Olba Healthcare Holdings 2689
オルバヘルスケアホールディングス
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Summary
OLBA HEALTHCARE HD sells medical devices and consumables to hospitals and clinics as its core business. It sources its products from roughly 1,000 domestic and overseas manufacturers and distributors, and supplies these to about 2,000 medical institutions, which are its customers.
Health Care Equipment & SuppliesHealth Care Providers & Services
Key dates
2019-09-17
Coverage initiation
Executive summary
Business overview
Olba Healthcare Holdings, Inc. (previously Kawanishi Holdings, Inc.) sells medical devices and consumables to hospitals as its core business. About 80% of its sales are derived from controlled medical devices and specially controlled medical devices, two categories of equipment for which registration as a medical devices vendor is required. The company sources some 400,000 products from roughly 1,000 domestic and overseas manufacturers and distributors and supplies these to about 2,000 hospitals and clinics. It has no bias towards any particular supplier or distributor, with the top 10 suppliers accounting for about 40% of its purchases in value terms, and the top 100 accounting for about 80%.The top 10 customers for Medical Devices and Consumables account for roughly 40% of its external sales, and the top 100 about 75%.
The company's business is close to regional communities, and its regional strengths lie in the Chugoku-Shikoku (66% of total sales), Tohoku (20%), and Kinki (12%) regions. According to the company, it has the leading market share in Chugoku (about 20%) and Shikoku (about 15%), and is third in Tohoku (about 7%). In other regions, even the leading company has a market share of less than 20% in many cases, and in Tokyo and surrounding regions (Saitama, Chiba, and Kanagawa), the market leader has a share of roughly 7%, and in Kinki the figure is about 12%. Also, close coordination with hospitals and doctors, a solid grasp of operation schedules and procedures, proposing the right equipment and supplies for surgery and treatment, and delivery in bulk require highly knowledgeable personnel. However, the company currently generates only 2% of its sales in Kanto, a large market.
The company’s segments are: Medical Devices and Consumables (82% of total sales in FY06/21), SPD (Supply, Processing, and Distribution; 16%), and Nursing Care Products (2%). The core Medical Devices and Consumables segment supplies consumables required for surgery, such as automatic staplers, surgical sutures, syringes, stents, and catheters (86% of segment sales), and equipment such as computed tomography (CT) scanners, Magnetic Resonance Imaging (MRI) scanners, ultrasonic diagnostic equipment, and surgical monitors (14% of segment sales). The SPD segment provides supply, processing, and distribution services, which include support to enhance operational efficiency at hospitals; inter-hospital transportation of pharmaceuticals, medical devices, and consumables; appropriate management of hospital inventories; and verification of hospital procurement prices. Product sales generate some 90% of segment sales, with management service fees contributing the remaining 10%. This segment is closely linked with the Medical Devices and Consumables segment. The Nursing Care Products segment mainly leases nursing beds. In FY06/21, the Medical Devices and Consumables, SPD, and Nursing Care Products segments reported OPM of 1.4%, 0.7%, and 6.3%, respectively.
The Japanese market for medical devices is generally expected to grow at a CAGR of 2–3%, driven by advances in medical technology and growth in the number of patients as Japan’s population ages. The company targets annual sales growth of at least 3–4%, mainly by increasing its share in regional markets. The market for nursing beds is also projected to grow as rises in the late-elderly population and expansion of in-home care push up demand. The company looks for annual sales growth of 5% or more in its nursing bed leasing business.
Earnings trends
In FY06/21, the company reported sales of JPY113.0bn (+4.7% YoY), operating profit of JPY1.5bn (+66.2% YoY), recurring profit of JPY1.5bn (+70.3% YoY), and net income attributable to owners of the parent of JPY989mn (+203.1% YoY). Although the number of surgical procedures decreased due to the impact of the COVID-19 pandemic, sales expanded on increased demand for infection prevention-related products and testing-related products, as well an increase in orders for COVID-19-response supplies. Profit benefitted from the positive effects from increased sales and the fact that the company booked a provision of allowance for doubtful accounts of JPY257mn as SG&A expenses in FY06/20, but no such expense in FY06/21.
In April 2022, the company revised its full-year FY06/22 earnings forecast. The revised forecast calls for sales of JPY107.5bn, operating profit of JPY2.0bn (+28.9% YoY), recurring profit of JPY2.0bn (+31.6% YoY), and net income attributable to owners of the parent of JPY1.5bn (+47.6% YoY). The revised forecasts constitute upward revisions of JPY2.5bn for sales, JPY402mn for operating profit, JPY414mn for recurring profit, and JPY407mn for net income attributable to owners of the parent, due mainly to the number of surgical procedures and demand for medical equipment exceeding company expectations.
