In the manufacturing industry, some of the best business models are focused on what are termed ‘consumables’.
Take photocopiers, for example. Big photocopier manufacturers usually make only a tiny profit on each machine they sell, and often they make a loss, but they can produce a steady, predictable income from selling paper and toner – the consumables that photocopiers need in order to work. In fact, the photocopier manufacturers usually do not produce the paper and toner themselves: they just employ quality control professionals to check the suitability of paper and toner supplied by third parties, before buying these consumables, sticking their brand on them and then charging the end users a hefty margin.
One version of the consumables-focused business model is used by Deltex Medical Group – a medical device manufacturer quoted on London’s Alternative Investment Market. It sells a blood monitoring system that requires a new disposable probe every time the system is used on a new patient.
Deltex’s main product is the CardioQ-ODM system. The system changes the way that doctors care for patients undergoing surgical procedures, helping the patients to recover faster and enabling them to leave hospital sooner and in better health.
Being able to measure blood velocity helps patients by enabling doctors to reduce the complications that arise from a medical condition that is common among almost all patients who undergo surgery, as well as many others in intensive care or arriving in an accident and emergency department.
This condition, known as hypovolaemia, is a reduction in circulating blood volume and it arise in surgical patients due to a combination of pre-operative starvation, anaesthetic agents and the blood and fluid losses associated with the surgical procedure itself. The body struggles to get sufficient blood to the tissues and vital organs, which are consequently starved of oxygen, which can cause medical complications including major organ failure that can in turn lead to severe long-term health problems and even death.
Clinical trials have shown that the use of oesophageal Doppler monitoring to guide fluid management in patients reduces complications and the length of hospital stay after surgery. Deltex points out that every randomised, controlled ODM trial has been positive.
By detecting a reduction in circulating blood volume early and in real time Deltex’s CardioQ-ODM product allows anaesthetists to intervene quickly and safely, using a combination of specialised fluids and drugs, before the hypovolaemia becomes serious and potentially life threatening. The company says that the use of CardioQ-ODM leads to fewer patients needing to go to intensive care, while those that do tend to stay there for shorter periods. This in turn means that patient journeys through a hospital are more predictable, so CardioQ-ODM can play an important part in improving the efficiency and productivity of any healthcare system.
Deltex’s products have been used on more than 300,000 patients to date and they have been sold in more than 30 countries.
The UK is identified by the company as the market where some form of system-wide adoption is most likely in the short term. Deltex’s management believes that CardioQ-ODM is well positioned to benefit as the National Health Service’s leadership currently prioritises initiatives to improve the quality of care it provides in order to make more efficient use of its resources.
Encouragingly, the UK’s NICE (National Institute for Health and Clinical Excellence) has selected CardioQ-ODM as one of the first products for review by its newly-established Medical Technologies Advisory Committee. NICE, which was set up more than a decade ago to ensure people in England and Wales get high quality healthcare from the NHS, has indicated MTAC is due to make draft recommendations in September after which there will be a period of public consultation before final guidance is issued in 2011.
“NICE is the global leader in making evidence-based recommendations on the clinical and cost effectiveness of medical technologies: a positive NICE recommendation should not only accelerate significantly the adoption of CardioQ-ODM in the UK but also help us create opportunities for accelerated uptake in many of our export markets,” says Ewan Phillips, Deltex’s chief executive.
But while the UK is currently Deltex’s most developed market, the company sees major growth opportunities in the US.
For example, last month Deltex announced its largest order, to date, for probes from a single hospital in the US. In April the company revealed that its largest single hospital account in that country was consuming more than 200 probes per months – amounting to annualised sales valued at more than $400,000. Now, that same hospital has placed a forward order for probes worth a minimum of $204,000 over six months.
“Our strategy in the USA is to develop a small number of accounts which adopt CardioQ ODM as a base for future national roll-out. This order is a major milestone in delivery of this strategy,” says Phillips.
At the end of April, Deltex also reported that sales in the first quarter of this year were ahead of Q1 2009, driven by increases in both volumes of probes and associated revenues in the UK, US and other international sales territories.
Last year, Deltex reduced its operating loss by £1.1m to £1.5m on sales that had increased by 8% to £5.6m. At the end of December the business had cash of £1.5m.
Unlike some other AIM-quoted medical device manufacturers, Deltex is not dependent on a lumpy revenue stream – where a few months of slow sales of its main product can significantly affect a financial period. Recurring revenue streams, not only from probe sales but also from monitor service and maintenance, accounted for 76% of total group revenues in 2009.
Analysts currently expect the £14m-market cap firm to make a pre-tax loss of £600,000 this year on revenues of £6.8m, with Deltex making a first profit of £0.2m next year on revenues of £8.4m. But investors should look out for news of further probe contracts, such as the one with the US hospital outlined above, since these will have a significant beneficial effect on profitability.