Thinking Points

  • DVx is a specialized medical equipment trading company primarily focused on arrhythmia (irregular heart beat) and ischemia (reduced blood flow) related medical products.
  • The company focuses on niche, underserved areas, delivering 10-year revenue growth of 11.9% CAGR and operating income growth of 10.3% CAGR.
  • Since its founding in 1986, the company grew revenues and operating income every year until fiscal 2018, when operating income declined as a result of periodic regulatory medical fee reviews and an end to an exclusive distribution agreement for automatic contrast medium injectors.
  • At 799 yen per share, DVx trades at an adjusted EV/EBIT of 1.9x with a market capitalization of 8,499 million yen ($78.9 million USD).
  • Investors can expect an investment CAGR of ~4.4%, inclusive of dividends, over the next three years.

Introduction

DVx (TSE: 3079) is a specialized medical equipment trading company primarily focused on arrhythmia (irregular heart beat) and ischemia (reduced blood flow) related medical products. The company operates through three segments: Arrhythmia, Ischemia, and Other:

Source: Company filings

Since its founding 33 years ago, the company has grown revenues every year. Until fiscal 2017, DVx had also consistently grown operating income as well. With periodic regulatory review of medical fees, however, gross profit margins have been contracting, and the company posted its first YoY operating income decline in fiscal 2018.

The business & environment

DVx was founded in Tokyo in 1986 by Makoto Wakabayashi. Prior to starting DVx, Makoto worked as a medical sales person. When he was tasked with selling pacemakers, what he discovered was a severe lack of aftercare.

In a President’s Dictionary interview (Japanese), Makoto described his early experiences in medical sales. One of the critical issues plaguing people with pacemakers were battery drain. At the time, batteries for pacemakers would last 5 to 10 years. With the lack of aftercare support, however, it wasn’t particularly rare that people would lose consciousness and collapse after the pacemaker ran out of battery.

As a seller of pacemakers, Makoto had a strong belief that it was the doctor’s responsibility to implant the pacemaker and the seller’s responsibility to keep the pacemaker running once implanted. With hopes to build a better support structure, Makoto started DVx. 

At first, he gathered information on all available pacemaker products and created comparison charts. The company started with 2 million yen ($18,000 USD) in startup capital. With pacemakers costing 1 million yen ($9,000 USD) a piece, Makoto quickly decided to operate as a reseller. 

Soon, with deep product knowledge, DVx became the pacemaker specialist. According to Makoto, a typical 500-bed hospital performs 30 pacemaker surgeries in a year. In comparison, a DVx pacemaker specialist witnesses 300 pacemaker surgeries in a year. This put DVx specialists in a position to recommend certain pacemaker models for certain patients to doctors, as doctors are often too busy to gain product-specific knowledge.

The niche focus eventually became the foundation of DVx. Today, the company also sells catheter ablation related products. Catheter ablation is another method to address cardiac arrhythmia, with only about 100 doctors able to perform the operation in Japan (Japanese). Additionally, the company has expanded into offering ischemia (reduced/clogged blood flow) related products.

For its Arrhythmia segment, DVx sells products to hospitals. For its Ischemia segment, the company sells to distributors. In both segments, the company procures from both domestic and overseas vendors.

Over the last decade (fiscal 2009 – 2019), DVx has been able to grow revenues at an overall 11.9% CAGR. During the same time period, the company grew operating income at a 10.3% CAGR. 

Source: Company filings

Since its inception in 1986, the company had maintained YoY growth for revenues and operating income until fiscal 2018, when operating income declined for the first time. The decline was largely due to regulatory review of medical fees. The Japanese government conducts this review every two years, with expectations that the review will happen every year in the near future.

The effect of the medical fee review on DVx has largely been overshadowed by strong revenue growth. Taking a closer look, gross margins have been on the decline for over a decade.

