abbott Laboratories, GE Healthcare, Becton Dickinson and Co. (BD), Royal Philips, Siemens Healthineers, Cardinal Health, Stryker Corp., and Baxter (in that order). Relative to these organizations, it would seem the firms most potentially impacted would be Medtronic, J&J, GE Healthcare, BD, and Royal Philips. For the time being, it may have less of an impact on Abbott Laboratories, Cardinal Health, Stryker, and Baxter.
Medtronic and J&J are obviously two of the most diverse medical technology companies; as such, they are almost always impacted in some way by any major industry event. While not impossible, these two companies most likely won’t have any major response to the Siemens/Varian (S/V) transaction. Within these two multinationals, we expect the business leaders of the impacted market segments to be adjusting their business plans accordingly. These adjustments could include making new R&D investments and/or making some additional minor “tuck-in” acquisitions that will supplement their offerings to compete with the blended Siemens/Varian entity. If for some reason, either one of these companies wanted to “go big” in response to the S/V combination, the most obvious response would be to acquire Elekta, which is Varian’s major competitor in most of its market segments.
As the fourth-largest player, GE Healthcare will be interesting to observe as it considers its responses to the Siemens/Varian deal. The most obvious response would be for GE Healthcare to acquire Elekta. But considering the financial challenges GE has encountered over the past few years, the company simply does not have the fiscal bandwidth of years past. It’s not impossible, but it’s highly unlikely that GE could pull it off. Consequently, GE will be forced to conduct more focused, incremental transactions to keep pace with Royal Philips and Siemens in these key market segments.
Becton Dickinson (BD) is a bit of a riddle, because it is not directly impacted by the S/V deal like GE Healthcare or Royal Philips. It’s possible the S/V purchase will be an active topic among BD board members but executives must decide whether the company pivots to compete with the new, larger S/V entity (via a major move like an Elekta acquisition) or it avoids direct competition in core market segments by refocusing on its existing business units.
Clearly, Royal Philips is the company most impacted by the Siemens/Varian deal. Philips has not been shy about M&A (large and small), so it could easily be argued that Siemens’ purchase of Varian might prompt Philips to actively pursue Elekta in order to bolster its product portfolio in key markets and address technology gaps. If Elekta is not amenable to M&A, then expect Philips to continue supplementing its portfolio with other aggressive organic and inorganic pipeline activity.
Other players possibly impacted by the S/V union include Boston Scientific Corp., Elekta, AngioDynamics Inc., Merit Medical, and several other smaller firms. Accordingly, the acquisition and corresponding M&A activity is likely to be included on most companies’ board agendas in the coming months.
Larger companies that do not compete directly with the new S/V organization could still be affected by the merger, mostly through future pipeline activity (both organic and inorganic). The deal might cause these companies to pivot in both public and private ways.
Other entities impacted by the S/V acquisition can be placed in three categories: smaller direct competitors; OEM suppliers; and startups with technology that augments S/V’s core market segments.
Smaller direct rivals competing with this bulked-up S/V industry giant will have to focus more on their own value proposition. These firms will need to re-examine their portfolios to ensure their solutions offer a clear competitive advantage for each product category sold to customers. Larger companies such as a combined Siemens/Varian tend to leverage their size by bundling their product offerings to block smaller rivals from competing for key customers. The best way for smaller direct challengers to outsmart their larger opponents is to focus on unique value propositions that demonstrate the positive patient outcomes and economic benefits of working with a smaller firm. Those companies that cannot do so risk losing customers to the cost-saving measures of “bundled” product offerings and a pared-down supplier base.
There is good news and bad news for OEM suppliers in the S/V acquisition. Most vendors to top 30 companies know it is often extremely difficult to become an approved supplier to an industry giant.
Approved suppliers to either Siemens or Varian (not both) will find an opportunity in the combined entity to expand their businesses. However, there is also a risk these one-or-the-other vendors may eventually be squeezed out, as these larger organizations often reduce the number of suppliers during the integration process. In such a scenario, vendors with unique offerings that provide a competitive advantage rather than merely a price advantage will remain in good standing with the new, larger S/V organization.
Companies that are not current suppliers to either Siemens or Varian will find it even more challenging to become an approved vendor. In the short-term (pre-closing of the M&A transaction), both companies will be stalled on vendor initiatives unless it is mission-critical to one of their existing product lines or pipeline. For the longer-term, the combined organization will likely be working actively to shrink its supply base, which will make it even more difficult for companies to achieve approved vendor status.
The last category of companies affected by the S/V acquisition is the medtech startup that is working to forge a strategic partnership (M&A or commercialization) with an industry behemoth in order to increase value for their stakeholders. Clearly, it’s better in the current environment for these companies to have two entities in which to “pitch” their company, technology, and overall value proposition as a potential partner. Thus, the combination of Siemens and Varian eliminates one possibility on the startup companies list of potential strategic targets. For now, the focus will be on integrating Siemens and Varian rather than acquiring more companies.
In summary, having two of MPO’s top 30 companies combine is a huge deal in the industry. As stated previously in this column, there will be many impacts including some that weren’t mentioned or ones that have not yet crossed our minds. Though this certainly won’t be the last big acquisition to impact the medtech industry, it’s repercussions are sure to be felt for quite some time to come.
Florence Joffroy-Black, CM&AA, is a longtime marketing and M&A expert with significant experience in the medical technology industry, including working for multi-national corporations based in the United States, Germany, and Israel. She is currently is CEO at MedWorld Advisors and can be reached at email@example.com.
Dave Sheppard, CM&AA, is a former medical technology Fortune 500 executive and is now focused on M&A as a managing director at MedWorld Advisors. He can be reached at firstname.lastname@example.org.