Sell needles to dialysis patients and get paid well

by admin on October 31, 2012

I love the idea of repeatable demand and cheap unit costs where the user does not care so much about the price. What could better fit that description than dialysis needles?

The reason why I like medical device companies in general is that they have obvious barriers to entry and are sticky (if you train a doctor with a specific procedure, guess what – he’s gonna use your device). And, unlike pharmaceutical companies, a failed trial is not a complete write-off of many years of R&D – they can just go and change it.

This is a discussion of one company that I think is not a star in terms of technology, margins, or growth, but I think has been too inexpensive relative to what we know about it.

Actually, the real reason why I’m discussing this here is because I was long Techno Medica, then sold it because it moved up too quickly whereas Medikit is in a transition period (in which its growth is paused for a bit). Obviously, as soon as I sold Techno Medica, it went up another 10% or so…doh. Luckily, I did also buy some Techno Mathematica (I don’t select companies based on names – just a coincidence), which made me feel better.

So, back to the story…

Medikit develops, manufactures and sells medical products mainly involving needles. The key to this idea is growth overseas, in new areas of business, and the valuation.

Medikit sales & op inc Medikit sales & op inc

They started out in 1973 making indwelling dialysis needles, which is still a major part of their business.

They explain their technology in English on their website:

Basically, their core technology prevents valves from leaking blood from an indwelling needle.

Also, very rarely for a small Japanese company, they have a good explanation of their business, which can be found here (in Japanese):

If you do not know this already, this company should not be compared against disposable medical product manufacturers such as JMS and Nipro because they produce low-tech, easily copied stuff, whereas Medikit is on a higher level of pricing power – the margins are somewhat close to those of serious mature US medical device players.

Now, dialysis systems involve three components: the dialyser, the blood circuit, and the indwelling needle. Medikit only provides the indwelling needle (40% of total sales). The dialyser is covered by national health insurance, but the indwelling needle is not. Plus, the price-setting committee of Japanese bureaucrats has decided to reduce prices for Medikit’s needles….but…

…the number of dialysis patients in Japan is increasing:

Dialysis patients in Japan Dialysis patients in Japan (thousands)

According to the company, approximately 120 M indwelling needles are used within Japan per year. Two needles are used for every dialysis (in and out), and a patient needs about 150 sessions per year on average. That implies a population of 0.4 M patients in Japan. This seems very unusual, because that is approximately the estimated number of dialysis patients in the USA (; however, a quick Google search of “Prevalence of dialysis in Japan” brings up corroborating statistics from medical papers. This difference could be due to the relative affordability in the two countries.

A propos, you may find it interesting that the lowest mortality of dialysis patients in the world is in Japan, and the highest is in the United States. Reasons for this may include compliance (i.e. patients in Japan not skipping sessions), nutrition, patient education, and availability. See here:

Approximately 43% of dialysis needles are the standard version (non-safety), but the proportion of safety-type needles has been growing:

(10,000s of needles; blue = safety-type)

Medikit safety needle usage proportion growth Medikit safety needle usage proportion growth

It would be nice to know the number of needles sold, but they do not disclose it.

They also make vein-indwelling needles which are used for transfusion and general infusion purposes (e.g. anesthesia), as well as “angio” products, which are catheter systems used for imaging and treatment. A catheter is a tube you put into a patient’s body to access certain blood vessels, instead of cutting the whole body open. It needs to be made right, otherwise bad news happens. This requires clinical trials (expensive) in some cases (basically, if you are doing anything new).

Ok, so total sales have grown 18% since 2008, which is about 4.3% per year. Net income has grown 19.7% over that period (CAGR of about 4.6%). Net assets have grown at over 5% CAGR during that time.

Although the most basic fundamental driver for their core business (people needing dialysis in Japan) is naturally growing, the management is quick to recognize the headwinds of increasing competition and cost pressures. Overall margins were 14.4% last year, down from about 15.1% in 2008. For comparison, Medtronic, an omnibus medical device company, had net margins of around 22% last year.  A fairer comparison (in terms of specialization) would be something like Boston Scientific, although that company has been beset with problems.


They do not break out segments in their annual reports, however they do provide information by product category in their presentations:

Blue = vein indwelling

Pink = dialysis

Yellow = angio

Medikit segments 06 - 10 Medikit segments 06 – 10 Medikit segments 08 - 13 Medikit segments 08 – 13

Beat guidance in 2011:

Planned sales for 2011: 13.372 B yen

Result for 2011:  13.779


Dividend yield: 2%; no share buy-back


Other considerations:

Old dude:

The founder is 77 years old, and controls about 70% of the shares outstanding. Could they get sold?

I seem to have good luck with companies that have a big founder personality driving them. The management gives me the impression of being transparent relative to other Japanese companies.

R&D costs:

These are expensed (included in SG&A), and were 208 M Yen in FY12 – very small as a proportion of sales (less than 1%) when compared with major medical device companies.

This means that they are extremely inefficient relative to major medical device manufacturers – I guess they can afford to be so fat when they are in a good business, but really, they could do with cutting down on things like “business trip & travel” expenses, which were over double their marketing budget. Too much goes to executive compensation, bonuses, and a myriad of the same under different names. Somewhat comically, they had a 7.2 M Yen loss on golf club membership revaluation – although this is very common in Japanese companies. Just fat and lazy, or you could say “cozy”. This would be a screaming target for private equity if it were not in Japan, and if it were not effectively controlled by one guy.

