This week, we chat with Kelvin Seetoh, a financial educator in Singapore. Kelvin shared with us one of his favourite idea, a peculiar healthcare company listed on the US OTC market! HemaCare Corporation is one of the few companies able to supply high-quality processed blood for pharmaceutical companies for their R&D and commercialisation.
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Stanley: Okay! So, let’s go back a little bit in time to explain, maybe how do you actually get started into investing, and why did you end up developing a passion for it?
Kelvin: Alright! So, you know like, from young, from primary school, I was always excelling very well in my academics, and I thought that I would do really well for PSOE, but boy I was so wrong, because you know [Unclear 02:30] it was like a wake-up call for me, so when I went to Temasek, actually I went to Temasek Poly, and I was naturally quite competitive because I knew that my [Unclear 02:45] was – well he got to a very reputable University in Singapore, and for several semesters, I was wanting to get a top student of certain modules but unfortunately I did not, so I felt like you know this is a game that I couldn’t play very well, and I couldn’t sort of win very well right, but I got to know this lecturer of mine, Mr. Daniel … he was formerly a firm manager, and I think that he would spice things up during his lectures, he’ll tell us about his experiences, managing portfolios, he would recommend us really great books to read, so for example one book called a One Up On Wall Street and one day I pull it to myself, what if I utilize what I learned in school into the real world, meaning go out there and really buy stocks right, so that thought actually consumed me for a few days, and I had the courage to approached my mom say; mom can I brokerage car, but of course I put in a bit of my money as well. The first stock I bought was Top steel, I bought it based on the net asset value, it had a hidden asset in pricing, which the value is much higher than what was recorded in the balance sheet, and made some money over there about a hundred dollars, and from there on you know, it’s really seeing is believing, and since then I actually had spent almost all my army pays into buying investment books, I was hanging around valuevalleys.com, got a lot of insights from there, and I really saw how investing could improve the quality of my life, and then subsequently, I got kind of – I joined an investment firm to manage a portion of their funds, I had a great time there, a lot of stretching, I think my mentor was – how I often say is sometimes harsh, sometimes demanding and often unreasonable, but I think he did that because he had this end goal in mind to really stretch us, and from then on, I actually he got exposed to a lot of Japanese companies, a lot of Australian companies, we had our conference calls with them, and you know since then this has always been my passion, I’ve been intrigued with business models, I’ve been intrigued about how if you look at these two businesses, why would one business be better than the other business right, why would a business have a higher return on equity, so these are questions that always come to my mind, and I think just felt really blessed and lucky that along this journey I’ve met a lot of incredible mentors.
Stanley: Right! Wow! That’s fascinating. So, you almost never really have a career change, and you just got started since your university days in investing?
Kelvin: So, actually I took a big leap of faith right, so right after army, I had a government scholarship, I had an NTU placement, you know finally, but when the chance came to join an investment firm, I actually give all that up, which is a dangerous thing to do.
Stanley: Wow! Okay.
Kelvin: But I felt like in my heart might drop, if I look back in my life I think a lot of times it’s following my heart, I think a lot of people, I kind of knew what was right for myself like I just went ahead with that.
Stanley: Well, that’s definitely very brave of you.
Kelvin: So, as of today, I don’t have a degree a lot of these is self-taught, and constantly reading books, and many people to learn from them as well.
Stanley: Yeah! I think that’s actually more important to really experience life and learn from life itself, well it’s fascinating, I didn’t know that about your history, and I think today you’re going to introduce to us one company, that is also to be honest I’m not very familiar with, both in the industry, and also this company, I haven’t really studied much into it, and but I find it fascinating, reading through your thought process, why don’t you share this company with our audience.
Kelvin: Hey guys, Kelvin here today, I’m going to present you a case study called HemaCare; so, what’s HemaCare all about right, I’m going to share with you the history about HemaCare. HemaCare used to be a blood bank, meaning they collect blood, and they sell the blood away to maybe companies that uses blood as a starting material to do their R&D. so, for example, to solve cancer, to solve leukemia, when you’re doing your R&D process, you actually require blood you know, as your starting material, and for them they have been supplying very high quality blood to companies like Novartis for their research development process, and they’re actually supporting two of the FDA approved company treatments. So, for the company treatments, I’ll talk about it later on, so I just want to share you some quick stats about company; generally for my investment style, I actually prefer smaller companies that has always been my age, because I do feel that in the world, let’s say we look at bigger companies, a lot of times I mean there are a lot of smarter people than me that probably can analyze Facebook, Google, Amazon, a lot better than me, but for me, my main focus is really micro caps, and that has been where I am focusing on for the past two years. So, HemaCare actually listed on the OTC board. So, in US, you have your New York, you have your NYS-balance stock exchange, but for HemaCare partly in this town, OTC and I think on the first glance, if you look at companies that are listed on OTC board, you will generally feel that they are risky, because of Pink Sheets stock, that kind of stuff, but surprisingly I managed to find HemaCare which is a very high quality business, and so at around $19.30 the share price, it has a market cap about two hundred million fully diluted, and over the last three years, if you look at a revenue growth, they average growth of about 40%, operating margin about 22 percent, ROE is about 29 percent rounded up, the net debt over equity is about like -30 percent. So, 30% of their charity’s equities is purely in cash, some of the clients which I’ll talk about later on is Novartis, Xencor, who are really strong clients. So, I actually prefer companies with a very strong clients, because they have ability to pay up, I do come across some companies in the past, whereby you know, you could be doing business for that client, and you know the client go boss, or the client wouldn’t pay up the money, and then you have this whole chunk of receivables which is not really something to be happy about, alright so I tend to look at companies with very strong clients, right. So, if you look at it in the last two years, I think their share price have done tremendously well, but today I think it’s my job to share with you, why I think this industry, or rather this company is interesting despite a huge run-up in the share price right. So, before then I just want talk a bit more about industry, I think sadly I think human we are not robots right, so sometimes we do fall sick, we have a lot of issues with our body, and one of the biggest problem is actually cancer, cancer kills a lot of people, and it’s just a sad thing. So, one of the most common treatment procedure is really chemotherapy right, so I actually asked some of my doctors what was chemotherapy, because I kind of understand it, but I don’t understand it fully. So, how it works is really, you know they will put you into the operating theater, and they’ll put some pipes into your body, and make sure that I mean the room is airtight, they’ll close the door and everything else, and then they’ll pump certain gas in your body, and I guess is really killing most of the cells right, and sometimes even the good cells would die, and that’s why your immune system actually goes down because it kills white blood cells, and because of that you know, after the chemotherapy, people often fall sick, the hair will drop out, because immune system just not strong enough, and that has always been a procedure to cure cancer, but it’s not a really good procedure, because you think about it, if let’s say in your room, you have a cockroach, you wouldn’t spray your whole room with you know cockroach killing gas right, if you have a way to target and kill that cockroach maybe putting a cockroach trap you know, it’s actually much more better, it doesn’t affect the whole room.
