In what one analyst labeled as a “summer surprise,” Varian Medical Systems Inc. and Siemens Healthineers AG said they plan to combine in an all-cash transaction valued at $16.4 billion.

Varian’s board has backed the agreement, which will see Siemens Healthineers pick up all outstanding shares for $177.50 per share in cash, representing a premium of about 42% to the 30-day volume weighted average closing price of Varian's common stock as of July 31. The transaction is expected to close in the first half of calendar year 2021.

For its part, Siemens Healthineers sees great possibilities with the deal. "Siemens Healthineers is creating an unprecedented, highly integrated portfolio for the global fight against cancer,” said Ralf Thomas, chairman of the supervisory board of Siemens Healthineers AG.

Word of the deal comes almost a year to the day after Corindus Vascular Robotics Inc. said it had agreed to be bought by Siemens Medical Solutions, a wholly owned subsidiary of Healthineers AG, in a cash deal worth $1.1 billion.

Unexpected target

The deal came as a surprise to BTIG analyst Marie Thibault, given that Varian is involved. “While we had expected med-tech M&A activity to pick up in the back half of the year, we anticipated that likely targets could be those companies that were struggling to perform during the pandemic and were seeking out strategic alternatives. [Varian] does not fit this profile,” she noted. In fact, her group had tapped the company as its top large-cap pick for the second half of the year, citing its resiliency, diversified business model, good growth profile and a healthy balance sheet.

Still, Thibault does not expect other potential buyers to emerge, given an ongoing partnership between the two and the fact that there are few players in the radiation oncology or adjacent spaces that could execute such a big purchase. Since 2012, they have worked together in the strategic Envision partnership that combined Varian’s therapeutic systems and Siemens Healthineers’ imaging technology.

Aurojyoti Bose, analyst at Globaldata, noted the deal was the largest for Siemens Healthineers since its spinoff in 2018. "Varian’s oncology related devices and software will allow Siemens Healthineers to expand into the oncology space while also creating a world leader in oncology solutions,” he noted. Also, the combination should create a leader in end-to-end cancer care, aligning with Siemens Healthineers’ goal to take a leading role in the oncology space by 2025.

Siemens call

Bernd Montag, Siemens Healthineers’ president, CEO and chair of its management board, noted during his firm’s Aug. 2 third-quarter earnings call that the company had promised 2.5 years ago that to shape the future of health care. Along those lines, "[b]y adding Varian to the Siemens Healthineers team, we both become stronger,” he stressed.

“With our support, Varian will make a leap to the next level in cancer care. With the integration of our imaging capabilities, Varian will be able to offer the broadest product portfolio in cancer diagnosis and therapy,” Montag continued. " Varian can tap into our vast data pool of curated images in our AI knowledge pool to leverage these new and even more impactful digital and artificial intelligence offerings, and hence, will more quickly broaden the spectrum of more individualized and more precise therapy.”

CFO Jochen Schmitz noted the group had the support of its majority shareholder, Siemens AG, in terms of financing the transaction. “That means we have a fully committed bridge facility in place,” he explained, noting that it will be replaced by a new financing structure, which he described.

“Firstly, new equity to be issued by Siemens Healthineers AG, significantly increasing free float and trading liquidity. The new equity could account for up to 50% of the financing structure. Secondly, new debt, which will be issued at Siemens AG level and pass-through to us at arm's length,” he added.

Q&A

Analysts on the call had plenty of questions. For his part, Berenberg analyst Scott Bardo asked why the company was diving into radiotherapy, given that it previously exited the space. He also noted that he thought that there was a European radiotherapy company “which is perhaps a little bit closer to home, a little bit cheaper, arguably, and maybe a little bit more advanced with image-guided radiotherapy.”

Montag replied that Varian is a well-developed cancer care company whose reach goes beyond radiotherapy. "Yes, we have been in radiotherapy, and we exited and not because we didn't like the market, but because we got outperformed by someone,” he added.

Related to the other part of the question, Montag noted that despite the geographic distance, the two have a good relationship and cultural fit.