Strengths and weaknesses
The company’s strengths are 1) its relationships of trust with customers, developed through a focus on regional areas, 2) its training system for human resources that underpins stable growth, and 3) the unique background and extensive personal network of President Yohei Maeshima that contributes to new business opportunities (including in the field of medical-engineering collaboration). Shared Research believes the company’s weaknesses are 1) difficulties in selling products and services at prices that reflect value added, 2) the lack of a business foundation that targets clinics, and 3) a sales presence that is limited to specific regions (in other words, its low market share in the Kanto region). (For details, see the “Strengths and Weaknesses” section.)
Key financial data
Note: The company is applying the Accounting Standard for Revenue Recognition (ABSJ Statement No. 29) from FY06/22. The company's FY06/22 forecasts reflect expected earnings after the application of this standard, and do not include the expected YoY change for sales. YoY change figures for operating profit, recurring profit, and net income attributable to owners of the parent are shown as the application of the new standard is not expected to impact earnings at these profit levels.
Recent updates
Revisions to earnings and dividend forecasts and acquisition of treasury stock
On April 28, 2022, Olba Healthcare Holdings, Inc. announced revisions to its earnings forecast and dividend forecast for FY06/22.
Revised earnings forecast for FY06/22
Reasons behind the revision
In the Medical Devices and Consumables business, consumables sales increased steadily as the number of surgical procedures turned upward from around fall 2021 owing to progress in implementation of COVID-19 countermeasures. With demand for medical equipment also exceeding the company's previous forecast gross profit beat the company's previous projections. The company expects the rising trend in consumables sales to continue through FY06/22.
SG&A expenses were below expectations as the company was able to rein in branch relocation expenses in the Medical Devices and Consumables business. Also, having reexamined the recognition of deferred tax assets, the company now expects a reduction in corporate taxes at the end of the fiscal year. As a consequence, all profit levels are seen beating the company's previous expectations.
Revision to FY06/22 dividend forecast
Based on the upward revision to its full-year FY06/22 earnings forecast, the company also revised its forecast for annual dividend per share to JPY60.0 (from the previous forecast of JPY50.0).
On the same day, the company made an announcement concerning the acquisition of treasury stock through the Off-Auction Own Share Repurchase Trading System (ToSTNeT-3).
Acquisition details
Type of shares to be acquired: Common shares of the company
Total number of shares to be acquired: Up to 80,000 shares (1.3% of total number of issued shares excluding treasury stock)
Total cost of acquisition: Up to JPY136mn
Announcement of acquisition results: The acquisition results will be announced after the completion of trading at 08:45 JST on May 2, 2022
Trends and outlook
Quarterly trends and results
Notes: Figures may differ from company materials due to differences in rounding methods.
At the start of FY06/22, the company adopted several new accounting standards, including the Accounting Standard for Revenue Recognition (ASBJ Statement No. 29). The figures shown above for FY06/21 have been retroactively calculated based on these new accounting standards and are shown for reference purposes only. The change in the revenue recognition standard effects both sales and the cost of sales, but does not affect earnings at the gross profit level and below. For this reason, the table above does not show YoY comparisons for FY06/21 sales but does show YoY comparisons for FY06/21 operating profit, recurring profit, and net income.
Note: Figures may differ from company materials due to differences in rounding methods.
Cumulative Q3 FY06/22 results (out April 28, 2022)
Summary
In cumulative Q3 FY06/22, the company reported sales of JPY81.8bn (+5.3% YoY), operating profit of JPY1.7bn (+23.7% YoY), recurring profit of JPY1.7bn (+25.0% YoY), and net income attributable to owners of the parent of JPY1.1bn (+28.3% YoY).
Medical Devices and Consumables
In cumulative Q3 FY06/22, the Medical Devices and Consumables business reported sales of JPY77.5bn (+5.4% YoY) and operating profit of JPY1.5bn (+23.1% YoY).
Earlier in the COVID-19 pandemic, hospitals had little knowledge about coronavirus infections and therefore prioritized measures against COVID-19 over performing non-essential surgeries. From around autumn 2021, however, the number of surgical procedures has rebounded amid increased division of roles and cooperation between hospitals, a rising vaccination rate, and progress in hospital measures to stem coronavirus infections. This led to a 3.5% YoY rise in sales of consumables under the company's Medical Devices and Consumables business.
Breakdown of consumable sales is as follows.
Cumulative Q3 sales of surgery-related consumables were up 2.3% YoY. Sales of ophthalmology-related products were down 19.8% YoY, due in large part to a lack of orders from several clients during the period. Sales of PPE-related products (masks, gloves, and other personal protection equipment) and other infection control-related products had been sharply higher amid the ongoing battle against COVID-19, but fell 3.0% YoY as the surge in prices stalled. Sales of mainstay surgical products, though, rose 10.4% YoY in a continuation of the growth trend since Q1. Sales of testing-related products rose 10.2% YoY, while in the focus area of internal medicine (which includes diabetes treatment) there was a 13.7% YoY increase in related product sales.