Kelvin: So, in this scenario, I’m just thinking about Car -T treatment, which I’ll talk about it, so currently right now around the world, there’s a lot of financing, a lot of money that goes into Car – T treatment, so what does it mean you know if you draw a hundred million liters of blood right, we have plasma, we have the white blood cells, and we have the red blood cells, but really what is the one that cures you from your fever, from the problems that you have in your body are your white blood cells right, so white blood cells are kind of like the patrol right, they patrol around your body, they look for any virus or any bacterial cells that feels foreign to them, and they will latch themselves onto the bacteria, and consume it, and pass it out as waste right, but unfortunately if you look at cancer cells, they are really smart people you know, they can camouflage themselves and they look as if they’re healthy cells, so when the white blood cells circulate around your body, they couldn’t find you know, they couldn’t recognize and identify other bacterial cells, so when we talk about Car T treatment right, because there’s this work out in your therapy, because in our body, we already have what it takes to cure our own cancer, whatever it is right, but we need to enhance the capabilities of the white blood cells right, so if you see this chart on, I think slide number six, what does it mean; it means that they’re actually extracting blood from a patient, and take out the white blood cells, and they enhance the white blood cells using certain receptors, so they actually enhanced the strength, the abilities of the white blood cells, and then they will inject it back into the body, and the white blood cells will actually move around the body, and then start having the ability to identify the bacteria, and the cancerous cells, and destroy it. So, the Car T treatments probably costing half a million dollars, it’s very expensive, so the part is that HemaCare is not doing this procedure, but what HemaCare is doing is, supplying blood to these big players like Novartis, to assist them in the R&D process, so that they can create Car T treatments.
Kelvin: Yeah! Okay. So, just want to move on to slide number seven, so this is where I think just to keep it really simple, it’s just like today you know just imagine I’m a white blood cell right, and I walk around the room, I do not know who is cancerous cells, who are the healthy cells, but after being enhanced, it seemed like as if I have this extra pair of glasses, which allows me to identify the cancerous cells, and once I identify them, I’m able to destroy them, and I can as a result the human body will get you know cured of cancer, so just think about Car-T treatment as something of enhancing the activities of white blood cells, and this is really important to share, because you know like big companies like Novartis, they are spending millions or sometimes billions of dollars trying to research a better cure for cancer, I mean election is next year for US, and Joe Biden is campaigning with this campaign promise of curing cancer, so really cancer is one of the biggest things which I find it quite amusing, but I also recognize the importance of it.
Stanley: You know, maybe just to clarify a little bit, you say that they – for the Car T treatment and everything, but HemaCare don’t really do the research, they just supplying the blood right?
Stanley: And if they just was applying the blood, does it matter where they get the blood either from HemaCare or from another provider?
Kelvin: Okay! Sure! the reason why I actually like this company a lot because if you look at back then in the US, I just bring cross six above the coal mine right, so instead of being a coal miner, don’t starve and I’m sticking going honestly don’t even get coal right, why don’t you be the shovel right, you sell shovels to the coal miners, so of course there are a lot of players as in this very hotly contested industry, so HemaCare actually provides the shovel, and from that point I feel that the risk profile of the company is very different from those pharma companies, and again later on I’ll share on the chart whereby when it comes to drug development process, you know there’s three phases right; phase 1, phase 2, phase 3, and as you pass from phase 1 to phase 2 to phase 3, it gets more stringent, and when it gets more stringent, it means you need a higher sample size. So, when you need a higher sample size, if you currently are working on with a certain supplier, if they can’t supply you that kind of blood then you know your R&D process stops, but also when we talk about blood suppliers, they’re actually two kinds of blood suppliers. one kind of blood supplier will only supply you blood that are certified research use only, in which you can use in your phase one, phase two, probably so, but there’s another kind of blood supplier with GMP which is Good Manufacturing Practices; it means you can use their blood to go to commercialization, so we do see in a lot of cases whereby all these big players, they would try to use research use only suppliers, but then subsequently they say you know, FDA actually require us to have the highest standards, and eventually almost all of them will go back to HemaCare and say HemaCare can you supply the blood to me, because they’re the only one that I think one of the very few, like less than five that is a GMP compliant, and it’s really all these regulation… at the end of the day, when it comes to blood type is really dealing with human lives, and you don’t really want to screw these things up you know, and if one of your drug kills one or two persons, that R&D project would be killed, and I think the reputation damage is really quite enormous, so even though HemaCare sells its product for a premium, rightly so, but it assures the guarantee of a good R&D process, and it actually expedites the approval process for some of the clients as well.
