Saving lives

I had just retired from work and I was looking forward to relaxed mornings and a quiet life when I had a heart attack,” says Ravi Krishnan, a resident of Chennai. “I was rushed to the hospital and the doctor said it was a mild attack. I was advised to have an angioplasty immediately. They also said a stent had to be placed in one artery.”

Angioplasty widens the clogged artery and a stent is a fine wire-mesh cylinder that keeps it open. There aren’t too many companies in the world that manufacture stents and they certainly don’t come cheap, which had Krishnan’s middle-class family worried. “Luckily, our doctor told us about eMagic,” remembers the now fully recovered 62-year-old.

eMagic is an affordable bare metal stent that’s made in India by Bengaluru-based Opto Circuits and it doesn’t cost the earth, unlike some of its imported counterparts. In fact, Opto is the only Indian company to have carved a niche for itself in the global medical equipment market.

It has not only taken on industry heavyweights like Boston Scientific, Medtronic and Johnson & Johnson in the global market, it has even managed to stay ahead with its innovative products and acquisitions — more on that in a bit. Revenues and profits have grown by 55% and 46% on average over the past five years, which is pretty impressive when you consider that the economy was at its shakiest at this time.

Opto Circuits is now a leading manufacturer of medical equipment and patient monitoring systems that are ‘invasive’ (products that are inserted inside the human body) or ‘non-invasive’. Invasive products include stents, balloons and catheters (tubes inserted into the body). The non-invasive business, which contributes almost three-fourth of Opto’s overall revenues, features devices like pulse oximeters, digital thermometers and equipment that enables emergency cardiac care. 

But as patients like Krishnan grow in number, it looks likely that Opto’s invasive business will be the star of the company’s future. What’s more, there’s a lot of room for growth because Opto is still a marginal player despite its racy numbers. Overall, you can expect to hear more about Opto Circuits in the coming years. Krishnan would surely approve.

Acquisition spree

Opto has acquired 11 companies since 2002, including three significant acquisitions in the US and Germany (see: Inorganic boost). “Mergers and acquisitions are a key business strategy in the medical technology business because it can take years to develop new products and technology from scratch,” says Vinod Ramnani, MD, Opto Circuits.

“Heavy investments in own R&D may not always bear fruit.” Opto has cleverly used acquisitions to enter new market segments and strengthen its product offerings. For instance, its foray into the clogged-artery-busting stents business came about from its 2006 acquisition of Eurocor in Germany. On the other hand, Opto’s latest and largest acquisition till date, Cardiac Science, inked in December 2010 for Rs.409 crore, fortfies its position in the non-invasive business — Opto is now present in cardiac monitoring and emergency cardiac care, too.

“Our acquisitions have added great products to our portfolio, expanded our distribution network, helped us access new markets and geographies, and given us an opportunity to cross sell,” says Opto’s Ramnani. “This strategy has ensured an unparalleled growth trajectory for us.”

Quite apart from acquiring companies, Opto has done a remarkable job of integrating its businesses and scaling up its revenues afterward. For example, Opto turned around its April 2008 loss-making Criticare acquisition within a year by restructuring costs. It did the same thing with Cardiac Science in an even shorter time span. The method: transfer production to the low-cost manufacturing base in India, reduce headcount, and source raw materials effectively.

“When we acquire companies overseas, we try to improve their margins by moving some operations to India or other lower cost locations,” says Ramnani. “The transfer helps rationalise labour costs by at least 15%, apart from lowering raw material and logistics costs.” Cardiac Science’s delisting from Nasdaq and the shifting of some R&D work hastened the turnaround process.

Cardiac Science is expected to post revenues of around $140-145 million in its first year of operation after its integration with Opto (operating margins around 13-15% and net margins around 9-10% expected in FY12). “The pace and extent of operational re-organisation at Cardiac Science is creditworthy,” says Amol Rao, analyst, Antique Stock Broking. “The company’s efforts at rightsizing Cardiac Science have made a visible impact on its margins in the December 2011 quarter.” As Cardiac Science’s operating performance improved, operating margins from Opto rebounded from all-time lows of 22% in March 2011 to 28% in
December 2011.

