This article first appeared in The Edge Malaysia Weekly, on April 4 - 10, 2016.
THERE was a different kind of buzz at Adventa Bhd’s 2015 annual general meeting (AGM) last week. Shareholders, usually impatient with the meeting proceedings, were attentive when management spoke and raised questions with an unfamiliar eagerness to understand the company’s plans for the future.
“It was a longer than usual AGM, not a typical one. All our shareholders were involved in discussing how to grow the company … contributing their ideas on how to go about it. We were surprised by that,” Adventa CEO Low Chin Guan tells The Edge.
The main cause of the excitement was the launch in January of Lucenxia INTELLIS, a home automated peritoneal dialysis device for chronic kidney disease patients. Developing the device took years of clinical trials, engagement with patients and industry experts and fastidious approval processes with healthcare regulators. But investors are finally getting a sense that the business of commercially providing the dialysis machine can live up to its billing as the company’s largest future income earner.
It’s not hard to see why.
The company’s business model is to provide its dialysis device to public hospitals. Patients will be allowed to lease and take the machine home for a customised self-treatment programme at the cost of about RM3,500 a month. The device has features such as remote monitoring and automatic data recording, which will allow Adventa’s own team of experts to track the patients’ treatment progress. That will enable Adventa to be notified of any inconsistencies in the device’s performance, and to deliver a replacement within 24 hours.
“We don’t sell the equipment. Doing that is very unfair to the patient. We may be making them buy something they probably don’t need,” says Low.
“If a patient registers for a treatment programme with us, he will undergo an access surgery. Two weeks later, the patient can get started with the treatment. Our team will train the patient in the hospital and guide family members and caregivers to use the machine at home. After that, we will visit the patient at home sporadically to see that everything runs smoothly,” he explains.
Currently, Adventa has 15 field nurses to cater to the needs of over 100 patients using its dialysis machines that have been leased from 15 public hospitals. It is aiming to grow the number to 500 patients in the current financial year ending Oct 31, 2016 (FY2016). Low declined to indicate the segment’s earnings contribution to the company but says it will be “very small at the start”, but “exponential” once the growing pains are over.
It seems a modest target considering that Adventa has a ready market of kidney disease patients to tap into. According to the Malaysian Dialysis and Transplant Registry of the Malaysian Society of Nephrology, Malaysia had over 31,000 patients undergoing dialysis in 2013. Out of this, an overwhelming 89% undergo treatment in dialysis centres that are already operating at overcapacity and struggling to cope with the growth in patient numbers.
Besides the number of patients, Low says the business has a strong accumulative effect. Once a patient signs on with Adventa’s leasing programme, he is expected to continue using the device for at least seven years.
The home treatment option has the advantage of saving on costs associated with travelling to dialysis centres, hiring of caregivers and time off for treatment. Moreover, from a price point of view, Adventa’s device is understood to cost 30% to 40% less than what its multinational competitors are offering.
The price tag would likely appeal to patients who need dialysis regularly. Checks with the National Kidney Foundation show that the average unsubsidised cost of treatment is RM150 per dialysis session and patients regularly need two to three treatments a week. Many patients who receive treatment at public hospitals receive some form of subsidy for dialysis treatments and the treatment programme offered by Adventa is not exempt from such financial aid.
According to Low, the segment’s potential goes beyond local shores. Adventa has plans to eventually expand the dialysis device’s reach to other key regional markets like Thailand, Indonesia, China and Hong Kong.
Yet, for all the excitement it provides to shareholders, the company’s venture into the niche home dialysis market is not without risks. More importantly, it isn’t giving an instant boost to the company’s profit.
The company is expected incur high costs for producing the devices, training patients and doing more home visits as business ramps up. Low says that funding has already been secured from financial institutions and structured in a way whereby Adventa will be able to produce as many devices as it needs.
So far, there are no indications that Adventa’s financials are under stress due to this venture. Its gearing in FY2015 was only at 28%, although that was almost double from 15% the year before. It was also in a healthy cash position of RM22.12 million in FY2015.
The extent of success for Adventa’s device rollout also depends on acceptance by both patients and physicians. The company has increased its marketing budget for awareness programmes and advertising to ensure its product will gain wide acceptance. It will engage with relevant stakeholders like nephrologists to showcase the product and with insurance firms to have dialysis treatments covered under their policies.
But results from these efforts are not likely to be reflected in Adventa’s financials immediately. HLIB Research, which has a “hold” call and a target price of 88 sen on the company, says in a March 30 note that it is positive on the home dialysis segment but expects contribution to flow only from 2017 onwards.
In the meantime, Low says that Adventa’s investors are still “well taken care of”. In FY2015, Adventa’s net profit fell 30.7% to RM3.1 million on revenue of RM41.9 million. But Low asserts that the company’s profit will stay on a growth path in FY2016 as its two other business segments — sterilisation provider and healthcare products — are poised for expansion of their own.
Its sterilisation provider is the bedrock of Adventa’s earnings, raking in RM11.4 million or 27.5% of the company’s revenue, and was the largest contributor to its bottom line in FY2015. The numbers should improve in FY2016 after outstanding treatment issues with respect to the Goods and Services Tax (GST) are ironed out with regulators.
Low says, “Some of the contracts we had for the sterilisation business were signed with customers overseas. They send in the goods for sterilisation and we send them out. GST should be charged on the value of our sterilisation service. Instead, it is charged on the value of the total products because we are deemed to have bought it.
“So, it is a grey area. Some of the GST money is stuck there and we hope to get that sorted out. After that, our margins would revert to FY14 levels.”
The sterilisation segment will see capacity increase this year and is expected to serve more foreign clients. Adventa has an almost monopolistic position in commercial sterilisation and warehousing activities within Asia. So, Low expects the extra capacity to increase realisable revenue by about 30%.
Adventa also distributes and trades healthcare products. It can count all public hospitals and half of the private hospitals in Malaysia as its clients. In FY2015, the division saw a 32.5% increase in revenue to RM30.6 million. To grow this, Adventa is targeting the underserved markets — general practitioners currently served by sales representatives of pharmaceutical companies and households looking for hospital-grade medical supplies .Adventa has just completed a 70,000 sq ft warehouse to cater to the segment’s growth.
Low says that the division is in talks with local hospital chains with operations abroad to explore possible opportunities in supplying medical supplies to countries like Turkey and Singapore. He adds that Adventa’s network and efficiencies will help clients save costs.
Much of the hype surrounding Adventa is based on the “immense” potential of its home dialysis device. Low says the company is ready to realise its full potential. If it happens, there should be little doubt that patient shareholders will be well rewarded.
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