Interview with Hydrix (ASX:HYD) Chair Gavin Coote 29 November 2022

Hydrix: Capturing value from the innovation engine

We spoke with Hydrix (ASX:HYD) Executive Chairman Gavin Coote about how the company has taken its basic capability in medical device engineering services into development of its own cardiovascular devices and investment in new medical device ventures.

You can read the in-depth research report on Hydrix by Pitt Street Research here!

See full transcription below.

 

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Transcription

 

Stuart: Hello and welcome to Pitt Street Research. My name is Stuart Roberts, and I’m one of the co-founders of our business. And joining me on Monday the 28th of November from Melbourne is Mr. Gavin Coote, who’s the executive chairman of Hydrix ASX:HYD. Gavin, good afternoon.

Gavin: Good afternoon, Stuart. Thanks for having me on.

Stuart: It’s good to have you. We recently published on Hydrix, an initiation piece. Prior to that a few weeks ago, a summary of the Hydrix opportunity. Gavin, you are literally almost, well, not quite literally, but it feels to me like you’re sitting on a gold mine. Forty to sixty really talented engineers at work every day of the week, working for clients, developing new generation biomedical products. And then off on the side, some of your best ideas where you’ve taken an equity stake and are developing those projects. How’s it feel to be sitting on such a gold mine as Hydrix?

Gavin: Yeah. Well, I think we’ve got ourselves really well placed, Stuart. You know, we’ve created considerable opportunities over the last three years largely. And I think our focus right now is around how do we capitalize on these considerable opportunities we’ve created?

Stuart: Right. So, let’s summarize Hydrix services in a nutshell. Let’s say I invent a new medical device. I’ve got the intellectual property, but I need someone to be able to reduce that to practice and get me a prototype that I can actually take into the clinic. You are one of the few companies in the southern hemisphere with a full suite of tools that can help me realize that reality with my product, and just about all of them are based in Melbourne right now, so I can find ’em all in one place.

Gavin: Yeah, I think there are a couple of different companies, Stuart. I think what differentiates Hydrix is our ability to work on the safety-critical systems for clients in med tech. Obviously, that’s really important and those sorts of systems are, if it malfunctions, someone could get seriously hurt or actually could die. So, I think that’s the point of difference for us. And one of the areas that we do a lot of, you know, innovation, if you will, is working with companies that are developing total artificial heart. So, in that cardiovascular technology space where safety critical systems are really important. So, it is a real point of difference for us.

Stuart: Right. Hydrix has been around since 2002. 2017 backdoor listed into a company, ASX listed company, then called Panorama Synergy, and then rename the business Hydrix. You got involved around that time on the Panorama Synergy side evaluating Hydrix as a potential acquisition. Talk to us about how you first got involved.

Gavin: Yeah, look John King, the major shareholder, asked if I’d join the board to lend a hand. And so, I did that early 2017. It became pretty apparent that some of the very early-stage research technologies, the company was trying to evolve, I guess, and they’d licensed that from universities. I actually got the Hydrix engineers to take a look at it when I first walked in and give me their views and thoughts. That was a really good way to do some due diligence on them. I think what we had identified strategically is rather than do work in really, really early stage, really early research, was to figure out how we could be more of a commercialization agent of some of the great innovators in Australia. And we ended up acquiring Hydrix because they’d had such a good track record of, if you like, transforming client ideas into commercially viable products through that highly specialized product design and engineering capability.

Stuart: Right. What’s exciting about that is where you’ve taken that business next. Not only does Hydrix serve other developers of medical devices, but you’ve actually started to invest in your own to hold onto some of the IP and grow the value out of that IP. I think, for example, of The Guardian, which is an implantable device to be able to detect in advance whether a patient is having an acute myocardial infarction. Talk to us about how the strategy evolved where you not only conduct the services but invest yourselves in some of the more promising ventures.

Gavin: Yeah. I think one of the things that we really liked about Hydrix services when it was a private company, Stuart, was that it was just charging the services on a fee-for-service basis. And then that was it. So, they were creating all this great IP and the client retained that and then went off to commercialize…

Stuart: Hundreds of millions of dollars in value. I think you were able to confidently say, having estimated the value you’d help create for others.