Stanley: Wow! Okay! Fascinating.
Kelvin: I think also the most important is this right, HemaCare has been a blood bank for the last thirty years; meaning it has a lot of reputation, a lot of database with a lot of donors as well, and all their donors are pretty much educated, that they are donating blood for a cause, so just give you examples so sometimes Novartis will come to HemaCare and say: Hey! HemaCare, I need a blood from maybe a lady that’s seventy years old, and I also need her to have previously cancer and a cure, or maybe I want a guy that is a American, but only want him to be below 40 years old. So, it’s all these complex customized requirements, which makes it really hard for other competitors to compete with them, or rather other competitors to supply the blood quantity to HemaCare, because HemaCare’s history was the blood bank for the last 30 to 40 years is why they have this vast amount of database they can count on, because you think about it, if I’m going through a R&D process; phase one, phase two, phase three, I cannot just run my drug on just pure Chinese right, and I got to test on a wide range of human beings, old, young, fat, skinny, different races. So, to have that kind of requirement, and to able to supply that amount of complex variety of blood types from different races, I think it’s quite hard, and I think HemaCare because of the history of being a blood bank for so many years, there’s the oblivious about it, but not only that, I think when it comes to doing an R&D project, there’s a lot of variables in place, so when you do your diagnosis, to understand what went wrong, what went right, unless you have this requirement of having a – you want to do a test on a kid right, so you go to him, and say hey I want this guy as about 30 years old, but for most competitors they can’t, because people would only want to donate once, because they are not well educated by the blood donors, in this case HemaCare could go back to the guy and say that, hey we need your blood again, is it possible to come back and donate your blood again, and you know I heard of some cases whereby people would actually take a day off, just donate blood again, so because they are the educated, and the process where they actually teach people about, if you are donating blood for whatever reason I think that that brings across a competitive edge for them as well.
Kelvin: So, I just want to talk about slide number 13, so I think HemaCare; I had done some research with their competitors, like Stem Express, and MCel technologies, HemaCare has one of the widest range of disease-state blood, so you want bone marrow, you want people from different races, they have everything that they need, and although I think BioIVT is one of HemaCare’s largest competitor, but they seem to be undercutting on pricing. So, I’m not sure whether that works out very well, but I think for the first half this year HemaCare actually reported almost like 40 percent growth in their earnings, and I think I like to share one story which I had you know listened from Pete who is the CEO, you know when HemaCare was actually not known by all these big pharma companies, what he did was that you know, he saw that the pharma company was trying to know how to go about their R&D project, and Pete said that you know, you guys are doing certain things wrong in the research process, this is why you have been stuck there for almost two years, and you know those big players, they you know Pete, your company is a small company you know, what do you know all right, so Pete just left you know, and Pete you know again went back, and tried to assist all right, and this time around, the bigger companies you know they’re spending so much millions of dollars trying to figure a solution, and it could not work right, so this time around, they said okay Pete, tell us what should we do, and within less than I think a year, the whole blockage was being solved, because HemaCare was able to provide the right blood type to assist them in that development process, and from that incident onwards, actually the reputation of HemaCare have started to spread around as well, and also most often, I think is all the sales person right are all PhD, you know they all have PhD, they speak to the pharma companies, and tell them you know, if you know sometimes, when assigned each we have certain requirements it’s because someone is selling blood but knows nothing about blood, I think is its very tough, but when the sales person have a PhD, they talk on the same wavelength, and the sales process is actually much more easier from there.
Kelvin: Alright! So, we talk about slide number fourteen, so I mean this year they actually managed to move into their new facility and that actually doubled its a donor collection capacity, and on-site processing capability as well, so right now, according to the management, it’s about twenty five percent utilized, so the reason why they had to expand so quickly, because I think there are a lot more clients that is coming on board, I think they could have this feasibility of the demand coming on as well, and I think if I look at slide 15; HemaCare, when they reported their first half results on 20 August they actually leased additional space to accommodate the GMP project management. So, I found it very interesting because they have just doubled their capacity, and now the leased additional space as well, so that could actually – I could actually kind of like infer that, a lot of demand is coming through, and they had to get prepared for it as well. So, I move on to the next segment which is actually the growth drivers here. So, this is one of the product from Novartis called Kymriah, so this is actually their forecast that they’re actually shared, I think I looked at the recent results from Novartis, actually its growing very well. So, Car – T treatments, I think is a very niche kind of cancer treatment that has been growing rapidly around the world, people who want to extend their life, and you know I could be trying also like treatments, but if all don’t work, and I still think that my life is precious, I’m still young, if you know today, if I’m rich, I’ll just spend a half a million to kind of like extend the life span of me you know, so this has actually been something quite useful, because as you can see Novartis’ sales has been growing, that also shows HemaCare could possibly grow along with them, as well. Kite Pharma, which is another FDA approved Car – T treatment as well, has also been growing. So, if you look at their customer base, I think it’s really a very reputable clients, that – you know, the way I think about it is very simple, like today if I source my