Blood and blood products play a major role in hospital care. Blood collection equipment, diagnostic tools and management software solutions constitute a sizeable market. The U.S. hospital market for blood management is calculated at more than $1 billion, with software and equipment opportunities estimated at $150 million every year. Massachusetts-based Haemonetics Corp. (HAE.N) offers products and services for hospitals and blood collection centers – essentially the lifeblood of these systems.
In the U.S. alone, the plasma market is estimated at $400 million annually and the blood centers market is worth around $1.2 billion. This puts the total figure at more than $3 billion in market opportunities related to blood collection, blood product provision and management of the whole process involving such products as whole blood.
Hospitals in the U.S. are currently trying to reduce the number of blood transfusions by applying blood management techniques, which is dampening demand for whole blood and red cell blood products. This drive resulted from new best practice guidelines from the American Association of Blood Banks and is putting pressure on companies specializing in the blood supply and management field. At the same time, there is growing demand in emerging markets.
Tapping the blood management cycle
Founded in 1971, Haemonetics’ products include software programs for donor recruitment, data collection and mobile blood drive scheduling, blood management tools, devices for diagnosis and auto transfusion and whole blood technologies including manual collection kits, wireless data automation and automated whole blood collectors.
During Alpha Deal Group’s initial due diligence call, VP Investor Relations Gerard Gould said that the company has more than a 30% share of the blood center market, under 20% of the hospital market and 70% of the plasma market. This gives it a relatively comfortable position in the face of emerging challenges.
Near-term headwinds
Around 20% of Haemonetics’ business comes from blood centers in the U.S. After publication of the new best practice guidelines, this business was hit hard by slumping demand and falling prices for blood components, which happened much more quickly than expected.
This trend has been especially damaging for the company’s whole blood and double red cell business divisions, since they get respectively 65% and 85% of their revenues from clients in the US. Another blow for the company’s business in the near term will come from shrinking business volumes resulting from unfavorable tender decisions, most notably in Europe.
Additionally, there have been some adverse effects from yen exchange rates as well as a decline in prices, affecting Haemonetics’ contract with the HemeXcel alliance of five leading U.S. blood centers. The combination of these factors will exceed any growth the company will be generating from its main performance drivers in financial 2014/2015 but expectations are that things will turn around as early as the following year.
Growth drivers
In spite of serious challenges, the company is upbeat about the prospects coming from what it has identified as its main growth drivers. Among these are the plasma market, where it expects demand to grow at an annual rate of 5-7% in the 2012-2018 period, and where Haemonetics has a leading market share.
During its next fiscal year, the company is planning to start marketing a new, next-generation software product for commercial plasma collection. This is part of its work on streamlining commercial plasma collection, aiming for higher cost efficiency and process verification for regulatory compliance in order to increase donor retention rates. This will improve yields and at the same time reduce costs per unit.
Haemonetics’ position on this market is stable due to long-term contracts and emerging market opportunities. It’s also expecting to benefit from implementing its plasma blood management techniques into whole blood automation, an area that also offers robust growth opportunities due to the currently insufficient degree of automation at blood centers.
At the moment, 97% of red blood cell collection comes from manual whole blood collections. The blood donation process is long and work-intensive and it’s difficult to use in remote locations. This makes the whole blood collection system inefficient, leading to lower yields, bad chances for donor retention and ultimately higher costs per unit.
In 2014/2015, Haemonetics plans to bring three new products on the market, apart from the plasma collection software. These include a significantly-upgraded BloodTrack software, a next-generation TEG diagnostic device and another software tool for donor recruitment and retention to complement the Donor Doc phlebotomy product that is already on the market.
Aside from new products, the company will be focusing on emerging markets in the next few years. In its last fiscal year, business in those markets registered a 20% increase on the year, contributing to combined growth of 13% for the company’s three key business areas, the other two being plasma and TEG. These three accounted for 53% of Haemonetics’ disposables revenue and it anticipates continued steady growth in each of these three areas.
Financial position
For fiscal 2013/2014 ended this March, the company reported GAAP net profits of $35.1 million, with earnings per share at $0.67. The adjusted figures were $114.4 million and $2.19, respectively, both marking a 10% improvement on the year. Revenues for the year stood at $938.5million, up 5%, including currency impact. Excluding that, the figure was 7% better than the previous year.
Haemonetics share price
Source: Eikon/StarMine
In the final quarter of the year, revenues totaled $241 million, down 4% on the year, although the base business of the company, excluding whole blood improved by 2% on a constant currency basis. Plasma disposables revenue alone was $74 million, a 9% increase on the year, or 10% in constant currency.
Whole blood revenue also declined in Haemonetics’ North American and European markets, but rose 10% in emerging markets to $5 million. The total whole blood revenue of the company was $45 million, down 18%, on the back of slowing demand in the U.S. and the loss of a low-margin tender earlier this year.
TEG was the leader in disposables revenue growth in the company’s diagnostics business, with a 28% annual increase to $9 million. Software solutions revenues were $19 million, a 2% rise on the year. Equipment revenue stood at $19 million, up 10%. In terms of clients, revenue from hospitals inched up 1% to $33 million in the last quarter of the fiscal year, with surgical disposables sales at $18 million, unchanged on the corresponding quarter of 2013. Blood center disposables revenue lost 12% in the quarter to $51 million.
Haemonetics financial strength
Source: Eikon/StarMine
Competition and risks
As market leader in blood collection equipment, Haemonetics does not face any significant challenges from competitors, especially after making two strategic acquisitions last year:the blood collection business of filtration, separation and purification major Pall Corp., in a deal worth $550 million, and a smaller blood collection company, Hemerus Medical, for $24 million.
However, in view of the shrinking blood collection market in the U.S., Haemonetics’ home market, the company would have to, and is planning to, focus its efforts on blood collection automation in order to be able to make these acquisitions and its overall blood collection business profitable once again.
Outlook
In its next financial year, Haemonetics projects a 7-9% increase in plasma disposables revenues and a 10-12% decline in blood center disposables, including whole blood. At the same time, hospital disposables revenues are seen to rise by 4-6% and software sales by 2-4%. For overall revenues, the company forecast flat to -2% results and an improvement of between 0 and 2% in constant currency.
Performance is expected to be disproportionately slow in the first quarter of the new financial year due to currency effects and cost reduction plans. In addition, the contribution of emerging markets is expected to start slowly but gain traction as the year progresses.
Over the longer term, the company will continue working on its value creation and capture (VCC) initiative, which includes $80 million in spending on restructuring and capex. That amount will come from a projected free cash flow of $125 million. By 2018, VCC activities should bring in annual savings of about $60-65 million.
Earnings-wise, financial 2016 should mark Haemonetics’ return to growth, initially in the single-digit range for revenues. Earnings per share are expected to grow by a mid-to high teen rate in that year. The VCC program should be completed in that year, pushing up margins and ensuring a more competitive cost position for the company’s products on a global scale.
Conclusion
With its robust portfolio of products and services, Haemonetics looks like it’s well placed to go through a transitional period during its ongoing financial year.
Although demand for blood collection is waning in its home market, global demand may partially make up for it but this will require further expansion of the company’s international operations.
At the same time, demand for plasma, one of its main businesses, is seen as growing at a substantial rate, contributing to an overall optimism in the management team. In light of our initial due diligence, we view this as ideal entry point for long-only value market players.
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