The pandemic has made entire industries and companies to be either winners or losers. Medical and essential products suppliers sit on record earnings while construction firms, hotels and airlines nurse their wounds.
Interestingly, contract manufacturer Vicplas International finds itself straddling both ends of the spectrum. On one hand, it manufactures pipe and pipe fittings used by the construction sector, which suffered prolonged periods of work stoppage. On the other hand, the company makes medical devices under subsidiary Forefront Medical, which is enjoying steady growth and contributing to a bigger proportion of the company’s earnings.
While there were periods of varying demand for the company’s products, Vicplas now finds itself in an interesting position of seeing brisk business for both its medical equipment and pipes.
For its FY2021 ended July 31, 2021, the company reported revenue of $113.9 million, up 28.2% over the preceding year. While the company incurred higher operating costs such as staff and materials, along with higher revenue, it enjoyed foreign exchange gains, lower tax and also wrote back an impairment.
As such, its earnings in the same period was up 112.5% to $10.4 million. Vicplas declared a final dividend of 0.45 cent per share, versus 0.375 cent paid for FY2020. On Jan 4, Vicplas’ share price closed at 23 cents, valuing the company at 11.26 times historical earnings and giving it a market value of $117.7 million, according to Bloomberg.
In recent years, the medical segment has been contributing a growing proportion of earnings, as revenue from pipes slid. However, in FY2021, the pipes segment recorded its first rise in five years, recording revenue and profit of $33.7 million and $3.2 million respectively, while the medical devices segment saw a surge in both to $80.2 million in revenue and $12.1 million in profit. Assuming things go well, the company is poised for growth as the construction sector recovers and the medical segment takes off.
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Piping along
Group operating director Jay Cheng, says that Vicplas Pipes began to recover in FY2021, with its revenue returned to 96% of FY2019’s pre-pandemic levels.
The pipes segment, surprisingly, is mostly immune to most of the supply chain disruptions as the company manufactures in Singapore, for the Singapore market. This means it does not have to deal with the problem of transportation costs. Cheng points out that “pipes are hollow, so you are basically paying to ship mostly air”.
Vicplas says it has beefed up its market leader position with its pipes that are made in a more environmentally friendly process. The pipes, free of heavy metal elements, are seeing growing demand from indoor farming operations — a growing industry here, given the national goal of producing 30% of our food locally by 2030.
“Stakeholders in the built environment are increasingly conscious about the environment, and with growing focus on ESG [environmental, social, and governance] and the Singapore Green Plan 2030, we see an increasing trend in building projects calling for construction and building products certified with green check marks,” says Cheng.
Medical as a growth engine
While the pipe-making segment is growing, what might interest investors more is the stronger growth prospects of the medical segment which is driving Vicplas’ transformation into a “medical-focused” group.
This business segment is largely operated via its contract manufacturer subsidiary called Forefront Medical, which has experienced revenue growth of more than 300% over the past five years. Forefront’s contribution to Vicplas’ total revenue has grown from 39.1% in FY2017 to 70.4% in FY2021.
According to Walter Tarca, who is president of Forefront Medical, there are a few key reasons for the rise. For one, making medical devices for the likes of Becton Dickinson and Co (BD) as well as Johnson and Johnson is a “complicated” endeavour full of restrictions and hurdles in order to get the products to the market.
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Examples of medical equipment made by Vicplas include screws used to repair hernias and feeding tubes. “So you can imagine if we don’t get the manufacturing process right, that’s a big, big issue,” Tarca notes.
Furthermore, the validation process is “tightly regulated” to the point that if a production line is moved from one place to another, it has to be revalidated by the customer all over again. Hence, customers will tend to stick with tried and tested suppliers. “Not anyone can simply enter this sector,” adds Tarca.
Thus, when a customer comes to Forefront, “it can rest assured that we have all the skills in house to be able to design, develop, make their product, and ship it to them. No issues,” says Tarca.
He adds that another advantage that Forefront has over its competitors is that the company is very “vertically integrated”. In short, the company handles the entire value chain of its products, from R&D to final assembly, which means that it has complete control over how a product is made.
“Somebody comes to us with a product, or they want a few products or design extensions. We can help do the design extensions. We can then prototype the product and make the tool that makes this product,” says Tarca.
He explains that this is important as some customers are worried about intellectual property theft. “This is very important because some of our competitors don’t have toolmaking capability, which means they have to approach another company to make a tool. So they have to give the other company the drawings of their product.”
Forefront ensures the security of these drawings by keeping all the processes in house. “We do all the validations, making sure that all the steps are passed. And then we do the mass production, packaging, sterilisation and then delivery, so everything can be done in-house.”
Made in Singapore
While many manufacturers face supply chain woes amid this pandemic, Vicplas is relatively unaffected, as its medical segment, under Forefront, has stockpiled more inventory in its supply chain. “We’re dealing with medical products that, if not delivered to our customers, will impact their patients. A lot of these products are life-saving or life-preserving products,” Tarca says.
He acknowledges that the increased inventory means more costs in the short term, but he does not want to damage the trust between Forefront and his customers who expect smooth delivery.
In any case, Tarca is keeping a constant eye on external risks. Forefront manufactures primarily in Changzhou, China, and also a smaller portion in Singapore. With the trade war dragging on, Forefront gets to help its customers avoid getting hit in the crossfire of tariffs between the US and China. What they do for some customers is moulding the products in China but doing the final assembly, packaging and sterilisation here and shipping them out with the label “Made in Singapore”.
“A lot of our customers like that model and even [products] totally made in Singapore because they see Singapore as a bastion of high integrity. They feel comfortable even though it’s probably a little bit more costly to do it in Singapore,” he says.
Furthermore, Vicplas is able to penetrate several niche markets by manufacturing in Singapore. One example is the veterans’ hospitals in the US. This is because Singapore is recognised by the US as a “TAA-compliant country”, which refers to the 1979 Trade Agreement Act that restricts the number of countries that can sell to the US government. As such, he is optimistic that Vicplas’ manufacturing operations in Singapore will get livelier in the coming three to five years.
Worldwide, Vicplas notes that the market for MedTech contract manufacturing market is expected to grow by an average of 11.4% y-o-y to 2025 from 2019’s level of US$52.9 billion ($72 billion).
This is with an ageing population, increased demand for improved healthcare in developing markets, as well as an increased willingness by product owners to outsource manufacturing to trusted partners that can fully support product and process innovation.
To capture this growth potential, Vicplas plans to expand its existing manufacturing site in Changzhou and is also mulling over another manufacturing site in a location outside Asia near the US.
“A wise man once told me, ‘given time, your competitors can always copy everything that you do. They can’t copy one thing and that thing is your people.’ So if you can build the strengths and the uniqueness of your people, and harness that to grow the company. You’re going to go places, and that’s what we’re trying to do,” says Tarca.
Correction: An earlier version of the article stated that Forefront Medical manufactures stents. The company has clarified that it does not manufacture stents as part of its medical devices segment.