Source: Company filings

In addition to the medical fee review, a decline in higher margin ischemia revenues has negatively impacted business performance:

Source: Company filings

The revenue decline in the Ischemia segment was mainly due to the company’s exclusive distribution agreement of automatic contrast medium injectors in Japan with US-based ACIST Medical Systems coming to an end in fiscal 2017. 

Although the medical industry is expected to grow alongside Japan’s increasingly aging population, the government’s medical fee review process leans toward shrinking margins in an attempt to keep medical spending under control. Hence, DVx is expecting continued revenue growth, but with declining gross and operating margins.

For fiscal 2019, DVx is expecting 42,948 million yen ($399 million USD, +6.4% YoY) in sales and 871 million yen ($8.1 million USD, -29.6% YoY) in operating income. The company is expecting customers to demand further price decreases as the government implements tighter pricing guidelines after the 2019 medical fee review.

Shareholders

As of Q4 2019 (ending March 31st, 2019), DVx had 11,280,000 shares issued and 452,621 shares in treasury, putting outstanding shares at 10,827,379.

Here are the major shareholders:

Source: Company filings

MSS is a family fund under Makoto’s control, however, Makoto passed away in January 2019. Prior to his passing, Makoto had sold 450,000 shares in August 2018 for 1,386 yen per share. When he passed away, he controlled 41.8% of outstanding shares. 

In July 2019, the company issued 179,200 shares worth of stock options for 86 employees.

Financials & Valuation

  • DVx is a specialized medical equipment trading company primarily focused on arrhythmia (irregular heart beat) and ischemia (reduced blood flow) related medical products.
  • The company focuses on niche, underserved areas, delivering 10-year revenue growth of 11.9% CAGR and operating income growth of 10.3% CAGR.
  • Since its founding in 1986, the company grew revenues and operating income every year until fiscal 2018, when operating income declined as a result of periodic regulatory medical fee reviews and an end to an exclusive distribution agreement for automatic contrast medium injectors.
  • At 799 yen per share, DVx trades at an adjusted EV/EBIT of 1.9x with a market capitalization of 8,499 million yen ($78.9 million USD).
  • Investors can expect an investment CAGR of ~4.4%, inclusive of dividends, over the next three years.

Since its founding, DVx has established itself as a niche medical equipment trading company, with deep product knowledge in highly specialized areas. Since its founding in 1986, the company successfully grew its revenues and operating income consistently until 2018, when operating income declined for the first time.

The decline in business performance was a result of regulatory medical fee reviews (every 2 years) and the end of an exclusive distribution agreement for automatic contrast medium injectors. Still, the company has been able to continue growing revenues.

With its niche focus, DVx’s business quality is high as it operates as a specialist in areas often not targeted by larger trading companies. Exposure to the medical industry, however, may take away from DVx’s business quality, as the Japanese government increasingly puts pricing pressure on companies in the medical field in order to keep healthcare costs low. While revenue growth is likely to continue with DVx’s niche focus, medical fee reviews are likely to limit profit growth.

At 799 yen per share, DVx trades at 2.7x EV/EBIT with a market capitalization of 8,499 million yen ($78.9 million USD). Adjusted for long term investment security holdings, the company trades for 1.9x EV/EBIT.

For fiscal 2020, DVx expects revenue to grow, but operating income to decline. This trend is likely to continue directionally over at least the near to medium term future. With this in mind, investors can expect an investment CAGR of ~4.4%, inclusive of dividends, over the next three years. This broadly assumes 2020 projection-level performance with a fair value EV/EBIT multiple of 3x on an adjusted basis.

The bottom line

DVx is a specialized trading company operating in a difficult medical industry. While the company remains competitive with its niche focus, serving small and specialized medical fields, regulatory medical fee reviews have pressured margins in the past and will likely continue to do so in the future. Taking this into consideration, investors can expect an investment CAGR of ~4.4%, inclusive of dividends, over a three year period.


Kenkyo Investing
Kenkyo Investing

Kenkyo Investing applies a value investing approach to Japanese equities, providing insights that are often unavailable to non-Japanese speakers.