Canon eyeing big bite into healthcare apple with Toshiba Medical buy; shares primed for rebound?

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Steve’s Take:

Late last year, the Japanese tech giant Canon Inc. quietly acquired Toshiba Medical Systems Corp., a leading manufacturer and seller of medical imaging devices. The move thrusts Canon into the global healthcare market and promises a host of synergies for delivering world-class medical devices and solutions, the company says in material supplied to Bloomberg and LinkedIn.

They’ve got the right idea but can they pull it off? If so, they’re a good bet to be among the leaders of the medical device sector’s stock performers in 2017 and should perhaps be a candidate for your portfolio.

But first, some brief history for those of you connecting the Canon name with just Japanese cameras and printers.

The first president of Canon was actually an obstetrician named Takeshi Mitarai. And since its establishment in 1937 in Tokyo, Canon manufactured digital radiography and ophthalmic equipment, but had never developed a large global presence in medical devices.

Last year, the company returned to its medical roots in earnest. In a modest but highly strategic US$5.47 billion deal, Canon acquired Toshiba Medical propelling the group into the global healthcare industry.

“As Canon’s first president was a doctor, there was always a yearning to make healthcare one of our main businesses,” says Fujio Mitarai, Canon’s Chairman and CEO. “We are delighted that Toshiba Medical is joining our group; it feels as if our dream of launching into the global healthcare market has been achieved, all in one fell swoop.”

The latest acquisition is certainly not mere nostalgia, but an integral step in the transformation of the $29.3 billion company (as of 2016). In recent years, the markets for office equipment and cameras–which have for long been Canon’s core businesses–have undergone structural changes, including market maturation and the proliferation of smartphones.

In response, the company has been pursuing a multi-pronged strategic shift of its business model. Its latest five-year plan focuses on pivoting away from consumer electronics to business clients in its traditional domains, while searching for new growth areas with affinity to its core competencies.

Canon’s plan is nothing if not ambitious: group revenues are targeted to increase to over 5 trillion yen ($44bn) with operating profit margins over 15% and net profit margins of over 10% for the Canon group by 2020.

The purchase of Toshiba Medical, wrapped up in December of last year, completes the re-alignment of the tech company and is expected to serve as a primary engine towards this medium-term goal, Canon says.

Like some other tech giants, Canon has set its sights firmly on healthcare, says Mitarai. He believes this to be “an area of the greatest potential,” in light of global population growth.

Other particularly positive trends for Canon both in developed and developing markets are that greater longevity and an expanding geriatric base of patients with chronic diseases related to the brain and respiratory and cardiovascular systems are driving demand for diagnostic equipment.

The market for diagnostic imaging equipment was valued at $32 billion in 2016, and is expected to grow at a compound annual growth rate of around 6.6% in the next five years to between $36.43 to $42.6 billion in 2021, according to industry research.

Currently, Siemens, General Electric, and Philips dominate, taking roughly three-quarters of the global market share, followed by Toshiba Medical and several smaller Japanese makers.

Mitarai believes the purchase of Toshiba Medical puts Canon in an ideal position to compete in the medical imaging systems market. As one of the most profitable divisions within the Toshiba group, Toshiba Medical has over 86 years of history in developing and supplying medical diagnostic devices, technology, and services in 140 countries and regions across the world.

The company is dominant in Japan for diagnostic imaging devices including CT (computed tomography), MRI (magnetic resonance imaging), X-ray radiology, ultrasound, and nuclear medicine. The company is vying to become the second largest supplier of CT systems globally and is currently the fourth largest supplier of MRI systems in the world.

“Canon has been in a small pond, unlike Toshiba Medical which has been in a large ocean, in terms of competing in medical devices,” says Mitarai. “So, we expect Toshiba Medical to take initiatives, including in the selection of M&A candidates, with the full backing and funding from the Canon group.”

A big plus is that Canon will inherit the global sales network of healthcare providers developed by Toshiba Medical over decades. The companies also hope that a second set of synergy benefits are realized in improved production quality and cost-efficiencies.

Canon has a supply of technologies that could be combined with Toshiba Medical’s capabilities. Notable ones include: high-speed dynamic X-ray imaging sensor technology, among other imaging devices, along with associated elemental technologies; photoacoustic tomography technology selected by Japan’s national ImPACT program2; medical robotic system technologies; and minimally invasive technologies.

As in almost all industries, healthcare is being reshaped by ICT, an explosion of digitized data, and the potential for AI applications.

Even before joining the Canon group, Toshiba Medical had also been gearing itself up for this “data healthcare” revolution by purchasing medical imaging and software companies such as US ViTAL images, French Olea, and Canadian Karos. The group is keeping an eye out for further opportunities to expand and develop medical IT solutions.

“We recognize that doctors are overwhelmed by an explosion of medical data. We believe it is our mission to not just collect this data, but to collate, analyze and then deliver it to them in a way that helps doctors make accurate and efficient decisions,” says Takiguchi. “The use of AI would play a significant role in achieving this mission.”

Another related and key market trend of “precision medicine”–medical treatment tailored to patients based on their individual genes, lifestyle, and environment–is also part of the new medical group’s plans.

In this area, Canon already established Canon BioMedical in New York State in 2015, and hopes to use this facility to commercialize genetic diagnostic equipment together with Toshiba Medical assets.

Bottom Line:

After all the warm, fuzzy platitudes about a CanonToshiba juggernaut and the bright future for growth let’s look at some numbers.

Five years ago, Canon was trading at $48 on the NYSE. Shares have slowly, steadily traded down since 2012 to approximately $30 today. However, the long downward trend in the stock stopped abruptly recently, following the purchase of Toshiba Medical.

Let’s say Canon management succeeds in its healthcare push and the stock price returns to its 2012 levels. That would mark a 60% upside.

According to a Reuters poll, of the 17 analysts covering Canon shares, the mean rating on the shares is 2.71–right between a hold and outperform.

I think analysts are under-appreciating the company’s recent strong trend upward and its tendency as a foreign tech company to fly beneath Wall Street’s favorite domestic heroes.

Here are some other positive data supplied by StockInvest pointing toward a strong buy in the short term.

Canon is up 1.03% in March and has now gained 8 days in a row. It is not often that stocks manage to gain so many days in a row, as dips for a day or two are expected. The price has risen in 7 of the last 11 days and is up by 2.41% over the past 2 weeks. Volume also increased along with the price, which is a positive technical sign.

There are only positive signals in the StockInvest chart today.

Canon holds buy signals from both short- and long-term moving averages. In addition, there is a general buy signal from the relation between the two signals where the short-term average is above the long-term average.

On corrections downward, there will be some support from the lines at $29.63 and $29.31. A break down below any of these levels will issue sell signals. A buy signal was issued from a pivot bottom point on Friday February 10, 2017, which indicates further gains until a new top pivot has been found.

Now, the risk factor.

This stock is usually traded at good volume, and with minor daily changes the risk is considered by StockInvest to be low. A major reaction is considered low as the stock is in very good shape technically, and therefore holds a positive evaluation despite the very short term risk. StockInvest’s recommended stoploss: $28.66 (-4.91%).

Like tech giants IBM with its Watson program, Microsoft’s NExT, Apple’s HealthKit and Alphabet’s Verily, Canon plans to use its own tech savvy and Toshiba’s accepted role as a solid player in the medical device/technology space to help doctors better diagnose and treat their patients.

Steve's Take: @Canon blueprint has right goals/benchmarks suggests #healthcare success Click To Tweet

The Canon blueprint does articulate all the right goals and benchmarks to suggest imminent success in its healthcare push. Only question is, as always, will the docs by in.

I believe they will.