But after years of acquisitions, the company says it’s time for consolidation now. “We are going to consolidate our operations and marketing functions to maximise the synergies within our subsidiaries,” says Ramnani. “So, there are no major acquisitions planned in the near term.”

Cost of growth

Of course, the acquisition-led strtegy hasn’t come without a cost — Opto’s debt has ballooned from Rs.538 crore in 2009 to Rs.1,100 crore at the end of December 2011 and its working capital cycle is stretched out of shape. The company raised Rs.350 crore for its Cardiac Science acquisition. 

Along the way, Opto’s low-cost manufacturing destinations in India and Malaysia have helped it keep a tight lid on costs. Two of its three Malaysian plants enjoy a tax-free status and the third will start operations in a couple of months. Opto has also obtained approval to start a manufacturing facility for non-invasive and some of its invasive products in Hassan, Karnataka, which is likely to be operational in a year — and its location in an SEZ will give it a tax-free status. Opto has earmarked $45-50 million for its capex needs in FY13 and plans to shift the bulk of its manufacturing to this facility.

Sure, the debt/ equity ratio is still comfortable at 0.65x but any further increase in debt levels will put pressure on Opto’s profitability. The company’s bigger concern is its 251-day working capital cycle which is eating into profitability. “The stretched working capital cycle still remains a drag on cash flow,” says Siddhant Khandekar, analyst at ICICI Direct.

Opto’s management says hospitals take up to five months to pay and that is the norm. It also has to maintain higher inventory levels since shipping components and finished goods to and from various manufacturing facilities take time. All this leads to higher working capital levels for Opto. Ramnani hopes to lower the working capital levels in FY13. And plans on consolidating the company’s manufacturing in India and Malaysia. Ramnani hopes that his company’s growing product portfolio and brand equity will give it better bargaining power on payment terms with clients, and also reduce the time taken to recover receivables. 

A big market

The addressable market for Opto’s invasive products is around $8-10 billion with the US making up half the market and some product segments growing 7-8% every year. The approval for its stents in the US may still be a couple of years away but its approval in Europe, Japan and other emerging markets gives it enough room to grow because they make up the rest of the market for invasive products.

The market for non-invasive products is even bigger — at about $12-15 billion — and the US again accounts for about 50% of the market in some product segments. Here, Opto has a significant presence via Criticare and Cardiac Science, and almost 45% of its overall revenues come from the US. “We expect to grow 15-20% annually over the next two to three years,” says Ramnani.

New products and increasing revenues from its emerging businesses will help Opto achieve that revenue growth. The company launched a next generation automated external defibrillator used to resuscitate patients after a cardiac arrest; new varieties of stents and monitoring products are also ready to be launched this year.

Opto also wants to increase its presence in emerging markets, where greater spend on healthcare is leading to higher demand for medical equipment. “Huge investments in primary health and diagnostic setups in rural areas are leading to double-digit growth for medical equipments in emerging markets,” says Ramnani.

Opto’s Indian distribution arm, AMDL Healthcare, is increasing market access. It’s also changing its product mix to access smaller cities, and to leverage investments in corporate hospital chains, speciality cardiac centres, government hospitals and medical schools. “Launching new products and tapping new geographies for existing products will help the company maintain its growth momentum,” says ICICI Direct’s Khandekar.

Analysts at Bank of America-Merrill Lynch estimate that Opto Circuit’s revenues and earnings are likely to grow by over 20% on average over the next two years, riding on the recovery of hospital capex in the US and increased insurance coverage. “Its prospects look bright as the non-invasive business is on firm footing. We believe that the ramp up of operations at Vizag and Malaysia should lead to improvement in the coming years,” says
Antique’s Rao. 

The stock currently trades at a price earning of  5.65 times its FY13 earnings, a significant discount when compared with Opto’s global peers. Over the past five years, the stock has generated a return of around 72% compared to the benchmark index (Sensex) return of about 59%. Opto’s non-invasive business will ensure the company doesn’t falter in its growth in the near term and its foray into the US for its invasive business will make sure its long-term prospects stay bright. Ramnani is not worried even though USFDA approval for Opto’s stents is some time away — he has his hands full managing his company’s growth till then. It’s a tough world but many would love to be in his shoes.