Sales of orthopedic surgery-related consumables were up 2.2% YoY. Among mainstay products in this area, sales of artificial joint-related products have suffered an ongoing drag from the pandemic, but were down only 0.2% YoY due to a rebound in joint replacement surgery numbers and increase in robot-assisted surgeries. Sales of spinal surgery-related products (which tend to be used in quite acute-care settings) rose 7.4% YoY, and sales of products used in arthroscopic surgeries and surgical procedures to treat external injuries and sports-related injuries were 4.7% higher YoY. While sales of the latter could decline as demand tends to be correlated with people's movement and this is likely to be limited by a renewed rise in COVID-19 infections, demand for orthopedic surgery-related consumable maintained an upward trajectory.
Sales of circulatory system-related consumables finished up 9.6% YoY, continuing the uptrend that began in Q3 FY06/21. Growth was driven by strong sales in catheter ablation-related products (+21.1% YoY), where the company has expanded its customer base, and there was a 10.0% YoY rise in sales of medical implant devices (such as cardiac pacemakers) used to treat arrhythmia.
Sales of medical equipment were up 20.3% YoY. The sharp jump was driven by a combination of new hospital construction/relocations and strong sales of low-ticket items such as air purifiers and equipment for creating negative pressure rooms, much of which was funded by the additional funds allocated by the government in the wake of the pandemic.
SPD
In cumulative Q3 FY06/22, the SPD business reported sales of JPY3.5bn (+5.6% YoY) and operating profit of JPY118mn (-2.1% YoY).
Sales increased YoY as although sales activities to win new contracts could not make much progress due to the impact of the pandemic, demand for products to combat viral infection remained high at existing clients. Operating profit finished the quarter down YoY as costs went up, especially personnel-related costs, which rose in response to changes in the company's pay scale.
Nursing Care Products
In cumulative Q3 FY06/22, the Nursing Care Products business reported sales of JPY1.8bn (+1.9% YoY) and operating profit of JPY132mn (+19.8% YoY).
Sales in the Nursing Care Products business increased YoY as the COVID-19 pandemic fueled a 6.5% YoY rise in sales from the mainstay nursing care product rental business amid heightened interest in at-home medical and nursing care. The YoY rise in operating profit reflected ongoing margin improvement at the rental business.
Company forecast for FY06/22
Note: The company is applying the Accounting Standard for Revenue Recognition (ABSJ Statement No. 29) from FY06/22. The company's FY06/22 forecast reflect expected earnings after the application of this standard, and do not include the expected YoY change for sales. YoY change figures for operating profit, recurring profit, and net income attributable to owners of the parent are shown as the application of the new standard is not expected to impact earnings at these profit levels.
In April 2022, the company revised its full-year FY06/22 earnings forecast. The revised forecast calls for sales of JPY107.5bn, operating profit of JPY2.0bn (+28.9% YoY), recurring profit of JPY2.0bn (+31.6% YoY), and net income attributable to owners of the parent of JPY1.5bn (+47.6% YoY). The company also revised its forecast for annual dividend per share to JPY60.0 (from the previous forecast of JPY50.0).
The new forecasts constitute upward revisions of JPY2.5bn for sales, JPY402mn for operating profit, JPY414mn for recurring profit, and JPY407mn for net income attributable to owners of the parent.
In the Medical Devices and Consumables business, consumables sales increased steadily as the number of surgical procedures turned upward from around fall 2021 owing to progress in implementation of COVID-19 countermeasures. With demand for medical equipment also exceeding the company's previous forecast gross profit beat the company's previous projections. The company expects the rising trend in consumables sales to continue through FY06/22.
SG&A expenses were below expectations as the company was able to rein in branch relocation expenses in the Medical Devices and Consumables business. Also, having reexamined the recognition of deferred tax assets, the company now expects a reduction in corporate taxes at the end of the fiscal year. As a consequence, all profit levels are seen beating the company's previous expectations.
The following explanation is based on the previous forecast.
Note: The company started applying the Accounting Standard for Revenue Recognition (ABSJ Statement No. 29) from FY06/22. FY06/22 company forecast reflects expected earnings after the application of this standard, and do not include the expected YoY change for sales. YoY changes for operating profit are shown as the application of the new standard is not expected to impact operating profit.
For FY06/22, the company forecasts sales of JPY105.0bn, operating profit of JPY1.6bn (+3.7% YoY), recurring profit of JPY1.6bn (+4.7% YoY), and net income attributable to owners of the parent of JPY1.1bn (+6.3% YoY).
The company adopted the Accounting Standard for Revenue Recognition (ABSJ Statement No. 29) from FY06/22. This will reduce sales and cost of sales by JPY11.5bn each, but will have no impact on profit from the gross profit line down. Under the previous accounting standard, the company's sales forecast would be JPY116.6bn (+3.2% YoY). Adoption of the standard will affect sales and cost of sales in the Medical Devices and Consumables and SPD segments.
The company expects an ongoing impact from COVID-19 in FY06/22, but looks for the impact to lessen versus FY06/21. It also assumes that the number of operations will recover gradually.
