red For Sale sign hanging with sky background

In July 2015, Toshiba was found guilty of overstating profits by $1.2 billion by an independent auditing firm. The investigation found that since the global financial crisis, accountants in the company's visual products, PC and semiconductor business units either booked future profits early and/or pushed back losses in order to meet quarterly "challenges" set out by corporate management; these practices continued unabated up until the investigation.

These "challenges", however, were often seen as unrealistic, yet failure to meet fiscal goals was highly frowned upon, and went against Toshiba's corporate culture (which follows conservative Japanese business customs of complete subordination to upper management).

The fallout: Toshiba is selling its entire medical device business unit, Toshiba Medical Systems. Currently, Toshiba as a whole is forecasted to lose $6 billion in revenue and 10,000 jobs in 2016. The sale of the medical device business could net upwards of $6 billion; a complete sale would increase the company’s liquidity; however, a healthy balance sheet is expected to take many years.

With FUJIFILM, Canon and Konica Minolta amongst the final four bidders, the ramifications of the sale will significantly impact market dynamics in the diagnostic imaging space. I’ve long considered Toshiba Medical Systems to be the biggest threat to the Big 3’s monopoly of the diagnostic imaging system market, especially in the premium ultrasound, CT and MRI system markets. With the impending sale, the Big 3’s revenues are less threatened, at least in the short term (note: Siemens Healthcare, GE Healthcare, and Philips Healthcare’s market position—barring catastrophe—won’t change drastically).

For any major transaction, it takes time to align business units—sales networks, marketing divisions, R&D, and supply chain—and adjusting to a new corporate culture can take time. Luckily—depending on how much you attribute a highly conservative business culture to the demise of Toshiba—all prospective buyers are Japanese, so corporate transition could go smoother than if a US or European company were to acquire it.

There is also the issue of what to do with competing products. FUJIFILM, Canon and Konica Minolta all have strong ultrasound and DR radiography portfolios that overlap with Toshiba Medical Systems’ products. In a fairly commoditized market, competitors have pretty much established themselves as high-, mid- and low-tier players; especially in the ultrasound system market, Toshiba Medical Systems’ Aplio premium ultrasound with SMI Doppler imaging has been applauded for its cutting edge technology. Outside of FUJIFILM, Toshiba Medical Systems’ DR radiography portfolio is also lauded by hospitals as a higher-tier system than Konica Minolta’s or Canon’s DR system. When Medtronic wanted to acquire Covidien, the FTC had antitrust concerns due to some overlap in the product portfolios of the two companies; as a result, Covidien sold off some business units that directly competed with products in Medtronic’s portfolio, its Stellarex drug-coated balloon being one (sold to Spectranetics). However, can prospective buyers really justify selling a world-class system, or is it better to sell off its own product and undermine its own R&D efforts?

There is also the issue of how to brand Toshiba Medical Systems’ products; because replacement cycles are so much longer in the capital equipment markets, consumers tend to heavily emphasize brand reputation when purchasing systems. This is especially true in emerging markets, although this concept holds true in the US and Europe as well. While more of an immediate effect, the unfamiliarity of new ownership—and the challenges of realigning sales channels, post-sale servicing, and marketing efforts—will detract some consumers from purchasing these systems. This is especially important given that the current installed base is aging fast in the US and Europe, and replacement sales are expected to increase more rapidly in the next few years.

The significance: there will be a redistribution of power in the global diagnostic imaging system market. FUJIFILM—who is currently the favorite—already has strong revenues from its ultrasound and general radiography business, and has experience in the acquisition and integration of diagnostic imaging companies’ (see: Sonosite). The scale of this transaction of course is much larger. Konica Minolta and Canon also have experience acquiring health care companies. Most recently, Konica Minolta acquired Viztek to enhance its health care IT business, and Canon acquired Delft Digital Imaging. While it would take some time, with product offerings now in the MRI and CT system space, FUJIFILM could realistically continue Toshiba Medical Systems’ challenge of the Big 3. Konica Minolta and Canon could also realistically put forth a valiant effort. In a market space that is often classified as highly commoditized and marginally dynamic, with huge capital barriers that prohibit entering the market (and therein being successful in the market), the fall of a giant is set to shake the foundation of the market below.

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