DRGEM Corporation, the Korean originated manufacturer of x-ray imaging systems, published its third-quarter results during November. These indicate that sales activity dramatically increased during the quarter, which propelled sales revenue back to growth. The quarterly sales revenue reached ₩13.4 billion, compared with ₩10.8 billion in 2018, an increase of approximately +25% year-on-year. On a calendar year basis, cumulative sales revenue reached ₩40.5 billion, compared with ₩38.8 billion in 2018, an increase of approximately +5% year-on-year. While the third-quarter sales results were strong, overall growth during 2019 is significantly lower than previous years due to a weaker start to the year. Sales growth has averaged approximately +28% per annum between FY14 and FY18.
Sales results by product category
From a product mix perspective, the sales growth during the first nine months of 2019 has been driven by a combination of stable sales of fixed digital radiography (DR) systems for human medicine, increased sales activity for new mobile x-ray systems and digital upgrade solutions as well as service sales for warranty, installation and maintenance. The companies portfolio of fixed DR systems for human medicine, which encompasses the GXR and the Diamond systems, accounted for approximately 70% of total sales revenue during the first nine months of 2019. Analyst estimates indicate that revenues from the sale of these systems were relatively stable and comparable to 2018. Both the GXR and Diamond imaging systems are available within the United States, which has historically been a strong export market for the company. The GXR series received FDA 510(k) clearance during Sept-19 and the Diamond system received FDA 510(k) clearance in Oct-19. Both are approved to utilise flat-panel detectors by Varex Imaging to offer wireless digital configurations. While the demand for fixed DR systems remained stable, the international demand for digital upgrade and digital mobile x-ray systems were notably stronger and accounted for approximately 13% of total revenues during the first nine months of 2019. The companies portfolio of mobile x-ray systems encompasses the TOPAZ system, a “premium” motorised digital solution and the JADE system, a highly compact, non-motorised “value” solution with both digital and analogue configurations. Both products are also available within the United States with recent FDA approvals during 2019. The TOPAZ system received FDA 510(k) clearance during May-19 and the JADE system received FDA 510(k) clearance during Feb-19. The companies digital upgrade or retrofit solution is branded RADMAX within the U.S. and received FDA 510(k) clearance during March-19.
Sales results by geography
The companies sales portfolio has historically been approximately a 70:30 ratio between international customers and those based domestically in South Korea. The companies export sales are generated through agency contracts with approximately 150 distributors across North America, Europe, Asia, Middle East and Africa. Its distributors are both agents and customers and typically are also responsible for the installation and ongoing maintenance of systems. According to DRGEM’s investment prospectus, the companies largest single-country export markets have been historically been the United States, Turkey and Iran, although China is also an increasingly significant part of its portfolio. In recent periods, DRGEM has been focused upon evolving its distribution within China in order to strengthen future sales pipeline within the country. At present, the company adopts an indirect sales method through its subsidiary, Weihai DRGEM Medical Equipment Co Ltd, which provides local manufacturing to the region. The company reports plans to operate both direct sales through this local subsidiary as well as indirect sales through regional distributors.
Strategic partnerships with FUJIFILM and Samsung Electronics
One of the factors helping drive sustained growth is the companies strategic partnerships with FUJIFILM Corporation and Samsung Electronics, which are both investors, customers and distributors of DRGEM x-systems and components. These strategic partnerships have materially contributed toward the companies favourable 5-year sales revenue CAGR. The half-year financial statements indicate that FUJIFILM Corporation remains the second-largest shareholder in DRGEM, with 14.2% equity ownership. Samsung was reported as the third-largest shareholder with a 12.8% share held through Samsung Venture Co., Ltd.
The partnership agreement with FUJIFILM Corporation means that DRGEM benefits through leveraging FUJIFILM’s worldwide sales distribution network which helps to deliver a stable sales pipeline. FUJIFILM also provides support with product development and R&D to help ensure new product launches reflect customer requirements and maintain market competitiveness. For example, the G-XR series of fully automated ceiling suspended x-ray systems were originally proposed by FUJIFILM in response to global product trends within developed international markets. The G-XR series of systems are expected to contribute toward continued sales growth as the firm seeks to capture additional market share from the large incumbent OEM’s through a combination of pricing and technological product competitiveness. One of the core benefits for FUJIFILM and Samsung Electronics is the continuous supply of high-quality x-ray generators which DRGEM has been producing on-mass since 2008. The firm has developed a strategic advantage through its know-how in high voltage insulation technology, high power conversion technology, and high voltage control technology which enables it to compete with other generator manufacturers such as CPI and EMD. Theses Canadian firms are still generally recognised as having the best x-ray generator technologies in the world, although DRGEM has made significant progress to achieve recognition for its prowess in x-ray generator technology. Its generators are particularly suitable for small hospitals and small clinics where high power supply is difficult, as well as developing countries with poorer power supply.
Production capacity and volumes
As well as developing out its international distribution, the company has also been investing in expanding its production capacity. The company currently has a factory of 7,000 square meters based in Gumi, Gyeongsangbuk-do, which has an annual production capacity of approximately 2,500 units per annum. The company has recently secured a second factory site of 34,000 square meters in Gimcheon, Gyeongsangbuk-do, which will increase the companies annual production capacity to approximately 10,000 units per annum.