Sysmex: Diagnosing future medical needs.

The value of an investment, and any income from it, can fall as well as rise and investors may not get back the amount invested.

The term ‘in vitro diagnostics’ (IVD) means tests on biological specimens in test tubes or Petri dishes, as opposed to ‘in vivo’ (in the body). IVD is not yet part of our daily vocabulary, though Covid has familiarised us with its technologies such as the lateral flow test, or reverse-transcription polymerase chain reaction – PCR tests for short.  

The pandemic has demonstrated the crucial role of diagnostics in identifying and curbing pathogens, especially ones that are initially asymptomatic. But IVD is not just about infectious diseases. It is critical to all areas of healthcare, underlying 70 per cent of all clinical decisions: in early diagnosis and post-treatment monitoring, as well as being increasingly integral to the trend toward personalised medicine. 

Kobe-headquartered Sysmex is a leading global manufacturer in this market and has been one of the strongest performers in the portfolio since its purchase in early 2019. Although Sysmex has had some positive exposure to Covid, from PCR kits and antibody tests, the pandemic actually hurt business due to a decline in its mainstay routine testing procedures. The company has, however, continued to deliver robust growth throughout this period thanks to the attractive razor-and-razor-blade model (in which the primary product is sold cheaply while supplementary products achieve high margins). It operates this within the three core niches it dominates: haematology (diagnosis of blood diseases), haemostasis (coagulation testing) and urinalysis. The model involves the sale of closed-system instruments (such as analysers) with high-margin consumable test kits (reagents or assays). In addition, the company benefits from tailwinds such as volume growth from demographic trends that demand rising spending on more patients with acute needs and the broader adoption of diagnostics to avoid wasteful treatments.

We have already witnessed a doubling of Sysmex’s share price since we bought, it but we believe that advances in genomic technologies will usher in the next wave of diagnostics growth and it should deliver a further doubling over the next five years. Sysmex now emphasises three new and expanding areas of opportunity. The first is within life sciences, where it uses liquid biopsy testing to profile the genome of cancers. This allows the company to develop ‘companion diagnostics’ (CDx) for personalised therapy outcomes, where drug treatments depend on the specific mutations of the tumour. The second is in molecular analysis, an equally exciting area where it deploys its core strength in blood testing to measure for beta amyloids, biomarkers for notoriously hard-to-detect Alzheimer’s – an affliction expected to hit over 140 million people by 2050. Finally, Sysmex is adding new end markets for its robotic-assisted surgical system Hinotori (‘phoenix’ in Japanese), which is already being successfully used to treat gynaecological and digestive diseases.

We believe that sustained earnings growth from haematology and haemostasis – from next-generation machine launches, and direct distribution models – will allow Sysmex to invest heavily within these emerging areas of future growth. In time we may even get to know their HISCL system for Alzheimer detection, or their OncoBEAM cancer test, as they become ever more commonplace and accessible. 

Risk factors

The views expressed in this article are those of Thomas Patchett and should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect personal opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.

This communication was produced and approved in January 2022 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.

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