Monday, 17 February 2020

Adventa: It's Do or Die with APD

Obviously, my Stock X is Adventa Berhad.

I put it as Stock X as I fear that I might have bought it too early, and it's proven that indeed I am. However, I don't mean that it's time to buy Adventa's shares now.

The first time I bought Adventa's shares was in July 2016, but I have been following it for a few years before I made my move.

Adventa used to be a medical gloves manufacturing company until it sold this business in 2011 to a private company related to its MD Mr Low Chin Guan.

After a brief period in PN17, Adventa kick started its new businesses in healthcare industry in the form of hospital supplies distribution, medical devices sterilization & home dialysis.

I bought Adventa's shares only because of its home dialysis business under its wholly owned subsidiary Lucenxia.

Lucenxia has come out with the APD (Automated Peritoneal Dialysis) machine called "Intellis" under the Malaysia's Economic Tranformation Programme (ETP) launched by the previous government.

If you don't know what is APD, you can refer the the earlier post "About Stock X".

To prove its efficacy, it must run clinical trials first and this is usually a long, painful & money-burning process. After several delays, Intellis was finally launched in January 2016.

Nevertheless, Adventa is not the only one who provides APD in Malaysia. Prior to that, there are already two established international players here: Baxter (US) & Fresenius (Germany).

So, Adventa does not monopolize APD, but it offers "Made in Malaysia" perhaps cheaper option of APD.

For Adventa's business to become successful, I think there are a few criteria that need to be met.

First, it's the efficacy of Intellis. In other words, it must work well! No one will ever use something that is in doubt, especially when it's related to health. If it passed the clinical trials, I assume that it should be OK unless new issues arise later.

Second, it must be priced competitively. Patients will rent the APD machine with service and not buying the whole machine. So the monthly expenses must be cheaper than Baxter & Fresenius, just like Proton cars must be cheaper than Toyota cars then only got people buying Proton.

Generally, CAPD is the cheapest way of doing dialysis. HD & imported APD cost higher. Adventa's local APD ideally should cost in between CAPD & HD.

Unfortunately I don't know the exact cost of Intellis APD at the moment. I read an article earlier from Focus Malaysia and Adventa's MD mentioned about the cost per patient of this Intellis. I can't remember the figure and can't find that article now, but I feel like it's slightly lower than HD cost, perhaps about RM3000 per month.

Third, it's about government support & policy. A significant numbers of dialysis patients are being paid by the government/JPA/Socso. Even if it's supported by NGO, most are also subsidized by the government. If the government approves payment for Intellis users, then it can have a chance to get more patients to choose Intellis.

To get government support, cost & expenses are surely a factor, besides some political connection. If it can save government money, surely it has a chance especially when government has tight budget.

Anyway, APD is still not that popular among Malaysian, with only 13-14% of PD patients are on APD while the rest are on CAPD/DAPD (modified form of CAPD)

To recap, 10% of dialysis patients in Malaysia are on PD, the rest are HD. So APD is 13-14% of those 10%.

In numbers, only 605 patients are on APD in year 2016, out of total 39,711 dialysis patients. That's merely 1.5%. However, we can see that the numbers of APD is increasing yearly without fail since 2007.

After the launch of Lucenxia's Intellis, it might create more awareness and increase the percentage of patients on APD.

Like I mentioned before, most kidney failure patients will be put on HD first before PD, that's why we have 90% of patients on HD.

From online search, I found that Malaysia Ministry of Health actually has adopted "PD first" policy since 2013, which means all kidney failure patients will be prepared for PD first, only if PD is not feasible then only do HD.

"PD First" Policy reported by New Straits Time Malaysia in 2014

Current practice is like "HD first" which is the other way round. This "PD first" policy is never implemented, if it really exist.

If "PD first" is seriously carried out, how much do you think it can benefit Adventa? You guess it.

Hong Kong is one of the region who successfully adopted PD first policy since 1985. As of year 2013, 76% of kidney failure patients in Hong Kong were treated with PD.

