Ladies and gentlemen, good day and welcome to the conference call of Poly Medicure Limited to provide an update on the proposed acquisition by the company of CTFE Group. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star and then zero on your touch-tone phone. I now hand the conference over to Mr. Rahul Gautam, President, Strategy and Corporate Development at Poly Medicure Limited. Thank you, and over to you, Mr. Rahul Gautam.
Thank you, Sagar, and good evening to everyone on the call. We appreciate you being here to discuss our second acquisition in the month of September of CTFE. Before I jump into discussing this acquisition, I would also like to inform the participants that we closed the PendraCare acquisition on 23rd of September. From that day onwards, PendraCare has now formally become part of PolyMed Group, and we are excited to have them as part of the PolyMed Group. Moving on to the acquisition of CTFE, you might have seen the presentation in the press release that was released yesterday on the occasion of signing of the share purchase agreement between PolyMed DB, which is a subsidiary of PolyMed, with the descending shareholder of MediStream, which is a Swiss corporation.
Over the next 5 to 10 minutes, I will briefly talk about our rationale for this acquisition and give you an overview of CTFE Group, and then open it up for Q&As that you might have. Starting with the macro picture, I mean, orthopedics is obviously a large segment in the overall medical devices sector. It's about $61 billion, growing at about 3 to 4%. Within that, trauma and extremity is the largest segment at about $12 billion, and it's growing the fastest at about 6 to 7%. U.S. is the biggest market. I mean, like all medical devices segment, orthopedic also is dominated by U.S., with almost 67% of sales in orthopedics being done in the U.S., followed up by Europe. Impact is the fastest growing segment. Within that, India is the third largest market behind China and Japan. India contributes close to 3% of the global orthopedic market.
The space is fairly consolidated, with the top five players having almost 60% of market share. Despite that, you know there are a number of local players in each geography who, through innovative products and servicing of their customers, have been able to build strong businesses locally, and that's where CTFE also sort of fits in and positions quite well. As I mentioned, trauma and extremity is the largest and the fastest growing segment, but it's also very resilient. If you look at the trajectory of orthopedic space, during COVID, the fall in the trauma space was the least because this is a segment where you cannot delay the treatment. Unlike in case of elective situations like knee and hip replacements, it's a fairly resilient sector, and growth has been fairly consistent pre-COVID and post-COVID as well.
Just on the trauma and extremity, the geographical spread is also similar to overall orthopedics, with the U.S. having close to 65% of the overall market, Europe having close to 17%, and balance being contributed by the rest of the world. I'll just move on to now giving you an overview of CTFE. It's a company which was set up in 1962 in Italy, so it's been around for a very long time, and they are a vertically integrated manufacturer specializing in trauma and extremity products. Their products are fully MDR certified in Europe and have acquisitions in the key market of the U.S., as well as other key Latin American markets. In terms of manufacturing capability and location, it's based in Bologna, Italy. They operate close to 2,100 square meters of manufacturing facility in the city of Bologna, and it's currently at 60% capacity utilization.
With the ability to add third shift to the business, there is significant headroom available to serve the customers through this facility. Just talking about the key strengths of the company, it's an integrated business model. Right from product R&D to product development, manufacturing, distribution, the entire piece is completely controlled by the company, which makes them very, very interesting. For a company of this size to have direct sales presence in the markets of Italy, U.S., and Mexico is quite credible. They've been able to grow in each of these markets for a very long time. As I said, they have very strong KOL relationships. That's another important differentiator when they compete with the global players.
Their agility in terms of product development, in terms of being able to meet the market needs at a much faster speed is what differentiates them and makes them sort of competitive in the market. They have 45 patents with six R&D team members, and they intend to launch three to five new products every year, which is something they have been doing in the past. Exceptional quality, very low complaint rates that the company has had in the history with a complaint rate of 0.001%, which again becomes a huge differentiator in the minds of the surgeons to be able to use their products. As I mentioned, the product is fully MDR compliant. One of the few companies of this size who've been able to get all their products certified in the EU and the new MDR regulations, and have acquisitions in the U.S. and other 25+ markets.