Patent dispute:

It is common that medical device companies get engaged in patents disputes. However, it is unusual for Japanese companies to do so. The reason here is that a US company, Phase Medical Inc., which is now a subsidiary of Becton Dixon, sued Medikit in 2008 over a patent for one part of the needle in some of their indwelling vein needle products.

In a preliminary judgment, The Tokyo District Court found in favor of the plaintiff’s complaint in Feb 2012, and awarded them 117 M Yen (not much), but Medikit is appealing and trying to get the US company’s patent invalidated. The legal costs will grow, but I do not think they are a large issue in themselves.

What I am worried about, and in fact my greatest concern with this company, is the patent risk. Their disclosure on this point is, frankly, useless. The core business could implode if their patents expire.

So I searched for their patents, and it seems that they have five related to indwelling needles/ syringes:

Now, I am no expert in this, but the complaint was about one patent, and the story is not closed yet. So, even if they lose one of their patents, they still have four more, it seems. My central view is that Medikit will drag it on and on, building up legal fees, but that is cheaper than letting the patent go.


My second biggest concern is about the manufacturers of the dialysis machines themselves – what is to say they don’t try to put pressure on Medikit’s prices? The company does not say who makes the dialysers, but the biggest dialyser manufacturer by market share in Japan is 日機(6376) – and they are doing well, although they make all manner of other stuff, too. My gut feel is that this fear is not highly likely to be realized, because Japanese companies in general are very respectful of each other’s’ territory, so much so that they are always getting investigated by the US Dept. of Justice for antitrust violations (I know because I have arranged for many of these to be translated). And, Medikit has the patent(s).


Overseas sales are growing (currently at 9.6% of sales), but the high yen is impacting them:

Medikit oversaes sales Medikit oversaes sales

Pension: Assets: 812 M; Liabilities: 1024 M Yen

New factory:

They built a fourth factory recently. It was the first one overseas, and is located in Vietnam. They are going to use this to reduce costs and increase profitability.


They are expecting the angio component to shrink a bit next year due to price reductions prior to developing their new product, whereas vein-indwelling needles and dialysis are expected to contribute about 0.4 B yen each in incremental sales growth for FY13.

Forecast EPS for FY13 is 217 y/sh, down less than one percent. The reasons for a decline are increasing costs in starting up the Vietnam factory, and because they are spending money on a clinical trial for a balloon catheter product, which they will eventually be able to make more money out of them their current catheter line.

I’m predisposed to give management is the benefit of the doubt, due to their openness and performance to date. And, I am pleased that they are using some of their cash for growth. Some more dividends would be nice, though.

I am assuming that the growth rate trend from 2008 to 2012 will resume after getting over this road bump and that it will continue for a while (4.7% CAGR in EPS) – the reason is that fundamentals for their business have not gotten worse, and selling patented needles to dialysis patients is just a good business any way you look at it. Margin compression is happening, but so is growth. There were, when I last looked at this earlier this year, signs from the government that medical device price compression may alleviate or stop; however – who knows? The company is also growing overseas, and their new angio product will give them some better pricing.

Back of envelope balance sheet examination:

After going through and taking large slices out of things like inventory, and completely getting rid of work in progress, etc., I get to an adjusted current asset value of around 23.2 B yen (book value = 26.1 b yen). The reason why so little was cut out is because of the huge amount of cash (19.7 b yen).

They also have land and buildings with a balance sheet value of around 4.9 billion yen, but which I am choosing to ignore for now, because most of it is in factories.

Investments: Although they have about 1.2 b yen in investments, most of these are deferred tax assets.

Capex: They do not explain very well where the recent capital investments are going. However, they have recently set up a factory in Vietnam, and the increase in plant and machinery seems to account for most of the capex in the last FY. I am assuming that their steady run rate is the average of 2010 -2011 (c. 0.5 b yen), or just let’s say that the depreciation covers the steady-state capex. Depreciation is likely to increase going forwards because of the new factory.

So, just taking the adjusted current assets minus total liabilities gives you a value of 18.1 b yen for the business if it is dead.  The market cap is about 25.5 b yen, implying a residual business value of about 7.4 b yen for an entity that made 3.6 b yen of earnings last year, has a significant moat, management that I can understand, and is growing (although probably not in FY13).

I am long this stock.

{ 2 comments… read them below or add one }

catsick November 19, 2012 at 4:30 pm

Excellent website, I have been trawling through Japanese value stocks for some time, came across your site while looking for new plays to reinvest proceeds from the Accordia golf buyout announced last week, you may like to take a look at paraca 4809 a very cheap carparking company and welcia (pharma retail) , both growth stocks trading at deep discount although both have had a nice runup recently as have many of these value names …

Any chance of a little bit more about yourself in the About section ? Are you doing value trading full time or is this a hobby still ?


admin December 9, 2012 at 8:13 pm


Thanks for the comments and sorry for the very slow response.

I have been bullish on all the carparking stocks for a while, but actually got out of that space and missed a large part of the runup in Park24.

Its more serious than a hobby, but I don’t manage OPM. I spend a lot of my time translating Japanese financials. Actually, I have been spending a lot of time researching short sale candidates in the US lately, and have been doing well there with the abundance of utter dogs such as Groupon and overstuffed stocks like MLNX and Vivus, but there are still many more left, in my opinion, so Japanese stocks have taken a back seat for the moment.

More info and updates coming soon – especially if my US shorts play out.



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