Our neighbour Thailand also adopted PD first policy since 2008. It is reported to be successful and their PD users comprise approximately 30% of total dialysis patients in 2015.

Most of the patients on PD are on CAPD which has lower cost, but we can expect APD will also rise because of more awareness of PD.

Percentage of HD & PD in year 2015

Back home in Malaysia, the dormant PD first policy is not easy to execute in my opinion, unless we have a very dedicated health minister to make it happen.

As you can see, dialysis is a big business. We have a lot of private dialysis centers (HD) that are owned by or connected to doctors, nephrologists (kidney specialists) & prominent figures in the society. So it's not that easy to promote PD first.

Adventa might face headwind for its home dialysis business to grow fast at home, but perhaps there is a chance overseas?

It has been a while that Adventa works with Sri Lankan government to introduce its APD there and currently it might be in trial phase. If it can be rolled out successfully, then it will only be good news to Adventa's shareholders.

Photo from Adventa Berhad website

A lot of things happen after I bought Adventa's shares. In Oct 2017, news broke out that Top Glove was going to acquire Aspion, a medical glove manufacturing company previously sold by Adventa.

As Aspion was at that time held by a private company Adventa Capitals Pte Ltd, which has the same name "Adventa" as publicly listed Adventa Berhad, speculators jumped in to push up the share price from 60sen to almost RM1. Then everyone knew it was a mistake and the share price quickly retreated to 60sen.

A year later, Top Glove found out that the acquisition price was overstated by RM640.5mil and filed law suit against Adventa Capitals (not Adventa) and its directors. Again, Adventa's share price took a hit.

This time it was not totally irrelevant because Adventa's MD Mr Low Chin Guan is also a director of Adventa Capitals. So his accounts were frozen and the initial plan to inject fund into Adventa through rights issues and free warrants has to be called off. 

Personally I don't like this rights issues as it will significantly dilute the earnings. So its cancellation is a good news to me.

The burning question is, is the MD Mr Low Chin Guan a credible and trusted person to lead Adventa? Hmm.... I really don't know.

In May 2019, Adventa announced its decision to dispose entirely its sterilization business (E-beam) and took a net gain of RM35.2mil. It distributed 7 sen per share of special dividend back to shareholders ex-ed on 14 Jan 2020.

Sterilization business has been the only profitable business of Adventa in recent years, while its healthcare segment (hospital supplies distribution & home dialysis) is loss-making. 

Moving forward, we can expect Adventa's bottom line to be in red throughout year 2020. When can it turn profitable will largely depend on its home dialysis business.

Actually I welcome the move to divest its sterilization business, to get the much needed cash to concentrate on healthcare business and pay the debts.

Just weeks ago, because of the Covid-19 outbreak, somebody still thinks that Adventa produces medical gloves and its share price jumped again only to fall back as expected.

The home dialysis business is still in infancy stage, its success will depend on how well Adventa promote it locally and regionally, as well as government policy.

As explained above, I think it is not easy to roll out fast in home soil. So, regional expansion might be the key.

If Adventa receive RM3000 per month from each patient using its Intellis APD machine & service, it will generate RMRM36,000 of revenue in one year per patient.

If there are 100 patients using it, one year revenue will be RM3.6mil. At this stage I'm not sure whether it can break even or not.

If there are 1000 patients using it, revenue per year will reach RM36mil and it should be able to generate profit. I expect the profit margin should not be low if it achieves economy of scale.

One thousand users seem to be a lot, but it's only 1.5% out of 70,000 estimated total dialysis patients in Malaysia in 2020, and we're not even counting contribution from overseas.

APD is cost effective & convenient, and it improves the quality of life of dialysis patients. I can't find a reason why anyone will not consider it as first choice.

The current truth is, patients are not given a proper chance to choose, which is sad. I believe that one day the public awareness will increase and APD will be more commonly used.

Adventa published a very good video (as shown below) on its Intellis APD cycler few years back. I think those whose family members, relatives or friends who are planning for dialysis should take a good look into APD.

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