Segment forecasts follow.
Medical Devices and Consumables
The company forecasts sales (including inter-segment sales) of JPY99.0bn (JPY97.8bn in FY06/21 under previous accounting standard) and operating profit of JPY1.5bn (+7.4% YoY).
The company looks for growth in consumables sales as the impact of COVID-19 eases and the number of operations recovers. However, in FY06/21 customers used COVID-19 subsidies to purchase ventilators and extracorporeal membrane oxygenation (ECMO) systems. Because the deadline for applications for subsidies for these items came in March 2021, the company expects equipment sales to decline in FY03/22. It expects profit to increase on higher sales.
The company outlined the following as key initiatives for the Medical Devices and Consumables business in FY06/22.
SPD business
The company forecasts sales (including inter-segment sales) of JPY4.8bn (JPY19.3bn in FY06/21 under previous accounting standard) and operating profit of JPY149mn (+7.4% YoY).
The company expects sales to decline YoY due to the newly adopted accounting standard, despite an increase in the number of facilities under contract. It looks for profit to increase on growth in number of facilities and higher profit as such facilities get underway.
The key initiatives in the SPD business in FY06/22 are as follows.
Nursing Care Products
The company forecasts sales (including inter-segment sales) of JPY2.4bn (+1.5% YoY) and operating profit of JPY151mn (+3.9% YoY).
The key initiatives in the Nursing Care Products business in FY06/22 are as follows.
Initial forecasts and results
Medium-term management plan
The company revised its medium-term management plan in August 2021 in light of restraints on sales activities and the market trend toward the curtailing surgical procedures to ensure enough hospital beds were available amid the COVID-19 pandemic contributing to the delayed achievement of prior targets.
The revised medium-term management plan, covering FY06/22 through FY06/24, targets FY06/24 sales of JPY110.0bn (average annual growth of 2.3% compared with the FY06/22 forecast) and operating profit of JPY1.9bn (9.1%). The company is applying the Accounting Standard for Revenue Recognition (ABSJ Statement No. 29) from FY06/22. The targets in the medium-term plan reflect the application of this standard.
While factoring in uncertainties tied to the COVID-19 pandemic, the revised medium-term plan assumes that the number of surgical procedures will recover as vaccinations increase. The company has positioned the improvement of productivity through digital transformation (DX), including expanding the subscription-based business and the increased utilization of telecommuting, as a priority strategy within its plan. The company expects the Medical Devices and Consumables segment to drive earnings growth.
The previous medium-term plan targeted FY06/23 sales of JPY120.0bn (CAGR of 3.6% from FY06/20) and operating profit of JPY1.9bn (27.0%). The company revised its plan due to delays as the number of hospital operations were curtailed and it refrained from sales activities.
Note: The company applied the Accounting Standard for Revenue Recognition (ABSJ Statement No. 29) from FY06/22, so did not provide YoY growth rates because its FY06/22 forecast reflects sales under the new standard. There is no impact on operating profit from the new standard, so growth rates are included.
Medium-term strategy
The Ministry of Health, Labor and Welfare (MHLW) has advocated for a new healthcare delivery system that fits within the community medical care concept by 2025, when the baby boomer generation will be over 75. Although COVID-19 will likely slow this process, the company still thinks consolidation of acute care hospitals is inevitable. Meanwhile, healthcare technology is advancing as seen in robotic surgery and personalized healthcare (treatments tailored to the patient’s constitution and disease characteristics) based on genetic analysis of cancer genomes, for example.
The company’s forte is in the acute care orthopedics and cardiovascular (cardiology and cardiovascular surgery) fields. It aims to increase its market share in these areas by using digital tools and optimizing staffing levels. It also plans to contribute to the development of healthcare by being the first to provide technical and academic information in advanced fields. In addition, it aims to look into developing business with clinics, where its sales efforts have been insufficient so far, by providing support for online medical services.
The company set out the eight following longer term strategies.
Re-engineer business processes in its high market share orthopedic business to create a win-win situation for customers, suppliers, and the company
Streamline and boost the efficiency of internal operations through Robotic Process Automation (RPA) and quality control (QC) activities
Strengthen purchasing power across the entire Medical Devices and Consumables business
Maximize value provided to customers by digital transformation of sales activities using ICT (rebuilding business model via digitalization)
Build a structure that can continuously respond to healthcare issues by developing new businesses to diversify revenue streams
Expand medical-engineering collaboration to include manufacturers to develop products that solve healthcare challenges
Strengthen initiatives for employees such as work-style reform and health management through focusing on the social aspect of ESG in particular
Enhance institutional strength by instilling the Employee Charter, which serves as the group’s corporate philosophy, across the organization
In line with its long-term strategy, the medium-term plan calls for enhancing the ability to negotiate for purchase across the Medical Devices and Consumables business, streamlining and boosting efficiency of administrative workflows, leveraging its high market share in orthopedics to re-engineer business processes, and rolling out ESG initiatives. It also plans to focus on new businesses and the digital transformation of sales activities.