blood type from a supplier, that probably is not well known, or probably is new to the industry, I could pay them maybe for the blood type, let’s say like 30 kg of blood right, might be much cheaper than HemaCare, but that doesn’t guarantee that you know, the blood okay so I just want to give a context a bit, so I know it’s a bit technical, but I’ll try my best to simplify it. Usually, let’s say when we draw our blood to certain areas, we have to actually freeze it because blood the primary cells will actually die off very quickly. So, if today I purchase it from another supplier, and the moment the blood reaches my facility, and the primary cells die, let’s say 20% of it dies, and for me to do my R&D project, it will actually create a lot of complications, so if my R&D project costs about like a million dollars, two million dollars, three million dollars, why would I want to jeopardize it by buying from an unproven player, whether I buy from HemaCare which have proven that you know I can buy like 30 kg of blood right, when the primary cells arrive, it’s in good condition, is pristine, and in an industry term, we will call it healthy cells, so the cells are still healthy, it’s still alive, and I can actually conduct my R&D projects on it. So, that’s one of the unique point about HemaCare, and I just want to share with you, a lot of times when doing my process, I actually look at what the customer feels about the business. So, these are some comments from Novartis, from Xencor, this is picked from site-19 as well. So, Novartis said “I never felt like I was on a sales call, discussions were very science driven and together we stepped on a new exciting territory. I had a chance to work with a lot of vendors, but you certainly stand out for me in terms of dedication, flexibility and quality”. So, I go to on page 20, so HemaCare currently provides starting material for three of the approved cellular therapies, I think that’s quite exciting, okay then I move on to slide 22. So, this is a whole list of I would say qualifications that they have, I think to replicate that process it’s not easy, so I feel that you know, if you look at how the regulation is around this industry is actually very tight. for example, let’s talk about a GMP qualification, how do you even be GMP compliant, all right for example you really have to have a lot of audience that could do the donating of blood from, do you have the consent, and who does the processing, I want the process named down, who operates the machine to separate the white blood cells from a plasma, I want the person to be trained, the person has to be trained consistently to be updated you know, a lot of paper work documentation has to be there, because we are dealing with human lives here, we are dealing with a product that eventually goes into a human’s body. So, the FDA of US is actually very particular about this, not many people actually has the GMP compliant qualification, sometimes it’s not just having money you know, if today I’ve hundred million, I tell myself I want to build an organization, I want to supply blood that is GMP compliant, I don’t think is just simple as that, I think it requires industry knowledge, I think it requires a culture around it that helps to get this process, and the process could also take a long time as well.
Stanley: Okay, maybe I just break it down break down a little bit, when you talk about because they have very high quality Bloods that they supply to all these customers and tagging on to the growth of the Car – T treatments, do they break down like, how many percent of that blood is going to which R&D; or how do you actually know that they are actually benefiting from this growth in research into Car -T treatment?
Kelvin: Okay! So, for this one is I already off their website that they’re actually serving certain clients, but in terms of their work customer breakdown, I actually do not have the customer breakdown, I think being [Unclear 28:46] I think yeah, so I initially have that information on the business itself, but I think this business is quite exciting, so later on I think there’s a segment which I talk about the industry as well, alright so okay so on slide page 3, you can actually see the key marker recallable donor base. So, really I think it’s quite amazing that people will actually take days off, just to ensure that you know HemaCare has the right product to be able to sell to all these Novartis, players like that as well.
Stanley: Do they pay their donors?
Kelvin: Yeah! So, you know, the exciting thing is this like as I was reading this industry, I discovered that US is the only country that pays people for their blood, you know in Singapore, you know we get [Inaudible 28:33] it’s all right, so US is known as one of the greatest exporter of plasma blood, a white blood cells as well, in fact I was speaking to a director, supply chain director from Tesla therapeutic in Singapore, although we have the National Blood Center as well, but I think we often lack enough blood for us to even have the right quantity to do our R&D, like for example, we embarked on this R&D project, how many tests do we need to do, what’s the quantity of blood do we need to have, a lot of times it’s just not possible, because you know like we donate blood, it’s really a voluntary thing, and there’s not a lot of drive to it, but in US, I think donating blood is something quite regular, and I will say this is quite set because in America you know, we are always brainwashed how prosperous America is, but in America, there are a lot of poor people that lives on paycheck to paycheck, there are a lot of poor Americans, that actually donate blood, and receive a forty-five dollars, so that they can but a birthday cake for that kids as well, so but you know, there’s a good side and bad side, the bad side is that you know poor people actually donating their blood, then the good is that you have all this blood supply that can actually aid in advancing human research, advancing discoveries in human therapy as well, so really I think the abilities to provide high purity, high yield products as well, so that kind of shows I mean on slide 24 is that, as the days goes by, the blood [Inaudible 31:15] dies very quickly, so it’s not something that’s easy, because it’s really high requirement, and then on slide 25, you could actually see this clinical development phase one, two and three, but if you really have a solid starting material, which is your blood, and that actually have, if let’s say you have promising outcomes, you actually are able to expedite the process, because you know, sometimes why is Car –T treatment so expensive, why is it like 400k, 500k? because if you think, if