Moving to on the financial performance of the company, in the year 2024, the company delivered a revenue of close to €17.3 million, which delivered a 15% growth on a year-end basis, and it went off about €3.1 million, which is a year-end growth of 14%. I'm also very pleased to inform that the existing management team, which has been around for a long time, is continuing to join the PolyMed Group and is going to be driving the future growth. Mr. Pascal Bovie, who has been the CEO of the company since 2019, will continue to remain the CEO and build the business with the help of PolyMed Group. We truly believe that we have a fantastic team led by Mr. Pascal Bovie, and we do think that with the help of PolyMed Group, much greater growth can be achieved by this company over the course of the next few years. Moving on to transaction overview, we are acquiring 100% of the company from the selling shareholders of MediStream. One of the key shareholders of MediStream was Arkimed, which is a European private equity fund focused on healthcare. They own close to 66% of the company, and balance was held by multiple other shareholders of MediStream. We are taking 100% in MediStream, which is the Swiss corporation which holds all other companies under it, including CTFE SRL, which is the main company where you have the manufacturing facilities and the R&D facilities located. We are valuing the company at an equity valuation of about €18.8 million and will be repaying shareholders' loan of about €4.2 million as part of the closing.
That's a €23 million payout that will happen on closing, and we are taking over a debt of about €8 million. That values the company at about €31 million enterprise value, which on the basis of reported EBITDA of 2024 values the company at about 10x EBITDA. Moving on to why this happened and why this space, as I said, orthopedic is a large segment, growing segment. The underlying growth drivers are well in place for the orthopedic sector, and it gives us access to a very large part of the medical devices implant segment. Second one, as I said, it's a very differentiated product portfolio. You know, to have an implant approved in EU MDR is a big, big achievement for a company like CTFE, and to have presence in the strategic market of the U.S.
with direct sales presence in those markets and having access to surgeons there is a huge advantage. They have a very strong position in the markets they're operating in. In Italy, they're the second largest player with about 12% market share. In Mexico, again, they have close to 12% market share amongst the top players in those markets, and U.S., they're slowly, gradually increasing their presence and getting greater coverage of the hospitals. The fact that it's an integrated business with end-to-end capabilities from R&D to marketing and sales with direct sales presence in markets is a huge advantage. We believe that the asset has a good amount of growth potential going forward. It's been growing, if you look at its longer-term trajectory, at 10% to 12% together.
With the help of Poly Medicure and our distribution network, we should be able to double the business in the next five years. This obviously includes the synergy that Poly Medicure Group will bring on the table. One of the most nearest sort of synergies that we see is to introduce plates as part of the product portfolio, something which has been missing in the company's portfolio currently. Just talking about the synergies, right? One, I've already touched base on the fact that the product portfolio expansion in the near term in plates and in the medium to long term to enter other segments of the orthopedic space is clearly an opportunity. U.S. expansion is an important part of our growth journey. As I said, it's a big market. 67% of the market is in the U.S. It's a fairly high-paying market. The realizations in the U.S.
are significantly higher than other parts of the world. Your ability to go and cater to that market by expanding your sales reps and increasing your sales presence in those markets could be hugely value accretive. Another opportunity is to outsource part of the manufacturing process in India, which can make products more competitive and supply to markets which are more cost-competitive or cost-sensitive. That's where Poly Medicure can come in and create significant value for CTFE as well as for the group. Obviously, an opportunity to build a BU or business unit in India for direct sales in the Indian market for CTFE products. We are evaluating those opportunities. India is a very attractive market for orthopedic space. It's been going quite well with domestic companies taking market share away from the MNC.
We believe with a differentiated portfolio of CTFE, we could further increase the presence of the local companies in that market. Other opportunities are obviously to expand distribution network in other parts of the world where CTFE currently doesn't have presence. These are some of the synergies that I see, and we are quite excited about having CTFE join PolyMed Group. Just to complete my opening remarks, this transaction starts a journey for PolyMed in the orthopedic space. It's the new addition within the medical devices space which PolyMed has entered into on top of cardiology, critical care, and renal care that we've entered in the last five to seven years.
