Haemonetics Leveraging Strong Recovery Trends And Repositioning For The Future (NYSE:HAE)

Companies facing markets in long-term decline have a few choices – pretend it’s not happening, consign themselves to riding it as long as they can, or harvest what they can and build toward a future based on new markets. It’s debatable as to whether plasma collection is a market truly in long-term decline, but with the growing investment in oligonucleotide therapies, gene therapies, and cell therapies targeting ailments treated with plasma-derived therapies, I believe Haemonetics (NYSE:HAE) is making the right strategic choice by reinvesting in growth opportunities like vascular closure within its Hospital business.

Haemonetics is likely looking at strong plasma center demand for many more years, and I find the margin improvement plans to be credible. At the same time, management will be directing free cash flow into supporting organic growth opportunities and pursuing diversification and new growth through M&A. Haemonetics shares have been strong over the past year, but if double-digit growth over the next five years and longer-term growth in the high single-digits is attainable, the shares aren’t yet overvalued.

Torrid Catch-Up Activity Drives A Strong Fiscal Second Quarter

Haemonetics reported another strong quarter earlier this month, continuing a run of above-expectation quarters (at the operating line) that goes back more than a year.

Revenue rose 27% in organic terms to $298M, beating by 10%. This growth was driven by 58% organic growth in the Plasma business, which beat expectations by 24%. Hospital revenue rose 22%, matching expectations, and Blood Center rose less than 1%, beating by 3%.

Gross margin rose 110bp to 53.7%, missing by 40bp, as the company saw some macro impact (materials, labor, et al), but also struggled a bit with inefficiencies tied to the surge in volume for the Plasma business. Operating income rose 38%, beating by 29%, with operating margin improved 210bp to 20.4% (beating by 320bp).

The Plasma business benefited from 62% growth in the North American business, including nearly 63% disposables growth, as the company saw 38% growth in volume at established centers, as well as strong pricing and mix (with the Persona technology now used in 50% of collections). Not only is this business benefiting from post-pandemic normalization, but also from efforts on the part of collection centers and producers of plasma-derived therapies to rebuild inventories run down during the pandemic.

Healthy Trends Should Continue For The Foreseeable Future

Although inventory-rebuilding is a process with relatively limited scope, I do expect healthy growth in the Plasma business. Persona technology is now used in 50% of collections, which means that there’s another 50% left to penetrate, and Persona offers meaningful value (roughly 10% increases in yield per donor) to those centers. I likewise see further opportunities for Haemonetics to leverage pricing opportunities in the business.

On the volume side, it’s a reality that recessions typically do drive increases in collection volumes, as donors look to supplement their incomes. At the same time, demand remains strong for a range of plasma-derived therapies, which is likely to drive efforts to expand collections (more centers, more active donor recruitment, etc.).

I also expect healthy near-term trends in the Hospital business. Segments like Hemostasis, Transfusion, and Cell Salvage do have some potential near-term tailwinds from hospital capex budget normalizations – with the chaos of the pandemic behind them, hospitals can return to refreshing, updating, and expanding more conventional durable equipment. I also expect further normalization of procedures volumes (which are around 5% to 10% below pre-pandemic levels) to drive disposables growth (disposables are 80% of Hospital).

Haemonetics’ vascular closure business (acquired with the Cardiva deal) should benefit from those procedure normalization trends. Cardiology and electrophysiology are “cash register” departments within most hospitals, and they will be eager to increase patient throughput from here – driving more demand for the Vascade and Vascade MVP closure devices.

I also see Haemonetics benefitting from increases in procedure volumes (not just normalization) within electrophysiology, as there is still growth potential in atrial fibrillation (driven by clinically-validated improved technologies and ease of use) and left atrial appendage closure procedures (Boston Scientific’s (BSX) Watchman device). While further penetration of closure devices within the interventional cardiology market may be limited at roughly 50% today (the devices have been around for over two decades now), penetration within electrophysiology is only in the teens, and I believe this market can grow at high single-digit rates as that penetration increases.