I do not understand that you know, I thought that you know you’re ripping off customers here and there, but if you think about it from a Pharma perspective is that, they could be running four or five, six R&D projects, and probably five of them could just die out you know, just because certain things did not work, and everyday where we are on R&D, okay I would say that every single day that we spent on R&D could cost another million dollar, two million dollar, three million dollar. So, if you are able to expedite the process, and go to market and we have a commercialized product that’s really going to the market, it just saves them a lot of money which is why out of everything, the starting material is one of the most essential, and I think if let’s say your project cost about you know, you project costs per day costs about $1,000,000, and the blood is just like 50k, 60k; if you pay 5% more, 10% more, to ensure that the guarantee I think generally is like almost quite brainless to just pay up to ensure that the stability of it as well. Okay! So, I talked about slide number 27, you can actually see that most of the staff are science oriented, who is a PhD as well, but again I think there’s a downside here, because people like that are not easy to hire, the knowledge, the ability is not easy to hire as well. So, eventually, if they want to scale, to sell to more people, to train the staff, I think it will require some time, it’s not someone where you can just hire, and within two to three months you know, that guy could actually go out and sell confidently, it’s something that require a lot of deep domain expertise. It’s a good thing and a bad thing from the way I look at it as well. Yeah! Alright! So, I’m just moving on a bit about industry right, I think Gene and cell therapy is starting to grow, I’ve been speaking a lot more friends from hospital, I think really this is an industry that would see more growth, and I actually went onto this website called Alliance for regenerative medicine here, this is really to show the global financing, the amount of money they had gone into gene and cell therapy, so you can see that it’s about in billions of dollars as well, I think that’s kind of a sign of how people are interested in to growing that industry, and finding a suitable Car -T treatment as well, and I think that is good for HemaCare because it means that the demand is there, people are probably going to demand more blood samples from them as well, but I think blood it’s not something that you can just produce out of a factory right, like there’s regulations about how we can donate blood, I think in a month. In US, you can probably donate about three to four times, you just can’t donate that all the time. So, it does have the recoupment process, I think HemaCare has to – I think every day, I mean they have just two percent that they do nothing every day, but just focus on a recoupment for the blood as well, so again I think we talk about scalability as well. it’s no use if there’s demand, but you can’t supply the blood, so I think there measurement recognize that portion as well, and blood is something that you cannot just manufacture like that, it comes from a willingness of your donor base to donate blood as well. So, I think that I think something we have to be aware about, like not everything is like sunshine and so there’s some downsides to the business as well.
Stanley: So, to better understand this part of their collection and supplying do they need to be collecting the blood very close to the R&D sector of their client, because blood cannot be stored for too long like you said, so is there a logistical issue for them to scale up?
Kelvin: Okay! So, for this one right! Currently, the current facilities is joined with their processing facility, so the moment the blood is being extracted, it goes to the processor, you extract the different components of the blood; white blood cells, red blood cells, plasma. and then it gets frozen, so there’s this company called Bio-life, which is very well known in US for their the system called Cairo preservation, so they freeze the blood in a sudden, that she regains the purity, the high yield, the lives of the blood cell. So, this part they are not strong at, but they also to display a Biolife and strategic alliances with Biolife to actually perform that role of the business.
Stanley: And after they freeze, it you can be used for a long time or how does it work?
Kelvin: Usually, the moment they freeze it, and you know, there’s a method to turn it back to the liquid form, and usually, one day or I would say just one day, and you have to use them already, so it’s like highly perishable material.
Stanley: As long as you freeze, it you still can store it.
Kelvin: Yeah! Correct. So, the freezing, I’m yet to understand fully, and you know I definitely know that it’s not just put it in a freezer… [Laughs] There’s some method behind it, clinical trials have also increased rapidly as well, you look from the 2009 to 2017, ongoing trials, the newly started trials, they have all been increasing as well, so that clearly shows the demand for the product as well, and they actually have this act that is being in the Senate, it’s called 21st century cure’s act. So, this act is targeted to Immunotherapy research, so they are supplying funding to the national institutions of the house, to a tune of about 1.8 billion dollar per year, so even the government like US, I mean I think of it like the race to the moon right, in the past of Soviet Union, US, China, talk about who is able to touch, put a guy on the moon first, and I think US managed to do that as well, and I think around the world; China, US, they’re leading in space and I think US doesn’t want to rest on its laurels, they are really serious about having this in Immunotherapy up and ready for this cancer, because the way I look at it is that, if you have a drug that could cure cancer, you literally could dominate, and I think it’s a sense of national pride as well. So, they’re putting a lot of money, and to ensure that it kind of works for them as well, for the management I just spoke about Pete Van der Waal as Chief Executive Officer, not really a founder, but he was appointed as the CEO since 2010, and he saw that they were just doing really ordinary business like getting blood you know, and selling blood, you know just been being a middleman, and he saw that you know a much more profitable business is learning how to process the blood, customize the blood type to supply to all his big players as well, and he went there, you know the culture was really bad, there were a lot of I think politics, but what he described to me is that; an