We believe that orthopedics is a very attractive space with significant growth potential over the course of the next many, many years, and we believe that CTFE is the right kind of platform for us to use and expand in that space. With that, I finish my opening remarks and open up for Q&A.
Thank you very much. We will now begin with the question and answer session. Anyone who wishes to ask a question may press star and then one on their touch-tone phone. If you wish to remove yourself from the question queue, you may press star and then two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Again, to register for a question, please press star and then one. Participants, you may press star and then one to ask a question. Our first question comes from the line of Vishal Manchanda from Systematics. Please go ahead.
Hi, good evening, and thanks for the opportunity. Would you be able to disclose the gross margins of the acquired company?
Yeah, sure. The gross margins of the company are in excess of 90% in this space.
Okay, would we kind of need to invest in production capacities to kind of take the business forward from here? You mean in Italy?
What kind of capex will require to kind of expand the business from here? The production capacities, basically.
Yeah, I think there is a reasonable amount of capacity that's available to sort of fund the growth needs, at least in the near term. We don't expect any significant CapEx to be done. The regular CapEx for this company is between $1.5 million to $2 million a year.
Okay, what's the gross block, physical gross block in value terms?
I have a net block number that's about €5 million.
Okay, got it. The immediate priority would be to build presence in India. Is that a right assumption?
No, I think the most nearest opportunity of synergy is to add plates as a product. Just that you understand, in trauma, nails, screws, plates go hand in hand, and in a lot of public tenders, you can participate only if you have a comprehensive portfolio, which basically means that CTFE currently is not able to participate in some of the tenders because they don't have plates. That seems to be the nearest opportunity. We will evaluate the India angle as we go deeper with the management, both from a distribution perspective, because you understand we don't have direct sales in India for orthopedics just till now. That's something which will take time.
Okay, and would you be able to kind of share some color on how this company is different from, you would know recently Zydus acquired a French company in the same space. Is this a similar company to the French company, or are there differences?
Yeah, so I mean, obviously they are in the larger orthopedic space like CTFE, but their main product is knee implants. CTFE is into, as I said, orthopedic trauma and extremity segment, which is, you know, into nails, screws, and instrumentation.
Okay, and this trauma and extremity itself is a $16 billion global market.
Yeah, I think it's currently $12 billion and expected to go to $16 billion in the next few years.
Okay, okay, in terms of the product portfolio, you said we'll be kind of introducing two to three products every year. Currently, in terms of addressing the market, what portfolio do we have? Like, do we have 20% of the portfolio in trauma and extremities, or we have 30%? If you can give some sense.
Vishal, it's basically, you know, when you say three to five new products, you could also be in the same product just adding a new feature, which makes it differentiated from what's available in the market. R&D is a continuous process, like the way it's happening in Poly Medicure. We're introducing new products on a yearly basis. They have a fairly good coverage from a trauma perspective when it comes to nails, and they cover most of the bones that are, you know, that get impacted by trauma events. Plates, which is again almost 40% of the overall trauma market, I'm just talking very macro numbers, that's a piece of product which is currently missing from the portfolio.
Okay, are there any Indian players into this space who are kind of manufacturers?
Yeah, I mean, obviously, I think all geographies have multiple local manufacturers, and so does India. India has a fairly large base of manufacturers who are operating in this space.
Okay, would you consider shifting your manufacturing to India? Would that make sense in this?
We have currently no such plan. I think the facility there is doing a very good job, and the customers, they know the product being manufactured in Europe. We currently have no plans to move the manufacturing to India.
Understood, got it. Thank you very much.
Thank you. Before we take the next question, a reminder to all the participants, you may press star and then one to ask a question. Our next question comes from the line of Karan Gupta from Acmil. Please go ahead.
Yeah, hi. Hi, good afternoon. My first question on the gross margin, you said 90% is CTFE, and the effective margin is around 17%.
Karan, we can't hear you well. There seems to be some disturbance behind you.
That's okay. Now I think it's.
Thank you. Yes, please.
Yeah, yeah. The gross margin, you said 90%, nine zero, if I'm correct? That's correct.
