May 3, 2017 7:00 am JST

Olympus stumbles on road to financial redemption

Scandal-plagued endoscope giant struggles to find next focus

TORU HATANO, Nikkei staff writer

Olympus President Hiroyuki Sasa, right, explains annual figures Tuesday in Tokyo.

TOKYO -- Aiming to move past a grave accounting scandal earlier this decade, Olympus pledged last year to grow sales 40% by March 2021. But one year into its medium-term plan, the Japanese optics equipment manufacturer has suffered significant declines in both sales and profit.

Rocky start

"We must admit that the results were quite tough considering it was only the first year" of a five-year endeavor, President Hiroyuki Sasa told reporters Tuesday. Group sales dipped 7% to 748 billion yen ($6.67 billion) during the fiscal year ended March 31. Operating profit plunged 26.8% to 76.4 billion yen. The average yen-dollar rate for the year appreciated by 12 yen from the prior year to 108 per dollar. This significantly ate into the company's yen-denominated revenue.

In 2011, it was revealed that Olympus had covered up years of losses originating from failed speculative financial engineering schemes known as "zaitech," and the group was forced to book crippling liabilities.

Although the Tokyo-based company is still resolving related disputes in court, it is successfully eliminating negative legacies on the business front. After plunging to less than 3%, its equity ratio has recovered to a far healthier 43.3%.

The five-year plan that began April 2016 seeks to effectively transform Olympus into a group specializing in medical equipment. The company hopes to expand all surgical support segments, such as disposable accessories used with its core gastrointestinal endoscopes. Sales are projected to climb to 1.1 trillion yen, driven by extended sales channels in emerging countries in Asia and elsewhere.

"If we omit the foreign exchange effect, we are growing in real terms," Sasa declared. "Efforts to achieve our medium-term plan will not diminish in any way." Although the company's earning capability is reportedly sound, it still needs to boost sales by nearly 50% in just four years to meet its target. A strategy focused on acquisitions and tie-ups will be key.

Olympus has already embarked on that route, announcing on April 28 the buyout of Image Stream Medical, its first acquisition since the accounting scandal. The U.S. firm supplies hospitals with systems for viewing and managing diagnostic images, affording Olympus "high synergies that will help us achieve growth in the surgical segment," according to Sasa. But Image Stream's annual sales through December 2016 amounted to roughly $31 million, a drop in the bucket in terms of reaching 2021's consolidated goal.

Past mistakes

Acquisitions and partnerships had been a weak point for Olympus. Facing the prospect of negative equity following reports of book-cooking, the company entered into a capital tie-up with Sony in 2012 which led to a joint venture. The plan was to apply Sony's imaging technology to Olympus' medical equipment, and to collaborate in the digital camera business.

Although the partnership enhanced Olympus' creditworthiness, the only visible outcome from the tie-up in the medical equipment segment was a jointly developed 4K endoscope. With digital cameras falling out of favor amid a maturing market, people at both companies grumbled that the purpose of the team-up had faded. Meanwhile, Olympus decided in February to end its 12-year capital tie-up with Terumo, another domestic medical device maker. 

The group's most successful acquisition has been Gyrus ACMI, an electric scalpel subsidiary now headquartered in the U.S. Inordinately massive fees paid to a financial adviser during the 2008 deal for the then-British company turned out to be a part of the long-running scheme at Olympus to hide losses.

Already controlling 70% of the global market for gastrointestinal endoscopes, Olympus is unlikely to be able to grow significantly in this segment. Whether the company will be able to channel the market dominance to growth in other fields will serve as a touchstone for the competitiveness of the Japanese medical equipment industry overall.

"We have not become overly cautious to acquisitions because of the Gyrus episode," President Sasa insisted. But in order to make a firm break with the past, Olympus will need to engage in buyouts and partnerships that display boldness as well as good judgment. 

Olympus Corp.

Japan

Market(Ticker): TKS(7733)
Sector:
Industry:
Health Technology
Medical Specialties
Market cap(USD): 11,863.51M
Shares: 342.69M

Sony Corp.

Japan

Market(Ticker): TKS(6758)
Sector:
Industry:
Consumer Durables
Electronics/Appliances
Market cap(USD): 48,629.94M
Shares: 1,264.38M

Terumo Corp.

Japan

Market(Ticker): TKS(4543)
Sector:
Industry:
Health Technology
Medical Specialties
Market cap(USD): 15,391.78M
Shares: 379.76M

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