Wasi Rizvi, with RBC Capital Markets, highlighted that the arrangement would position the combination as a cancer care company. To that end, he wondered whether that could become an area of bolt-on M&A in the next few years. Montag explained that Siemens currently is a strong cancer care player, as well as a holistic health care company.

“But when it comes to bolt-on acquisitions, I think when you look at the Varian M&A strategy in the last years that makes perfect sense. Building up an interventional oncology portfolio step by step,” he continued. “So, a lot of very meaningful bolt-on steps which Varian took, and I don't see a reason why that shouldn't go on.”

Varian’s results, buy = hopeful sign for Accuray?

Varian also released its quarterly results Aug. 2, ending with $769 million in cash and cash equivalents and $580 million in debt. Oncology systems revenues came in at $654 million, down 17%, while proton solutions revenues totaled $33 million, up 6%. Finally, the other segment saw revenues of $7 million. With the deal, Varian has canceled its third quarter conference call that was scheduled for Aug. 5.

In May, Palo Alto, Calif.-based Varian withdrew its guidance in the wake of the pandemic, even as Thibault saw positive news for the second quarter. “Demand for the Halcyon product, software offerings, and value-added services is driving [Varian] to higher growth rates. We think this trend should continue to increase orders over the next few years,” she wrote at the time.

The Halcyon system, which is for cancer treatment aims to simplify and enhance virtually every aspect of image-guided volumetric intensity modulated radiotherapy. The company also scored a win at the U.S. FDA early this year, obtaining a nod for its Ethos therapy, an AI-driven holistic solution for cancer care. This solution is designed to deliver an entire adaptive treatment in a typical 15-minute slot and is intended to put the patient at the center of care, Chris Toth, president of Varian oncology systems, said at the time.

For his part, Cowen’s Josh Jennings saw the results combined with the proposed buy as potentially boosting investor sentiment when it comes to Accuray Inc., of Sunnyvale, Calif., and its deeply discounted valuation. The buy, he added, could indicate a revived interest in radiation oncology assets by larger health care conglomerates.

“We believe larger imaging players like Hitachi, Philips, and historically GE could be reassessing the potential synergies associated with combining radiation therapy assets with their respective advanced imaging platforms,” he explained. “[Accuray’s] severely discounted valuation (~1.0x '21E sales) & strong pre-COVID-19 outlook calling for an 8%-12% revenue CAGR could drive interest.”

With that, he gave an outperform rating for Accuray, calling out its Cyberknife and Tomo HD systems and upcoming Radixact and Onrad launches. “We think [Accuray] can take share with its U.S. replacement cycle and emerging market opportunities in geographies such as China,” he added. Accuray is slated to hold its fourth-quarter earnings call Aug 13.

Top-ranking deal

According to figures from Clarivate’s Cortellis, this deal ranks as the sixth biggest med-tech M&A of all time. In terms of more recent deals, it trails behind Becton, Dickinson & Co.’s $24 billion buyout of C.R. Bard at the start of 2018. (BioWorld is owned by Clarivate.)

Siemens Healthineers also is ahead of the pack in terms of its IPO, raising $5.2 billion in March 2018.

Further, the deal tops another big buy revealed in March, when Waltham, Mass.-based Thermo Fisher Scientific Inc. agreed to buy Qiagen NV, of Venlo, Netherlands, for $11.5 billion. Last month, the two reported a boost in the original offer price of €39 (US$45.77) to €43 per Qiagen share in cash.

Other big deals include the $6.725 billion acquisition by 3M Co. of Acelity Inc. and Dassault Systèmes’ $5.8 billion buyout of Medidata. Early last year, Ethicon Inc. agreed to buy Auris Health for $5.75 billion, while Veritas Capital Fund Management picked up Athenahealth for $5.7 billion.

Still, M&A money for deals has fallen in 2020 vs. last year. At $5.18 billion from 171 completed M&As, the half-year amount is only a third of what was seen during each of the first, second and fourth quarters of last year, and a drop of 85% and 84% from the first half of 2019 and 2018, respectively.

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