organization is like an onion right, you have to let go of the bad people, so it’s like you peel and peel and what you realize is that the core of the organization is a very strong team of people. So, it’s been a I think a few months to really get out a culture back together, and he said someday which actually made me think a lot, he said ‘my job is to make myself redundant’ I thought that was a bit funny, because – but then, on a second thought, I understand because when the CEO is redundant, it means that the team is strong. So, he is here to build a strong team, and he realized that a lot of good people in the organization they need the rehab their handcuffs, you know it means there’s a lot of great tips, that goes around the organization, and sometimes you have ideas that you cannot pull through just because you’re a lot, just great tips alright. So, when he went there he took off other handcuffs, and really let people run, let them take ownership, and I think the whole organization runs as a decentralized organization, and only when important decisions should have to be made, and Pete steps into kind of work things out, and Pete spends a lot of time speaking to customers, and ensuring that the relationship remain strong, and ensuring that the customers’ requirements are being met, so they are a very customer driven organization I would say, and also I guess they are very strategic, they invited a lot of key personnel from the industry to sit on their board of director. So, sometimes I look at the board of directors very carefully, who are on the board, so first one is lady called Dr. Jill O’; she’s the Director Of The Cancer Research Institution, very well-known, top leader, so I guess when Dr. Jill goes to industry conferences could also promote HemaCare a bit, but there’s some scenarios whereby I look at certain businesses, there I wonder why they are there, like army generals, why are there people that are not related to the industry being there. So, I think a part of that is actually very important, to actually have the kind of CEO, the kind of management team on what are they transit, and also offer insights as well, and I do realize that over time, the time investors these two companies, they are actually staff with very good are independent directors as well. Okay! So, I just want to talk about slide 35; I think the risk here for the business is, it’s you know, like my preference has always been platform business right, so just for example like visa, for them to share a technology with additional hundred, or 600 merchants is actually not them doing the job, is actually the Ingenico right, which is the payment I mean first it at the permanent the payment have in your company, and you know any transaction, you know you can swipe a $50, $100, $1000, $1,000,000, whatever it is, Visa gets a cut, very scalable business you know, very good business as well, but in this case, its unique right, like I tend not to buy into manufacturing businesses, but in this is case, you know I asked myself HemaCare is something unique, but again I see the problem here is that, as they out grow their facility, do they have to spend their capex to grow the business you know, so capex is something that I think it’s like the growth capex, I cannot grow the business, but the tendency is I like to see businesses that don’t have a lot of capex, and you generate a lot of free cash flow, and I think that’s actually a better way to grow the business, so I often ask myself is that this facility allowed them to double their output, and you know they have been leasing another facility, and but right now you know if they continue to grow, what’s the amount of capex that’s being required, but I think in this case, it’s not so bad because the capex, is being spent, I think that there are a lot of demand has already being placed for them to be well utilized you know, I never liked a scenario whereby you spend your money to have a facility, and then you incurred depreciation on it, but only like ten percent of it is being utilized, I think it’s like a waste of money, but in this case, I think is it’s not too bad, but it’s just something at the back of my mind is gone. So, on slide 36, is just really rehashing about the proper documentation, the SOPs, the training, it’s not really something that’s not easy to achieve. Then on slide 37, actually if I look at the product inventories and supplies right, so as of 2018, they had about 3.6, sorry they have about 4.2 million worth of product inventories, but how I wish they have about close to 900k of obsolescence, so the blood just died off, and you know you pay money, and then the blood dies off, then you can’t use it, you can’t you know pass it on to your customers, and I don’t think that’s a good thing here, they’re still at high 21.2% obsolescence, I think they are trying to best to make sure that the blood type is of high quality, but again what I will like to mention here is a unique CRO, let’s say if they were to improve on their inventory right off, among the profits will actually go up, because this obsolescence is being brought off on the PNL level. But if they could actually manage their portion a bit better, the profit margins would go up, the profits will go up as well. I mean this is just something if I think they could manage better, you would let me help them as well, in terms of the numbers itself, typically in my version, but I prefer to use Enterprise value to up bring profit, so I’m just going to share briefly; if we look at the revenue, from 2015 all the way to 2019, it’s about 40% for quite a number of years, in fact although they started up at a low base, so you could say 40% is exaggerated, but it seemed to show that they are able to continue growing at that kind of rate, for quite a number of years, if you look at the gross profit margins as well, I think it was 45% in 2015, but have grown to about 55 percent on 2018. So, it does seem that they are able to manage their cost well, and they are becoming more profitable on that level, as of the operating income, you could see their 2015, they were negative about 1.4 million dollar negative, but since then, they have grown really stronger because I guess the reputation is being built, I think the customers are recognizing the value they are providing as well, I think the margins are about to need 22 percent currently. Yeah!
Stanley: Maybe I have a question on the financial for you first, you mentioned that this company has been around for 40 years right, but it seems that there are some restructuring back in 2011, in 2012. Do you want to share a little bit what happened then, what has actually changed after that, this time the new CEO came in?