Repositioning For The Future

Over at least the next five years, plasma collection should remain an attractive market for Haemonetis. The use of plasma-derived therapies continues to grow, and Haemonetics is directly leveraged here through its consumables-dominant business model and its strong share within the market. The loss of CSL (OTCPK:CSLLY) to Terumo (OTCPK:TRUMY) will sting, but it’s been a known headwind for some time now, and underlying double-digit market growth should keep the business growing even without CSL.

Longer term, though, I am not as confident in the sustained growth of plasma collection and plasma-derived therapies. There was a time long ago when all insulin came from animals, but through genetic engineering it became possible to produce biosynthetic human insulin and then insulin analogs, and these are now far and away the dominant insulin products. I expect something similar to happen over time with most plasma-derived therapies.

Antibody’s like Roche’s (OTCQX:RHHBY) Hemlibra are already taking business from plasma-derived Factor VIII providers, and gene therapy-based approaches will likely accelerate that conversion. There are also oligonucleotide-based approaches in trials for alpha-1 anti-trypsin (roughly $2B of the $15B/year immunoglobulin-based treatment market), as well as other gene, oligonucleotide, and cell therapies in clinical trials for other conditions currently treated with plasma-derived therapies. It will take a long time for these therapies to reach approval and become the new standard of care (and many will fail along the way), and there may be many conditions that can’t be adequately addressed this way for another decade or more, but I do think the plasma-derived therapy business is likely to shrink over time.

Even though that process will likely take a long time, and may never completely eliminate the need for plasma-derived products, Haemonetics isn’t waiting around. It spent $510M to acquire Cardiva (including earn-outs), paying more than 7x revenue to enter the closure business, and then invested EUR 30M into Vivasure to acquire the option to buy this manufacturer of the experimental PerQseal closure device (for use in valve replacement/repair procedures). I expect further acquisitions in the future, and it may well be the case that Haemonetics looks to go even further outside of its traditional core, perhaps expanding into other electrophysiology or cardiology device markets.

The Outlook

M&A always carries risks, particularly when it involves new markets/products and high multiples, and both are likely to be the case for the future deals Haemonetics looks to do. Management could squander the cash flows generated by its Plasma business chasing growth in markets it doesn’t truly understand, and the company will likely have to build (or repurpose) its sales and marketing efforts to support these new growth initiatives. Still, I like a company prepared to harvest and maximize the value of healthy near-term growth in its core business (Plasma, for Haemonetics) and reinvest those proceeds into new businesses that can take the company to the next stage of its life.

I’m expecting double-digit revenue growth over the next five years, with healthy underlying trends in Plasma (driven by demand growth in plasma-derived therapies) and growth in Hospital driven by market share gains in the closure business. I do expect growth to slow over time, but I’m expecting long-term (decade-plus) growth in the high single-digits.

Management is also committing to maximizing the value of that revenue, looking to drive around 10 points of gross margin improvement over time (to the high-50%’s/low-60%’s) and similar improvement in operating margin (to the high-20%’s). I could see the operating margin target proving to be a bit ambitious, particularly if the company acquires more growth opportunities that require investments in R&D and to grow sales/marketing.

The Bottom Line

If the company can hit its own medium-term targets and my longer-term targets, high-teens free cash flow growth can support a high single-digit annualized total return from here. Likewise, the company’s combination of healthy growth and margins (I’m expecting EBITDA margins around 30% in FY’25) support a forward revenue multiple of around 4.7x, or a fair value in the neighborhood of $90.

I’ve seen the market pay up for med-tech stories that offer above-average growth and margin leverage, and Haemonetics should qualify over the next few years. I do have some concerns that expectations for the Plasma business could be too high and that the company could miss the mark on future M&A, but on a risk/reward basis, this is a more intriguing name than I expected it to be.