Bolster buying power across the Medical Devices and Consumables business
The company group's procurement volumes of medical devices and consumables are comparable to that of a major company, but procurement is divided among three separate companies—Kawanishi Co., Ltd, Sansei Medical Materials Co., Ltd, and Nikko Medical Materials Co., Ltd. The company aims for the three business companies to collaborate in negotiations with manufacturers to gain commercial rights over wide areas.
The company also plans to negotiate incentive terms with major medical equipment manufacturers and rejig basic agreements. It aims to receive manufacturer sales incentives of JPY480mn in FY06/24, up by JPY120mn from FY06/20.
Streamline internal administrative operations
Administrative departments can leverage digital technology to promote operational streamlining and enhancement of efficiency. From May 2022, the company plans to introduce a new integrated logistics system LiFlo that strengthens inventory management by adopting package management and streamlining movement within the warehouse at each location in turn. LiFlo also provides quality control such as expiration date management and sample product management. It will be possible to record usage sales on handy terminals and boost efficiency of lending operations.
The company also plans to continue focusing on using RPA to streamline workflows. In FY06/21, the company used RPA to reduce the time spent on routine tasks such as printing, data output, and emailing by 75 hours per month. In FY06/22, it plans to use RPA to reduce time spent on routine tasks by 160 hours per month.
ESG initiatives
The company looks to promote health management such as being certified by METI as an “Excellent Corporation for Health Management 2021.” In consideration of COVID-19, the company plans to increasingly utilize web lectures and improved e-learning for human resource development of employees in 2020.
New businesses
The company plans to continue its efforts to diversify revenue streams. It will have a particular focus on the clinics business, ICT healthcare solutions, subscription business, and medical-engineering collaboration.
Clinics business
The company formed joint venture Kawanishi BarcMed (equity-method affiliate) with EPARK in July 2019. EPARK has a proven track record in reservation systems for restaurants, hospitals, pharmacies, and mobile phone shops. The joint venture will develop a reservation system and contactless automatic checkout and change machines, aimed primarily at clinics in the Chugoku region to establish a foothold in the clinics market. The selling points of contactless services include prevention of infection spread, easing the outpatient workload at busy times, reducing waiting times, and addressing the labor shortage. In the longer term, the company looks to leverage online medical care support to expand business into clinics, a market it has yet to crack due to lack of sales activities. As of August 2021, it had sold 25 units.
ICT healthcare solutions
In February 2021, the company entered a business alliance with NTT East. Under the agreement, the company provides a Wi-Fi rental service, Medi-Fi, for patients and medical institution staff; a cloud camera that can store images from inside a hospital securely in the cloud, Medi-Sight; and cloud-based PC rental service, Medi Lock PC. As it provides Wi-Fi for inpatients, Medi-Fi is eligible for subsidies and the company plans to expand service offerings going forward.
Subscription business
The company also looks to build up the subscription business. Products that have been launched on a monthly subscription basis include rental ventilators. Medical institutions used to procure and own equipment, but rentals and leasing lower their equipment costs and increase convenience, and the company plans to tap into such demand. The company will also focus on growing sales of its amenity support system, which handles the sale of amenity sets for inpatients.
Medical-engineering collaboration
The company has focused on medical-engineering collaboration, in which medical and engineering disciplines team up to develop new medical devices. Traditionally, products have been developed based on needs from medical settings as communicated to manufacturers and engineering universities, then produced by manufacturers or contractors. However, products developed simply based on needs "as is" were often not cost-effective. By involving as a distributor with access to both medical settings and device manufacturers, the company aims to develop new products that are also marketable from a price perspective as well.
The company is the sole distributor in Japan for the medical training simulation robot mikoto (training robot for procedures such as nasotracheal intubation and oropharyngeal intubation) developed by MICOTO Technology Inc., and has also helped commercialize Gagless Mouthpiece (reduces the gag reflex and aspiration during endoscopic procedures) jointly developed by the Tottori University Hospital and Inaba Rubber Co., Ltd.
In FY06/21, the company provided small and medium-sized businesses with proposals for specifications and advice on the development of personal protection equipment (PPE) while also cooperating to develop sales channels. In light of the medical needs of Fukushima Medical University, it has collaborated in developing a portable negative pressure clean dome, for which subsidiary Sansei Medical Materials is the sole distributor in Japan. Product differentiation is not easy among medical devices and consumables but strengthening ties with upstream manufacturers through medical-engineering collaboration can lead to product differentiation that can lift sales values and cultivate new sales channels. Strengthening medical-engineering collaboration is again a theme included in the new medium-term management plan.
