A dominant healthcare player with multiple growth avenues

Olympus has a 70% market share globally in gastrointestinal endoscopes. Asia has a very high prevalence for gastrointestinal cancer and needs to dramatically increase the amount of screening via endoscopes.

Olympus is doing the right things in terms of shifting towards the right areas of business and investing in the right growth areas.

Olympus recently announced that they'll be expanding to a full suite of consumables for those endoscopes, including ultrasonic lasers and clamps, which will allow the company to generate more recurring revenue off their very well-established customer base.

How did Olympus establish that customer base?

Well, via its very rigorous training programmes. Over decades, Olympus has provided training for surgeons across the world, and that really ties in its customer base.

For a surgeon to retrain to use another system, it takes time off their tools, away from the operating table, and that is something that is obviously a high switching cost for both the surgeon and the hospital. 

So, Olympus has a degree of very strong customer retention. I recently read a very interesting interview with a competitor, who essentially said that many times he would approach a hospital with his product and he would just find that they are an Olympus house, and that there was no chance he would be able to shift the surgical team off of the Olympus products.

We feel that Olympus has this great, sustainable competitive advantage developed through its training programmes and sticky customer base. 

What is also interesting is the company is unlocking value. There's new management that has come in and targeted 20% EBIT margin, which is far higher than its previously low-teen EBIT margins in the past, and it's taken really interesting, tangible steps to get there.

It has exited what we probably know as consumers Olympus to focus on, which is its camera business, and it has sold that off to private equity funds in Japan.

What's really interesting is there is a big change: not just in Japanese companies looking to improve their margins and optimise returns for shareholders, but there's more opportunity to do this now in Japan.

These private equity funds, which are very well positioned to receive spun-off assets, restructure, and perhaps merge with other competitors, have seen a record growth in unused capital to put to work.

We think over coming years, there's going to be a lot of examples like Olympus which have a great established supply chain, distribution network and customer base in a growing Asian market to focus on those products and spin off poorer performing assets, and really unlock value for shareholders. 

Diversification preserves wealth. Concentration builds wealth

VGI Partners is a high conviction global equity manager, focussing on businesses with secular growth, attractive industry structures and where they believe they possess insights not appreciated by the wider investment industry. For further information, please visit the VGI Partners website.