Kelvin: Okay! So, their business have been around for a long time, but I don’t think is being managed by a driven a visionary CEO, in fact they’re just doing the same old boring stuff for a long time to come, but like when Pete the CEO came on board, he saw that there were actually two parts of the business. one is doing the commercialized blood collection, like the blood reseller, kind of business which itself, I don’t think creates any value at all, but the other side of business, which is where they are really strong in, is actually processing the blood as well, which is why over time I think they actually put that reseller business component away, and it was solely focusing on growing their niche extremely profitable business side. If you look on 2015, reason why they were unprofitable is that, they kind of understood one thing that the business is bound to grow, and which is why that year alone, they actually hired a lot of executives, it actually added a lot of cost to the business. However, you know, I think their management because being on OTC, you don’t have a lot of Wall Street pressure, I mean in it I know, I like businesses that have the capacity to suffer meaning you know, that you are doing the right thing for the business, although on a PNL level, you will show negative earnings, so on that year alone, I think they hired a lot of people to ensure that they have the right staff to support their clients, and that push the whole business the negative territory, but you know, like as an investor I look at it you say oh this company is making not making it, it is dangerous blah, blah, blah. Right! I spoke to the management, they say that they knew that that year they going to be loss making, but they still press ahead with hiring more people, because that may not be popular with the short term objective, which is showing profitability, but that certainly put us in the long run in a long term to show a sustainable and growing business, and I think it was proven right, because since 2015 all the way to 2018, you can see that after the hiring was pretty much done, the key personnel was being put in place, operating income actually started to shoot up as well, and I think 2019, it should demonstrate similar trends as well, just judging by the first half of the 2019 results alright, so on the financials, I had a call with the CEO Pete, we had a one-hour call, because the fascinating business a lot of insights that could be claims from the internet. So, what he shared was that how he’s seeing a lot of demand in the business as well, and he said within two years timeframe, it would be quite possible that a $19 in revenue so just to give context on that; 2019, they were having a 40 million in revenue, but I think in 2021, it should hit 90 million dollars in revenue, and that could also gels up with what we were saying earlier, is that they expanded the facility and on top of that, they leased the additional facility that’s adjacent to it, for a GMP project as well, so usually when I look at management, I want to hear what they have to say, I don’t understand whether it gels up together, I think that’s something very important. I’m going to use a price comparable, I’ll talk about the valuations first, so I guess they are probably going to hit about ninety million dollars in two years’ time, and I talk about a bit. So, I guess I not add it in the slide, but there’s one point that I like to mention, because for example, if HemaCare have actually processed the blood type, but again we are very aware that there is this highly perishable, so usually let’s say we worked to our Car T treatment, you know the procedure is about 50 steps right, 50 steps a long process, but can Novartis say you know, the first five steps, can I outsource HemaCare, because that is the most critical part for example, are getting the blood, processing the blood and you do additional five steps, that means you like outsource manufacturer for me for the product, so if HemaCare say, sure why not right, but HemaCare did not have that experience in that right, what HemaCare have are like clean rooms, and the machines, and the equipment, and the people as well. So, for example, using the same amount of people all right, I’m not going to hire more people, by using the same amount of people as well, they are going to earn more revenue, so what do I mean by that, because HemaCare doesn’t have that experience, but Novartis is going to teach them. So, when Novartis teaches them, who gets paid, HemaCare gets paid, they get paid for learning, and when they write a new SOP, they were bill; it’s called a billable event, so they bill us X amount of money, and using their machine, using their people, is it’s going to be another billable event, so several five billable events, using the same people, so your incremental cost is almost zero but your revenue is higher, so your margins should actually go up over time, but in this case, I’m just going to use a conservative operating margins about 20 percent. So, 90 million in revenue in two years, 20 percent operating profit margin, if you have price mark your 25 times, I don’t think its aggressive, because if you look at comparable, you look at how this would actually pan out, I think 25 times multiple is kind of like a fair valuation. So, this is the enterprise value of 450 million enterprise value, but if you work backwards to find an equity value, you add back the cash of 8.1 million which is currently on the balance sheet, you have about 458.1 million equity value / # outstanding. So, what I use the shares outstanding is really the fully value that was, because there are some stock options, so that I think is much cleaner, I think that demonstrate the value a lot better as well, so you can I think adding a fair value of $30.00. so, this is the company that – I’ve been spending a lot of time, in fact I was so ready to avoid it for many years, because I see there as a de facto standard, the cost and the like, whoever wants to do an R&D project, they will always go to HemaCare, because of GMP compliance, ability to recallable donor base, the ability to supply blood within a short period of time, a lot of times when you go to other players you know, you want the blood that is either they don’t have it, all you going to take a long time, three to four weeks, and as I’m doing my R&D project, I can’t wait, I need it soon, I need it now. So, for that sake, I think HemaCare has its reputation really, really well, so you know, I prepared a slides I was ready to share with you, I know that probably this is the industry that not many people know, but something really sad happened yesterday.
Stanley: Yes, very sad, I wouldn’t call it sad even.
Kelvin: Alright! So, Charles River laboratories which is a listed company, I think about seven being lucky kept US dollars decided to acquire HemaCare, so that was yesterday in December 16, it was really quite said I had to say that. Okay! So, they actually wanted to acquire HemaCare at about $25.40 per share, and yesterday the share price have officially had gone up to about $25, I have the thumbless conviction behind this company becoming eventually a 1 billion dollar market cap business, but right now it’s been acquired, and I think throwing a $25.40 you know just kind of like lost for words, and in fact in the acquisition document, it was being shared that HemaCare actually gave the management guarantees to grow at 30% for the next four to five years, still quite confident about that, and that industry is going to grow about four to six times, in terms of the address of market the client based that they had that they can sell to. Yeah! I mean because you know in the past, I bought this company called Auric Pacific right. It’s an SES other, it’s a hybrid leave you with telephones to other generations as well, I knew that company was worth more as well, and then it was privatized by the Reilly family, at $1.65, so the feeling sucks right. it’s still all right, I guess because throughout the process, I have learned a lot more about the industry, about Gene and Cell therapy, and you know although it’s already privatized, I still feel that could be some players that could do really well, but generally I would say I would avoid companies that are in business models of hit and misses right here, right like Novartis, if they don’t do well, the drug doesn’t get commercialized, I think that’s an issue right. So, again I’m going back to the shovel, a concept whereby something more stable, you always have this reoccurring income, it always R&D process that’s always being done. Yeah!
Stanley: Wow, that’s fascinating. it’s definitely an unfortunate case that they’re getting privatized, and I know that we have been already talking about, you coming on to the episode, and you have already prepared a lot of work into sharing this HemaCare with our audience, it’s really unfortunate, just one day before our shooting, they came up with the news that is going to be privatized, but I guess it’s to congratulations to you for finding this company, and I think we have a great chat with you to really understand your thought process, and into the detail that you go into when you’re analyzing especially micro caps, where the news and information about such companies really hard to come by right, like I said before if I want to analyze Google or Facebook just from the web, I can find tons of research about them, and you know without even speaking to the management, but in this case you really put in the work to have to dig through the information, and finding more about the industry, and this I think you should really pat yourself at the back for the more work that you have done for this company. Thanks a lot, yeah.
