In 2011, when Dr. Moshe Ben Shaul's Ilex Medical acquired control (54%) of medical equipment distributor and service provider Medtechnica for NIS 260 million, it was hard to imagine where the company would be within a decade.
At first, it appeared the deal was not going well. Medtechnica lost several marketing contracts with major companies, its revenue fell, and employees and management were dissatisfied with the match. Medtechnica's share price fell, dragging down Ilex, too.
Ilex Medical, which is active in the laboratory test market, was left with a large bank debt. Meanwhile, the asset it had acquired was declining; from the time it gained control of Medtechnica until its lowest point, in 2012, Ilex’s share price fell more than 70%.
Moreover, the merger drew investors' attention to Ben Shaul's dual roles at Ilex Medical, (CEO and chairman), to his salary - which was linked to Ilex's performance and increased dramatically over the years - and to the family members he put in most management positions. In the end, Ben Shaul was forced to repay about NIS 13 million out of the salary he received over the years at Ilex. When Ben Shaul proposed merging Medtechnica with Ilex in 2013 through a private placement mainly of Ilex shares, the shareholders refused.
But those of little faith in Ilex have lost the day. The company's share price has risen by almost 1000% from its post-acquisition downturn to the present. This increase was achieved first and foremost thanks to Ilex's activity, which has grown significantly. Ben Shaul managed to stabilize Medtechnica, and last May, Ilex managed to acquire Medtechnica’s publicly-traded shares. Most of the purchase was made with Ilex shares, which this time were happily accepted by investors.
Today, Ilex has a NIS 1.38 billion market cap. Speaking with "Globes", Ben Shaul, now the company's chairman, and Tammy Galili, the CEO and his daughter, discuss what led to Ilex's success and future expectations for the Ilex group, including Covid-19-related matters.
"We bought Medtechnica to diversify our business and grow beyond the limited market for Ilex in Israel," says Ben Shaul. "But I had to completely change Medtechnica’s corporate DNA, in both personnel and products. The problem was that I’m not always communicative, and I didn’t explain to the stock market exactly what I was doing."
Today, in retrospect, it’s easier to explain. "When we acquired Medtechnica, 60-70% of the products they sold were either low value-added products, like hospital beds and mattresses, or capital equipment (requiring a large one-time investment by the hospital).
"They didn’t make sales with the 'handle and razor blade' model, where a device is installed at the hospital and payments are made not on the one-time purchase, but for every time the device is used. I prefer this model, because it creates a more stable revenue stream. Plus, it’s easier to persuade customers to upgrade their technology, when they don’t have to take on the full risk immediately. Using this model, if the product does turn out to be useful to the buyer, then the revenue is higher." Ilex was already using this method at that time.
Ben Shaul: "I also consider Medtronic’s sales model a good one. They’re a brilliant medical equipment company that tells the customer, ‘Not only will you not pay for the device, you will also not pay for use - only for the benefit derived from it, and you’ll share the profits with me.’ That’s possible to do that if you’re a company with a stable revenue stream."
Now, says Ben Shaul, Ilex's approach to Medtechnica is finally beginning to bear fruit. "We’re gradually migrating Medtechnica over to Ilex's 'look and feel.' Medtechnica set up 20 Covid-19 hospitalization complexes in Israel from end to end, fully equipped, maybe 80% of all the ones in the country. Apart from the actual construction, we did everything, including the control systems. Today, Medtechnica provides a far more comprehensive solution."
Galili: "We’ve learned project management, and that’s very important for clients who don’t currently have the time or ability to manage projects themselves."
"We’ve eliminated all our market competition"
This is how, according to Ben Shaul, Ilex stabilized Medtechnica. But the big story is Ilex itself, which in recent years has managed to significantly increase its business in the field of laboratory test salesg, both in Israel and in Africa, expanding to many countries on the continent, as well as to other places like Russia. Ilex's 2019 revenue (excluding Medtechnica) was NIS 322 million, of which about 58% was from Israel and the rest from Africa, which is an expanding slice of Ilex's revenue pie.
Ben Shaul: "Ilex didn’t wake up one morning and say, 'Let’s conquer Africa'. Before Ilex was founded in 1992, I was a regional director there for a diagnostics company, Instrumentation Laboratory (IL)."
Galili: "Those were the years when the two countries, Israel and South Africa, were under embargo, which is why connections became close."
Ben Shaul: "Over the last decade we’ve taken over virtually every blood test market from Kenya to Mauritius. We’ve taken Roche and all the other competitors out of the market. Today, we employ over 60 people in Africa. At first, we represented foreign companies, and chose the right products. Today, we market products we’ve developed ourselves. For example, an AIDS test for babies that needs only one drop of blood, taken from the heel.
"The whole fabric of life in Africa today revolves around AIDS. In Botswana, 40% of the population has AIDS. You go to the grocery store and see five people there - two have AIDS. The AIDS test market in Africa accounts for about 90% of all AIDS tests in the world.