Yeah, yeah. Gross margin is 90%, and EBITDA margin is 17 to 18%. What's the operating cost here?
Obviously, the gross margin is basically the cost of material that is there. Obviously, labor cost on top, the sales cost, the marketing cost is all of that. Plus, the corporate overheads is all back between the gross margin and EBITDA margin.
Okay. Basically, overhead cost is basically the higher portion.
Not just overhead cost, but also the other parts of manufacturing, which is labor and other manufacturing costs, because that's how the gross margin is reported, right? Gross margin is your cost of goods sold.
Gross margin, yeah. After gross margin, the difference between gross margin and EBITDA, I'm just saying your labor cost and all manufacturing cost is basically the part.
Plus sales cost, right? Because the company has direct sales still. Even the cost of sales, marketing, all of that is covered through gross margin.
Okay. Okay. Going forward, asset turn, what asset turn you're expecting?
Sorry?
Right now, it is around more than 3.
Sorry, I didn't hear.
Yeah, fixed asset turn.
Yeah, I mean, I think currently, as I said, there is a significant amount of headroom available to grow the business within the current facility without significant CapEx being required. It is possible that, you know, we could do significantly higher revenue from here where we are today without adding much CapEx. As I said, between $1.5 million and $2 million of CapEx is done as it is in the business. That also includes instrumentation, just that you know, because for trauma, you also need instruments which are provided to the surgeons for undertaking the surgery. I think without any significant CapEx, we could, we can, you know, double the revenue in the next five years.
Okay. Without significant capex, you're saying?
Yeah.
Okay. Is it possible to take the EBITDA margin from 17, 18% to our blended margins around 25%?
Probably to provide guidance on how the margins will expand. I think it's very clear that there is an operating leverage play that will happen in this company as the sales increase. So far, the company has been operating in a constrained environment and obviously did not have plates as a product portfolio. Now, for us to expand revenue from current $17 million, $18 million revenue to $25 million to $30 million revenue doesn't require a significant increase in fixed cost. That flow-through of margin from gross margin to EBITDA should be better as the revenue increases from where it is today.
Okay. What was your value proposition to the promoter of this company, that you want to, you know, turn around or maybe take the leverage of your distribution channels and networks? What was basically the value proposition here?
I mean, I think, see, one, this is, you know, this is not a space where Poly Medicure has been operating in the past. It's, in a way, it's a plan for us to enter into a space which Poly Medicure did not have, sort of presence in. That's very important to understand. Obviously, we have very strong capabilities on the R&D side, which we can build here in India by having people from the orthopedic space come and join us and help the team in Italy to develop products much faster and also develop products for the Indian markets. Secondly, I think clearly the fact that we have a global distribution network already, CTFE could leverage that to get into markets where they don't have presence today.
Thirdly, with time, there are obviously areas in the manufacturing side by moving some parts of the processes to India, which will make them competitive.
Okay. Can you tell us the pricing of products and average pricing of the products of this?
We don't have a product pricing term. Okay.
So combine this CTFE and one more acquisition you've done.
Yeah.
Overall, blended growth, you were saying 20, 22%. You mean for PolyMed? Yeah, what was the guidance?
I mean, I think guidance, so I think we've guided for the three businesses separately. Poly Medicure, we have obviously guided, given the guidance for the Poly Medicure organic business, you know, in the Q1 call as well. We think that, you know, on the PendraCare, we had mentioned that the asset could grow in high single digit to low double digit on its own, currently. We expect a similar kind of growth profile for even this asset. Currently, we haven't accounted for the synergies that will happen. I think it's early to give guidance on how the synergies will help, overall, revenue growth. Over the course of the next few quarters, we'll come back to you.
Okay, just one last question on this. If I may ask on PendraCare in this call.
Okay, one. One, if you can ask one.
Okay, just wanted to know the size of the opportunity of this cardiology, your products, catheters, as you mentioned in your orthopedics.
You want to know what the total global market size of cardiology catheters is?
Yeah, yeah, yeah.
I think it needs both diagnostic and guiding catheters put together. Each segment is over $1.5 billion each global market. Okay. What? Sorry, I think I missed it.