Kelvin: Yeah, I guess one of the beauty about investing micro caps is that the business tends to be a lot simpler to understand, and if you reach the CEO, their willing to actually call and have a conversation with you, so I guess a lot of times you know, in investing we have a few age right one is behavioral age right, for example when the prices go down, and you know, you because you know our stuff here the information, you don’t panic that’s the behavioral age, the second I think informational age, so the way I look at it is that a lot information out there, but if we call the management, we will derive some unique insights, we are actually having that information age and lastly I think is for analytical age, so perhaps I think when we speak to many investors and also I mean I both you and I, I think all times we do analyze information quite differently as well, so I’m just trying to become better in all these three different domain, because a lot of times I think times have changed I think technology have changed a lot, you could screen, I could screen, and where can we derive additional our far with us. I’ve been always trying to work on that, and hopefully become better every day.
Stanley: Yeah, I guess before we end now, do you mind sharing a little bit about your own maybe portfolio strategy, because you said that you focus a lot on micro caps, and microcaps themselves; number one, the information is less readily available, and also they tend to be slightly more risky in nature, most of them are by the way. So, how do you manage your portfolio, actually how many stocks do you own to feel comfortable with it, and how do you manage your risks within your portfolio?
Kelvin: Okay! I wouldn’t advise like anyone to follow anything that I do, and I think is really about formulating your own investment strategy, which you’re comfortable with, and that goes along with offer education as well, I think starting out, I can be really honest that I actually took over my portfolio, and I got into a very simple stock, and I think they were doing quite well, I was talking about eight to nine stocks in the beginning, and I read about these books called the winning habits of George Soros and Warren Buffett, and what I got out of it is that it may not be a popular thing to say, but they say that diversification is for the ignorant, meaning you know, if you don’t know what you are doing, then it is probably good to diversify, if you really know what you’re doing, and I think concentration is something that is very important. So, it took me some time and I wasn’t ready to say that but as I went through my own mistakes, and also kind of learn a bit more I mean sometimes the way I look at it, if I have like ten companies, but probably out of the ten, five is my best ideas, and I know that they tend to do really well, I mean, I had the conviction behind that, so why would I want to hold ten, you know when I can hold five, and it is easier for me to track, but again in terms of managing risk, I would say that it will be more volatile, because it’s not host a bigger presentation of your portfolio, but I guess it’s also very important that any ideas that I have, that I generate I actually put through my inner circle of friends, investors. So, you kind of get what their thoughts on, and really spend a lot of due diligence. Oh sometimes, I think that it’s kind of crazy, but that level of detail to actually understand about a company, have talks with the management, and really I think when it comes to investing in stocks, it’s really being unreasonable in your selection process. So, being unreasonable in like do we want to compare ourselves with company that’s growing at 5%, 10%. should we feel good about the company or do we think a company is growing and having an ROE of 15 percent, do you think that’s good, or having a high capacity ratio is good, you know but when we choose in our heart to say that, we are here to only choose nothing by the best quality companies, then I just say that within a year if we can find one or two great companies, my job is done right, yeah so I mean like if you look at per share today right, 25% of per share world is actually in Apple company itself, and Buffet in the past bought 50 percent, I think in Amex as well, but again he didn’t do that because he was new, but he did that cause he had a foremost conviction done tremendous amount of work on it as well. So, but I do see increasingly people who are full time investors, they kind of tell them across the portfolio, I think that’s a way to go, but if you don’t have a lot of time to manage, I would say because you ultimately want to spread your risk across, and but there’s one risk that we actually cannot diversify away, it’s actually the unknowns, like there are certain things, which are like black swans yeah you and you can never know that, so and I also have this very strong emphasis on growth companies, because you know sometimes, when I buy companies, you know if this company’s really good quality, if it grows really well then it would not trade undervalue price, probably fair price or maybe slightly over value, and I have to ask myself this question right, am I willing to underwrite and pay a high price for a company like that, because I think the biggest mistake is that people look at a company and think that oh the valuations are high, but if you do consider the growth of the business, then it probably doesn’t look that bad right, and I think for me I tend to buy companies at fair value, but I like companies they have a huge growth potential, because I can buy something that is fair value, but as far as it grows really well in the future, looking back at the price I purchased it could be as cheap, so that has always my approach, and I mean like starting out, I actually did make some of the quite big mistakes, so let me just share one of the mistakes, there’s actually this company in Hong Kong, property management company called… holdings, so unlike Singapore, you know in Singapore, you talk about condos, if you don’t pay your property management fees, you get a fine, you get an interest nearly 10%, every month out of the year, so people tend to pay up on time. But in China you know, it’s so huge and a lot of times people buy properties, and in fact they may not live there, and they may not come back at all, so months and months of property management fees are not being paid, so while contractually and accounting-wise. somehow they could actually report revenue, could report profit, but when you look at the cash flow question is actually not very good right, because a lot of receivers start piling up right, and they try always to collect the money, but can’t collect, and you know the business didn’t do well, and I think early on that’s one of the mistakes I have learned from, and so is why I had this mantra of really being unreasonable like choosing the best companies, and even when there’s no best companies, I’m willing to be patient on that, because money and I really want to allocate to the best companies possible.
Stanley: Yeah! Wow! Thank you so much for your time. Kelvin, that’s definitely a lot of learnings of wisdom in what you say, and in the stuff that you present today. So, once again this is a co-founder of 10x Capital private limited, Kevin Seetoh. Thank you so much for your time. Kelvin