The medical imaging and informatics industry seems to be about to embark on another big wave of financial transactions from varied initial public offerings (IPOs), spinoff, and merger and acquisition (M&A) activity. Eleven RSNA Annual Meetings that I have attended in a row may or may not be enough to judge, but the last time M&A seemed so intense to me was in the mid-2000s, when almost every major radiology PACS vendor picked up a cardiology PACS vendor.
Without us getting into any speculation or financial advisory, there are a few high-profile vendor moves that are undergoing, planned or expected to occur over the next few months, that will make 2017 an interesting year to watch unfold:
• Siemens Healthineers: When Siemens AG, the parent company of Siemens Healthineers, officially announced the $50 billion spin-off plan of the health care group, its shares went soaring. This suggests that the investment community may have perceived the carve-out of the health care division as alleviating the German industrial giant of a weighty asset. The hypothesis goes that Siemens AG is anticipating major growth impetus when the contracts kick in to rebuild the U.S. infrastructure under Trump’s America. The outlook for the health care industry, however, is more uncertain. In the best-case, it will continue to grow slowly, and in any case, it will continue to be shaken by macro-economic forces.
The rationale for the spin-off, then, is to create a new ownership structure for a company dedicated to health care that can decide and execute its own growth plan more autonomously. By all accounts, Siemens Healthineers has long been and remains the technology leader in the medical imaging industry. Realizing its growth potential will certainly benefit from higher flexibility in its governance.
• Varex Imaging: The latest in a long history of spinoffs, this carve-out of the Imaging Components segment of Varian Medical will be an independent company and carry the ticker VREX. The new company’s executives, who come from Varian, confirmed at the investor meeting held at RNSA that the transaction should be completed in early 2017. The soon-to-be stand-alone company kicked off 2017 with a bang, by acquiring the medical imaging assets of PerkinElmer, one of its main competitors, and the supplier of components to GE Healthcare, for one.
Historically, Varian Medical has always held a strong to very strong position across the value chain of X-ray imaging - from static and dynamic X-ray tubes, to flat panel detectors, to image processing. More often than we think, it is the component manufacturers that are the real innovators behind the latest product innovations of the large system integrators. The hope is that by operating as an independent company, Varex Imaging will be better able to stay at the leading edge of technology innovation, to continue to strengthen its value-add to OEM customers, to expand its market access, albeit while fighting price pressure and commoditization in some of its product areas.
• Change Healthcare: Upon close of the spin-off by McKesson Corporation, Change Healthcare will become the new umbrella for McKesson’s health IT and imaging IT business lines. The Blackstone Group, majority owner of Change Healthcare, said it would likely launch an IPO in the months following the transaction. While McKesson continues to be strong in imaging informatics, that is not the case for every other area of its health IT initiatives. The synergies with former Emdeon, which constitutes the ‘other half’ of Change Healthcare, should be interesting to watch.
• Agfa-Gevaert, the parent of Agfa HealthCare: As soon as German hospital IT vendor CompuGroup Medical made public its interest to acquire Agfa, the stock price of Agfa went up by double-digits. This reaction of the financial market makes sense, because there is every reason to believe that CompuGroup, as a pure-play health IT player, is really only interested in the assets of Agfa that are 1) health care and 2) digital. The legacy businesses of Agfa Gevaert, such as the analog and graphics divisions, may continue to be profitable, but are likely not the type that any entrepreneurial investor betting on health IT or medical imaging would want to go after. The CompuGroup attempt rapidly turned out inconclusive without providing any clear reason. However, it hints at the scenario of a “hostile takeover” of Agfa Healthcare from Agfa Gevaert, which may interest more investors.
• Carestream Health: Shortly after its ten-year investor owner, Onex Corp officially put it up for sale, rumors surfaced the sell-off would involve a potential breakup of the Carestream Health organization. This means the company, valued at more than $3 billion, could see its digital X-ray, film, imaging IT, dental, and ultrasound divisions take different directions. This idea of ‘piecemealing’ Carestream Health to different investors has somewhat of a sad spin to it, because since the Kodak days, the company has managed to balance well the cycles of success and slowdown in each segment.
Until today, Carestream manages to remain very innovative on numerous fronts of its portfolio. However, it may well be time for Onex to take a serious pulse check at the remaining synergies – or actually the lack thereof – between the different business lines of Carestream. Is radiography equipment still driving the PACS business, or vice versa? Is there still any overlap left between digital imaging and analog film operations? Is dental going to become any less of a world of its own in the new health care environment?
How valuable is the imaging IT business of Carestream alone, for example, considering that IBM paid no less than $1 billion for Merge Healthcare a year ago? Merge’s global imaging IT footprint is smaller than Carestream’s, which leads the large-cloud PACS market in dozens of countries. If a potential investor is really looking to capitalize on the goldmine that lies in these big medical imaging datasets, there is no reason why Onex would not expect a seven-digit valuation for the Carestream imaging IT business alone.
Each of Change Healthcare, the Agfa-CompuGroup combination (if the takeover had occurred), and Carestream Health (if it gets sold as one asset) represents roughly $3 billion of annual revenue. Three-billion-dollar-sized companies seems to be a sweet spot for the health care industry today –not too small, so as to still have credibility and access to ‘big-fish’ contracts, but not too big either, so as to be able to maintain the entrepreneurial as well as an intra-preneurial spirit required by the changing health care environment.