Maximize value provided to customers through DX of sales activities
To date, the company has prepared and uses an in-house electronic catalog for its employees that lists 450,000 of the total 800,000 medical devices and consumables, covering most products normally distributed. Various searches can be used on the electronic catalog thanks to enhancements such as application of in-house tagging, creating a system that can quickly and reliably find information sought by customers. The company is considering making the electronic catalog available to some medical institutions. The company established a DX promotion office in July 2021, and plans to step up its initiatives in the area.
Business
Business description
The company sells medical devices and consumables to hospitals and clinics as its core business. It sources its products from roughly 1,000 domestic and overseas manufacturers and distributors, and supplies these to about 2,000 medical institutions, which are its customers. It has no bias towards any particular supplier or distributor, with the top 10 suppliers accounting for about 40% of its purchases in value terms, and the top 100 accounting for about 80%. The top 10 customers for Medical Devices and Consumables account for roughly 40% of its external sales, and the top 100 about 75%.
In FY06/21, the company reported sales of JPY113.0bn, with the Medical Devices and Consumables segment (core business) contributing 82%, the SPD segment (contracted distribution and procurement for hospitals) 16%, and the Nursing Care Products segment (leasing of nursing beds and other products) 2%.
Sales grew at a CAGR of 2.2% in the five years from FY06/16 to FY06/21, and 1.6% in the three years from FY06/18. Although sales fluctuate due to changes in equipment sales caused by hospital reconstruction and other factors, the company has achieved stable growth driven by advances in medical technology and growth in the elderly population.
Note: From FY06/17, figures for its Life Science business are included in the Medical Devices and Consumables segment.
In FY06/21, GPM came to 10.3%. Its CoGS mostly consist of procurement expenses for devices and consumables (procurement-related transportation costs are also included in CoGS, but amount to only about 0.2% of sales, according to the company). Since FY06/11, GPM has reached a high of 10.6% in FY06/11 and a low of 10.0% in FY06/16. The difference was only 0.6pp, suggesting the company’s operations are relatively immune to major swings in GPM.
The Japanese Ministry of Health, Labour and Welfare (MHLW) estimates GPM in the medical devices sales industry came to 9.4% in FY2019, and also averaged 9.5% in the five preceding years. In other words, the company’s GPM is trending above the industry average. This is mainly because 1) the company has earned deep trust through sales activities centered on customers such as hospitals and doctors (proposing necessary devices and consumables inferred from limited data on surgery schedules, medical cases, surgery procedures, surgeons, and other categories), 2) it supplies some 400,000 products and has established mechanisms to ensure precise deliveries of necessary products in adequate quantities and at the right time (removing the need for hospitals to hold high-value and excess inventory), and 3) it can leverage its large scale of operations (Shared Research estimates the company is ranked fifth in the medical devices sales industry) to gain advantages in procurement.
Note: FY06/17 shows GPM in the medical devices wholesale industry in 2017.
In FY06/21, the SG&A-to-sales ratio was 8.8%. Employee salaries, allowances, and bonuses were the major cost items, totaling JPY5.7bn and accounting for 5.0% of sales (1,261 employees at end-FY06/21).
Since FY06/11, the SG&A-to-sales ratio has hit a low of 8.8% in FY06/21 and a high of 9.7% in FY06/11. The company’s SG&A expenses mainly consist of fixed-costs, and therefore, the SG&A-to-sales ratio tends to drop in years of sharp sales growth.
Although the company’s GPM does not fluctuate much, its SG&A-to-sales ratio is affected by changes in sales. As a result, OPM improves sharply in years of strong sales expansion. Since FY06/11, OPM has peaked at 1.6% in FY06/13 and bottomed at 0.5% in FY06/16.
Sales trends by region
The medical devices sales industry has a strong regional characteristic, mainly because companies require approval from prefectural governors to sell advanced medical devices and need to develop relationships of trust with customers (hospitals). The company has a strong presence in the Chugoku/Shikoku (66% of sales), Tohoku (20%), and Kinki (12%) areas. The company says it has the leading market share in Chugoku (about 20%) and Shikoku (about 15%), and is third in Tohoku (about 7%). In other regions, even the leading company has a market share of less than 20% in many cases, and in Tokyo and surrounding regions (Saitama, Chiba, and Kanagawa), the market leader has a share of roughly 7%, and in Kinki the figure is about 12%.
The company’s predecessor, Kawanishi Co., Ltd., established its business foundations over many years in the Chugoku/Shikoku areas, which today account for 66% of sales. The company’s subsidiary, Sansei Medical Materials Co., Ltd. (added to the group in January 2012), operates mainly out of the Tohoku area, which currently makes up 20% of sales. Meanwhile, the Kinki area generates 12% of sales thanks to contributions from Nikko Medical Materials Co., Ltd. (based in Kinki, turned into a subsidiary in June 2005), Inoue Medical Equipment Ltd. (based in Kobe City, acquired in 2004, and absorbed in 2011), and the supply of products and services from the new company, Kawanishi, Co., Ltd. (sales department spun off from the preceding Kawanishi Co., Ltd. in 2004), to neighboring Hyogo Prefecture.