"The money that flows into this field comes from the United States, mainly from a program by George W. Bush Jr., called the President's Emergency Fund, which has already allocated over $85 billion. This program includes medications and contraceptives, as well as tests. If in the past, organizations gave money to local governments or local organizations that squandered the funds, today we receive the money directly from the US.
"We’ve known about this technology for a decade"
In Israel, Ilex is focused on other types of tests. Ben Shaul: "We offer diagnostic tests of all kinds, laboratory automation systems and laboratory management software. Every year, we look at our three growth channels: Which of our customers in Israel is right for automation upgrades? Where in Africa have we completed market penetration, and where are tenders being opened? And what new technologies can we introduce into Israel? For example, we’re now marketing a technology for that sterilizes blood units, inactivating viruses and bacteria, even those we can't test for but which are there."
Galili: " We’ve known about this technology for a decade, but only now has its time really come. I’m saying this so you’ll understand how far our long-term thinking goes."
In the first half of 2020, the Ilex Group recorded revenue of NIS 377 million - 23% growth compared with the corresponding period in 2019. Gross profit was NIS 118 million, an increase of 24%, and net profit attributable to shareholders was NIS 41 million - an increase of 37% in comparison with the corresponding period in 2019. Ilex comprises 52% of revenue and Medtechnica - 42%. There is also a third arm, Flight Medical Innovations, which generates 6% of revenue.
Flight Medical, which manufactures portable respirators, had until recently not been terribly successful. The company, previously traded on the Tel Aviv Stock Exchange, hadn’t been able to log more than a few million shekels in sales a year, and had failed to reach cash breakeven.
Things changed completely with the outbreak of the Covid-19 pandemic, when the market first discovered that Israel had a respirator manufacturer, a product which, at that time, was in such severe global short that the Mossad was brought in to make purchases.
Flight Medical immediately received an order for the supply of thousands of respirators from Israel’s Ministry of Health. Additional orders came from abroad, so that revenue for the first half of 2020 doubled to NIS 5.9 million. Demand for respirators has now calmed down somewhat, but the event gave Flight Medical a new lease on life.
"I was judged solely because I'm ‘the daughter of’"
Even now, Ben Shaul and Galili refer to Ilex as "We" and Medtechnica as "They". Galili manages Ilex Israel and Ben Shaul runs operations in Africa, as well as the new coronavirus laboratory, and oversees group strategy. Medtechnica is run by CEO Boaz Yehezkel, who is not a family member.
Given the rise in the share price, do people still ask you why Ilex’s management is all Ben Shaul family members?
Galili: "I admit that in the past I was offended by these questions. I was judged by people who didn’t know me, just because I'm ‘the daughter of'. I'll tell you what I say to investors: I think a family company has value. As the owner's daughter I can make quick, flexible decisions. I don’t live for my annual bonus. I won’t work on having one good year in the knowledge that I’ll be at another company the following year. I’m here to stay. From the time I was eight years old, my father would bring home Ilex correspondence and I would fold the letters and put them into envelopes. I have a responsibility towards our family property."
Ben Shaul: "If I were to hire someone from outside, it wouldn’t be the same as someone who was born into the business."
The Ilex lab: 30,000 Covid-19 tests a day
Last week, Ilex inaugurated its NIS 20 million Covid-19 testing laboratory at the Airport City complex near Ben Gurion Airport. Ilex won the tender to establish the lab, which serves the northern region (tests will be transported from Yokne'am).
Ilex's laboratory will conduct 30,000 corona tests a day and employ 60 people, in addition to its current workforce of 360. Most of the work is automated; according to Ilex, the lab requires about a third of the workforce of comparable labs.
Galili: "2019 was the year we invested in infrastructure. We invested in a new logistics center and in computing. We’re very lucky to have designated 2019 for this program and not 2020, otherwise we wouldn’t have been able to deal with the crisis.
"It is important to say that the coronavirus brings opportunities, but also challenges. In March and April, no one did routine testing, only vitally necessary ones. We ordered supplies, even though we didn’t know if they would be used, because we didn’t want to delay routine testing services once the skies were opened, and we ended up throwing those supplies into the trash. It wasn’t easy, but we’re flexible and we know how to compensate by doing something else."
And what will you do with this giant lab after Covid-19?
Galili: "Any kind of test there is. Throat swabs. Our testing capacity for Israel will facilitate fast results for any type of illness."
Ben Shaul: "The general market for Covid-19 tests may end, but the market for pre-flight testing for coronavirus and other diseases is just getting started."
At some point, testing for Covid-19 and in general, will move from huge laboratories to rapid testing at medical clinics. Does that pose a threat to you?
Galili: "It’s not expected to happen anytime soon. For many types of tests it doesn't pay, and for many other types it’s not technologically feasible in the near future. But any change is also an opportunity, and if and when it happens, we’ll be ready for that as well."
Published by Globes, Israel business news - en.globes.co.il - on November 1, 2020
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