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(Bloomberg Opinion) -- The aspiration for the biggest medical deal of the year is commendable — to transform cancer treatment so sufferers can live longer and better lives. In pursuit of this goal, German diagnostics group Siemens Healthineers AG has agreed to pay a high price to acquire U.S. radiotherapy specialist Varian Medical Systems Inc.
Covid-19 has displaced existing medical priorities this year. Cancer hasn’t gone away, but spending on the technology used to treat it has, at least temporarily. With elective procedures pushed out to make space for coronavirus patients, and hospitals spending heavily on safety measures, Varian’s underlying revenue fell by 19% in its most recent quarter. A 14% decline in orders for its oncology systems division was a troubling indication of the future trajectory.
It’s the same challenge everywhere. Siemens Healthineers isn’t replacing its order backlog at the same rate it’s making shipments to customers. The company, whose controlling shareholder is industrial group Siemens AG, points to an “investment reluctance” caused by the pandemic. Rival General Electric Co. recently warned of a challenging environment for its health-care business.
That backdrop may explain why Varian was willing to consider an all-cash takeover by Siemens Healthineers even though its stock had bounced from its March lows and was approaching pre-pandemic levels.
Strategically, the deal marks a new departure in marrying diagnostics with treatment. The thinking is that customers will benefit from a having a company that provides the kit for both, and that research and development will become more productive.
But financially, this is an expensive transaction despite a seemingly low 24% takeover premium. Strip out Varian’s small amount of net cash and the deal will cost about $16 billion. Varian’s operating profit is forecast to be around $600 million in its 2021 financial year when the deal would complete. That would imply a paltry 3% post-tax return on investment initially. Siemens Healthineers investors will want returns to climb to double or high single-digits.
Two leaps of faith are needed. One, that Varian’s performance is going to markedly recover from this depressed level. That could happen if a recent investment phase starts to bear fruit. And two, that Siemens Healthineers can deliver on a promised 300 million-euro ($353 million) profit boost from the deal. But this will take until 2025 to fully materialize. Only about one-third of it comes from cost savings. The bulk is revenue synergies — a challenge to achieve in any transaction.