Gavin: Yeah. And there’s several ASX-listed companies. And so, if you think about market capitalization and the value they’ve created and some of the larger global companies who have ultimately bought the products that were created with our help. So, but what we did is we set about adding two new business segments to Hydrix after we bought the services component. The first was the Hydrix Ventures piece, and that was about how can we selectively make minority investments in some of our high-potential MedTech clients. So, we can capture more of the value, but also through the product development, be aligned from a shareholder perspective as well. And so we’ve got four investments today that we’re holding. Three of those are private, one’s public. The third part of it is set up Hydrix Medical, and that’s about distributing disruptive cardiovascular technologies. And, you know, we’re building there off about a decade-long experience from the services team in helping to shape some of the cardiovascular technologies of the future, such as, total artificial hearts and other technologies that are gonna be used to help people with heart failure, you know, like mechanical heart pumps, etc. So, I think it’s a natural extension and, you know, we really, we set up that distribution to generate new product revenue streams outside of being otherwise a pure-play services company

Stuart: Right, now it’s interesting to me. The services business is enjoying a little less revenue than it was in 2017 when you first acquired. So, it does about, $10 million a year at the revenue line. You are confident that can increase in the next few years, particularly as you start to bring in overseas clients. And Peter Lewis is relocating to Boston as we speak, to take care of your business development for the U.S. market. What’s the potential, once we get out and knock on enough doors?

Gavin: Yeah, look, I think there’s plenty of growth in that business. It’s about a $2 billion outsource product development market that we’re chasing. The U.S. is about a billion. And incidentally, we delivered…less than 10% of our revenues in FY 22, were revenues out of U.S. clients. But at the same time, about 52% of our revenues in FY 22 were from outside Australia. And a large chunk of that came from Europe. And that was after we appointed a business developer on the ground in Europe, so they can be basically face-to-face with clients. I think one of the things that we learned in COVID was it’s a bit difficult having a business development team all based here in Melbourne when travel restrictions and everything came about. So, we’ve set up business development in Europe, which is really driving some nice growth.

We’ve set up one of our more senior business development people in the U.S. who’s also lived there and worked there before. So, got lot of contacts. I think for us, our goal is to generate more than 80% of our revenue from that services business outside of Australia in the next couple of…two to three years. Which I think suggests that there’s plenty of growth beyond where we are, having grown 40% last year. September quarter, we grew 23% over the comparable period of last year. So, you can see is getting into that, you know, certainly a lot higher than where we are currently at the $10 million. So, maybe it’s a $15 million to $20 million number in the coming years.

Stuart: All right. So, at the moment, Hydrix Ventures. So, you’ve invested in four different biomed ventures. Talk to us about one of those investments that you’ve made in The Guardian product. Now, I got quite excited when I read about The Guardian because I thought here is the answer that a lot of cardiologists are looking for, to be able to spot in advance where patients are about to be in some serious trouble. Talk to us about how you got invested in that particular venture.

Gavin: Yeah, it was through a combination of things, Stuart. The first thing was having Hydrix services, having worked in cardiovascular technology over a long period of time, gave us an incredible footprint to have a conversation with AngelMed. And we got engaged initially through some services work to help them develop some next-generation features. In particular, how do you go from…get data from the device into the cloud? So, we’ve done some work there. And in that discussion and process, we really got, quite engaged in what we thought the product’s potential was. And we did two things. One was to negotiate exclusive rights to distribute the device in eight countries throughout Asia-Pacific. And the second is that we decided to invest in that company, take a minority position. So, of the three business segments, AngelMed is one of those that each of the business segments is actually engaged with. As you said, it’s a real-time cardiac alerting device. It continuously monitors a patient’s heart signal, and it’s looking to detect any irregularities in that, primarily driven from a plumbing problem where there’s an onset of a blockage in one of the coronary arteries. There’s no other device in the world that can do that today in real time. And a couple of key things that are really important. One is that almost half of heart attacks, the patient either has no symptoms, so like a silent heart attack…

Stuart: First time I’ve ever heard of a silent heart attack, was reading about it in when I was researching your company. I think it’s amazing. There could be people out there who had a heart attack and just don’t know.

Gavin: Yeah. That’s exactly right. And so, the challenge today, in the standard of care, Stuart, is you’ve gotta have symptoms. Then you’ve gotta be able to recognize them, and then you’ve gotta be able to act on them. That’s the standard of care. So, if you introduce The Guardian, it is the only device that can detect that you’re having a silent heart attack or your symptoms are unclear, the emergency alarm would go off. And what you can do there is you can confidently get yourself to hospital. It’s that time to door is so important. You want to avoid having too much heart muscle damage, the longer you take to get there and get that blocked artery taken care of.

Stuart: Okay. So, we’re gonna have another conversation online, which we’ll release later today to talk in more detail about the other Hydrix ventures and your cardiovascular approach generally. But it’s fair to say you’re pretty bullish about the company that you’ve now bought together after five years of restructure.

Gavin: Yeah, look, I think it’s sitting on a lot of good opportunities. And our job now is to go and capitalize on the considerable opportunities that we’ve created that gives investors an opportunity to do two things, I think, Stuart. One is to put money into a company that’s making medical devices that currently maybe don’t exist, and through that process, you know, we’re pretty lightly valued at the moment. And so there’s a good upside there for punters to invest in the company as well.

Stuart: Certainly. Get those picks and shovels and start working on this gold mine. It’s gonna be great. Gavin, good. Thanks for joining us at Pitt Street Research.

Gavin: Good. Thanks, Stuart.