On the other hand, the major Kanto market, with its large population, only accounts for 2% of the company’s sales.
The company says it is extremely difficult to cultivate new customers of hospitals in prefectures where it has no sales track record and gives two main reasons for this: First, hospitals have multiple decision-makers who determine orders for medical devices and consumables (such as doctors, directors, nurses, and persons in charge of SPD areas) and the company needs to establish personal relations with each of them to win orders (it must demonstrate its ability to make informed and optimally timed proposals about devices and consumables that precisely match individual hospital needs). Second, while the company can set up delivery centers near new customers to ensure prompt deliveries, it still needs approval from prefectural governors to sell advanced medical equipment (which in turn requires the appointment of resident managers and leads to upfront fixed costs). In other words, the regional characteristics of the medical devices sales industry are the main cause behind the variation in the company's market shares by region.
By segment
Notes: From FY06/17, the company included figures for its Life Science business in the Medical Devices and Consumables segment. The Life Science business was operated by consolidated subsidiary Takatsuka Life Science Co., Ltd., which mainly sells reagents, test drugs, physical and chemical appliances, and analysis devices. Takatsuka Life Science Co., Ltd. was absorbed by Kawanishi, Inc. in January 2017, and figures for the Life Science business have been subsequently included in the Medical Devices and Consumables segment.
Medical Devices and Consumables
The Medical Devices and Consumables segment is the company’s core business, accounting for 82% of sales in FY06/21. It procures medical devices and consumables from domestic and overseas manufacturers and distributors and sells these to medical institutions. By product, consumables make up 89% of segment sales, with the remaining 11% going to equipment. The company handles some 400,000 products.
It has roughly 1,000 supplier and deals with about 2,000 medical institutions. It has no bias towards any particular supplier or distributor, with the top 10 suppliers accounting for about 40% of its purchases in value terms (on a consolidated basis), and the top 100 accounting for about 80%. The top 10 customers for Medical Devices and Consumables account for roughly 40% of external sales, and the top 100 about 75%.
(equipment)
Consumables sold by the company include automatic staplers for surgery (surgical devices used to automatically close tissue using consistent staple lines after ailing body parts have been removed in a gastrointestinal surgery), surgical sutures, surgical drapes, syringes, gauze, scalpels, patient return electrodes for electrical scalpels, surgical drains, artificial joints, orthopedic plates and screws to join fractures, spinal prosthetics, pacemakers, vascular and other indwelling stents (reticular tubes), vascular catheters (tubes inserted from blood vessels in the neck or groin to enable passage to the heart or brain via blood vessels), vascular grafts, artificial heart valves, intraocular lenses, and devices used to inject insulin. In other words, the company supplies a vast and diverse range of products to medical care departments.
Equipment supplied by the company include Computed Tomography (CT) scanners, Magnetic Resonance Imaging (MRI) scanners, ultrasonic diagnostic equipment, patient monitoring devices (such as surgical monitors), infusion pumps, extracorporeal membrane oxygenation (ECMO) systems, and mechanical ventilators.
Consumables, the driving force behind stable growth
Consumables are the main product category contributing to stable growth of the company. Sales of consumables have grown at a CAGR of about 2.4% in the last five years and 0.5% in the last three years. In FY06/21, the number of operations fell due to COVID-19, slowing growth in sales of consumables. Medical institutions postponed operations to make beds available for COVID-19 patients.
The company is enjoying stable growth driven not only by fundamental factors, such as an increasing need for medical care due to growth in Japan’s elderly population and a rise in treatment costs per patient, but also by innovation in the medical devices field, such as advances in medical technology that allow doctors to save more lives, the growing adoption of less invasive medical treatments (e.g., the shift from thoracotomy procedures to surgical procedures that rely on catheters and stents), and the development of medical equipment that enhances the quality of patients’ lives (e.g., the shift from using syringes to inject insulin necessary to control blood sugar to using portable insulin pumps).
Fluctuations in equipment sales reflecting capital investment trends at hospitals
The company’s equipment sales fluctuate more than its consumable sales mainly because it supplies high-value equipment in bulk when new hospitals are constructed or when existing hospitals undergo reconstruction to upgrade earthquake resistance. As a result, equipment sales surge whenever a new hospital is established in its operating regions. That said, its equipment sales are not entirely dependent on new construction or reconstruction of hospitals. The company also enjoys steady demand from periodic equipment replacement and the installation of new equipment. In this respect, it benefits from the fact that hospital operators are encouraged to introduce new equipment to attract doctors.
According to the company, none of the customers in the Medical Devices and Consumables account for more than 10% of total sales, suggesting the company has a diversified customer base.
Profitability in the Medical Devices and Consumables segment
This segment also records sales to the SPD segment (which make up roughly 7% of segment sales) as inter-segment sales through FY06/21. In FY06/21, OPM (operating profit divided by segment sales, including inter-segment sales) came to 1.4%. Since FY06/11, OPM has reached a high of 1.9% in FY06/13 and a low of 0.7% in FY06/16.