It's $1.5 billion for diagnostic and $1.5 billion for guiding.
Okay. Thank you. Thank you so much.
Thank you. Our next question comes from the line of Jayavir Shekhawat from Ambit Capital. Please go ahead.
Sure. Thanks for taking my question, and congratulations to you, Mr. Gautam, and also to Mr. Baid and family as well for the acquisition. First, on the acquisition, could you first specify these devices? Are these Class III devices as per FDA classification? Also, since you mentioned there is a direct presence in the U.S., are their products paneled with all the top GPOs there, like Vizient, Premier, or HealthTrust? If you could clarify on that, that'll be my first question.
Yeah, so these are class IIb products in Europe and the U.S. These are not class III products. No, this is currently our products are being sold through the direct sales reps that we have. We don't have contracts with the GPOs there, but our own team or, you know, what is called as 1099 agents in the U.S., those are the people who are distributing those products to trauma centers and hospitals in the U.S.
Okay, just for my better understanding, because ideally, I was under the impression that most of the procurement in the U.S. would have happened through these large GPOs, and it's possibly top four or five, which control the majority of the procurement. Are you directly going onto the hospitals with the sales rep, or in a way, does that get supplied to GPOs, which in turn supplies to the hospitals?
Your understanding that the entire business happens through GPO is not correct. Obviously, you have medical devices companies who have direct sales reps, like the way we have in India, where people are going directly through their own sales team to go talk to the stakeholders. A similar model also exists in the U.S. Obviously, you have large GPOs operating in the U.S. of the names that you've taken, but, you know, like the way CTFE has a direct sales team, which is going and talking to hospitals and surgeons and are present in the OTs as well when the surgery is going on, that's important to understand. You know, businesses have their own reps going talking to hospitals and surgeons.
Sure, that's great to know. What does that mean for Poly Medicure in a way? I mean, given that you've also been trying to go via the fight and kill approval route, if you already have a direct sales force, could there be synergies in terms of you selling more of consumables that you're manufacturing via the same channel?
No, I mean, it's very, very different segments. It's like asking equity guys to sell commodities. It's very similar. You can't have an orthopedic guy going selling infusion therapy.
No, what I meant was since you already have tied up with hospitals there and you have a direct sales team force, and at the end of the day, if the brand, the house of the brand remains Poly Medicure.
You will go to hospitals where surgeons are fixing broken bones, and the agent and the sales rep is going talking to the surgeon and talking about the products, right? It's impossible for an orthopedic sales rep to go and say, "Okay, I'm going to come and sell you IV site." It's very different.
Sure, that's well understood. Lastly, I just want to understand because this acquisition in the entire history sort of forays into a very different segment. I think most of the other ones, of course, there have not been too many, but I think that even the actual acquisition, even the one that happened on PendraCare as well, these are related consumables. How is the management promoter thinking in terms of, I mean, building or say thinking of acquisition going forward in terms of which areas, therapeutic areas, and then what is not, what is open to us or what is not open to us? I think that's where I wanted to more get clarity on.
I think, you know, on the M&A strategy, which we have said in the past, that we want to obviously stick to the medical devices and we'll stick to the existencies of the medical devices. We have also very clearly called out that there are certain segments which are very exciting for us, and we've been obviously investing in those segments over the course of the last five years. These are all effectively driven by the disease burden pattern, right, that's been sort of evolving over the course of the last few years. We've entered into renal, we've entered into cardiology, we've entered into critical care, and now orthopedics. If you look at the overall patient pool, the growth of patient pool in these segments is obviously faster than the overall medical devices.
To that extent, we are picking up segments where the underlying demand is quite high and the growth is higher than the overall industry. I won't say that we have said, "Okay, we don't want to get into any space." We'll obviously evaluate each opportunity on its own merit. Given the fact that we've done two acquisitions just now, we would want to pause and absorb these at the moment and then sort of get back to potential opportunities in the future.
Sure. That's very clear. Thank you so much, Ainav.
Thank you. A reminder to all the participants, you may press star and then one to ask a question. Our next question comes from the line of Harsh Shah from Marcellus. Please go ahead.