Sales and gross profit increase in years when the company records bulk orders of equipment (but GPM does not change much). When sales increase in any given year, SG&A expenses tend to grow, the SG&A-to-sales ratio (particularly, personnel costs) tends to decline, and OPM tends to rise. By contrast, in years when bulk orders for equipment (which are transient in nature) dissipate, the reverse occurs.
Note: Internal sales are included in the calculation of OPM.
SPD
The SPD segment, which handles hospital distribution, generated 16% of sales (including inter-segment sales) in FY06/21. It offers both on-premise (warehouses on hospital premises) and off-premise (warehouses located on nearby off-site locations) SPD services, including 1) support to enhance operational efficiency at medical institutions, 2) inter-hospital transportation of goods and appropriate inventory management, 3) verification of hospital procurement prices, 4) streamlining of operating room support, and 5) management of medical fees. As of end-June 2021, the company managed 65 SPD projects for medical institutions (63 at end-June 2020) through its subsidiary HOSNET・Japan, Inc. Although earnings contributions from the business are small, the company also franchises out the SPD-related systems it has developed to third parties (13 projects).
Sales in the SPD segment are broadly divided into product and management fees. Product fees mainly reflect procurement fees related to alternative procurement for medical devices, materials, pharmaceuticals, reagents, and other products required by hospitals, which account for over 90% of segment sales. Management fees are service fees that include personnel and other costs (estimated at roughly 6–7% of sales). The company enters pharmaceutical and medical device procurement contracts through which hospitals specify vendors, as well as contracts through which the company selects suppliers. Both contract types are expected to contribute to sound hospital management (through cost reductions, prevention of product shortages, and elimination of excess inventories).
When the company is required to buy products from only vendors specified by hospitals, it must make purchases from a narrow range of vendors. This limits the value added it can offer, resulting in an extremely low gross margin (low management fees). When it is able to select suppliers independently, the company can have multiple vendors compete for an order, thereby increasing value added. It can also source products from its main business company, Kawanishi Co., Ltd., thus generating group synergies (leveraging of procurement capabilities within the group). In fact, JPY6.3bn, or 33% of the JPY19.3bn in sales generated by the segment in FY06/21, was procured from the Medical Devices and Consumables segment (booked as inter-segment sales in the Medical Devices and Consumables segment).
Since FY06/11, profit in the SPD segment has bottomed at JPY36mn in FY06/11 and peaked at JPY134mn in FY06/17. Although the segment has not posted a loss in the last 10 years, its profit contributions have been limited.
According to the company, low-priced, low-quality SPDs were prevalent at times due to stiff price competition. Recently, medical institutions are rating the company’s SPD business more highly as it provides high-quality services. From FY06/21, it aims to boost earnings by reviewing its service charges and increasing the number of contracted institutions.
Nursing Care Products
The Nursing Care Products segment made up 1.9% of sales in FY06/21. It mainly leases and sells nursing care and welfare equipment (such as nursing beds, wheelchairs, and handrails), and remodels homes to support caregiving through a subsidiary, Life Care Co., Ltd. Segment sales have expanded at a relatively high CAGR of 6.7% over the last five years and 4.4% over the last three years. OPM was 6.3% in FY06/21, the highest among the company’s segments.
The business supplies products to about 13,000 care recipients and it leases just over 7,000 nursing beds (the core product). Demand for nursing rental beds is expanding amid an uptrend in the number of people needing long-term care caused by the rise in the elderly population. Over the last three years, the cancellation rate for rental beds has ranged from 4% to 12%. According to the company, the main cancellation reasons are care recipients’ deaths and hospital readmission, and switchovers to competitors are very rare.
The company procures its rental beds from welfare equipment rental wholesalers, and subleases them to care recipients. It generates a gross profit margin of 45–50% on this business. Personnel costs (sales and delivery representatives) represent the largest cost item in SG&A expenses. Care managers, who set up care plans and serve as counsellors to the users of rental nursing beds, often advise users and their families on which equipment (and, by extension, supplier) is suitable for them. Accordingly, the company’s sales representatives also target care managers as part of their sales activities.
The market for rental nursing care equipment is projected to expand on growing needs for in-home care due to increases in the elderly and late-elderly population. Under these conditions, the company appears to be targeting annual sales growth of just over 5%.
However, low barriers to entry and susceptibility to regulatory changes are two areas of concern for the business. From April 2018, care manages who provide advice regarding care equipment for care recipients have been required to propose several products across multiple function and price categories. Also, the cost percentage to be shouldered by care recipients with incomes equivalent to the current working generation has been raised from 20% to 30%. In addition, the government has imposed price restrictions on rental services for long-term care equipment covered by public aid from October 2018, and care managers are now required to not only explain product features and pricing to care recipients but also share nationwide average prices for applicable products.