Yeah, hi, Rahul. In the previous acquisition that we had taken, there was some incentivization for the top management where the stakeholders are supposed to be bought after the previous down the line, and there's some milestone-based payment as well, depending on how the numbers are in CY2029. Similar to that, in this one, how are we incentivizing or retaining the top management team, or is there a top milestone-based payment here as well?
That's an excellent question, Amitayash. Obviously, as you rightly said, in PendraCare, we had a different situation because one of the founders was the CEO as well. He had an equity stake in the company already, and we incentivized through milestone payments as well as earnout payments over the course of the next four to five years to keep them motivated to build the business with the PolyMed Group. It's a slightly different situation in the case of CTFE, where a professional management has been running the business for over six years now. We've created a sort of incentive structure or a payout structure which incentivizes short-term performance, but also sort of creates a long-term incentive plan, which is basically linked to the delivery of the business and financial performance over the course of the next five years.
We have very clearly defined targets, and on achievement of those targets, there is an incentive-linked payout that is variable in nature, completely variable in nature, which will be paid out to the key managerial team of CTFE.
Okay, got it. From PolyMed side, can you give some insights on who will be looking after these two acquisitions? There's a concern in my mind that have we bitten off more than we can chew here.
I think we're creating a group of people who will be responsible for integration. We are in the midst of finalizing what that executive committee will look like. We will obviously have representation from different functions being part of that group to drive individual synergies which have been decided, either it's on the sales side or on the manufacturing side, on the R&D side, obviously under the overall leadership of Himanshu and Rishi. That's what we're thinking about. We are in the midst of preparing that structure, and at the right time, we'll update you guys.
Okay, got it. My third question was with respect to adding the plates as a product portfolio, which seems like a pretty low-hanging fruit here. As you said, in various public tenders, both the products go hand in hand. I just want to be curious why didn't the previous management themselves add this product?
Sorry, I didn't understand you well. Can you repeat your question, actually?
Yeah, hi. I was asking that you alluded that the initial priority is to add plates as a product segment because in various public tenders, plates as well as nails go hand in hand. My question was why didn't the previous owners themselves add plates as a product portfolio?
I mean, I think it is because honestly, it was their choice. I think, you know, this Arkimed, the majority owner of this company, had invested in this company in the year 2014. I think we all know that typically private equities have a holding period of five years. In this situation, the holding period obviously went quite long. It became almost 10 years. Maybe they had fund constraints because of which they were not able to provide, you know, a large amount of capital. They obviously supported the business by providing incremental capital. Maybe that was the reason because if you think about it, to add a plate as a product is a significant investment. You will have to have multiple SKUs, need to create inventory, obviously then identify the products. It is a significant investment.
I'm assuming that was the primary reason that, you know, they decided to not invest in this space.
Oh, okay. Got it. Thank you.
Thank you.
Again, if you would like to register for a question, you may press star and then one. Our next follow-up question comes from the line of Vishal Manchanda from Systematics. Please go ahead.
Yeah, thanks. I just have one follow-up. Can you share what is the total investment that has gone into the company so far in total equity and borrowings?
Yeah, so their net worth is about $16.5 million. On top of that, you add another $8 million plus $4 million, $12 million. It's about $28 million, $29 million, say about $30 million of total investment.
Got it. Thank you. That's all.
Thank you. Participants, if you would like to register for a question, please press star and then one now. To register for a question, please press star and one.
Raghu, we wait for 30 seconds. If there are no further questions, we can.
Sure.
Yeah.
If there are no further questions from the participants, I now hand the conference over to Mr. Rahul Gautam for closing comments.
Thank you, everyone, for joining on the call. Appreciate your time. This transaction is the continuation of our inorganic strategy, where we have very clearly stated that in segments which are high technology or gives us access to sort of key markets of Europe and U.S., as being part of our core inorganic strategy. We have, in the last two transactions, clearly demonstrated that. We are excited to have CTFE as part of the Poly Medicure Group and very excited to build a solid orthopedic business across the world using that as a platform. Thanks a lot for your time.
Thank you. On behalf of Poly Medicure Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.