Ilex Medical: Reported Profit Improved, but 2026 Depends on the Core Business and on Starget

Company Overview

At first glance, Ilex Medical looks like a long-established medical distribution company that closed 2025 with a 21.6% increase in profit from continuing operations, to NIS 55.6 million. That is true, but it is not the heart of the story. The core operating business weakened. Profit from ordinary operations before other income fell to NIS 55.9 million from NIS 64.8 million, while the bottom line benefited from NIS 21.3 million of net finance income and NIS 7.6 million of other income.

What is still working? The company still has two real operating engines. The first is diagnostics, with a broad public-health customer base, long contracts, deep service capabilities, and a growing genetics layer through AMG. The second is Medtechnica, which has wide exposure to the Israeli medical-equipment market, a large backlog linked to the Ichilov proton project, and a service infrastructure that is difficult to replace overnight.

What is still messy? Both main segments earned less from ordinary operations, inventory rose by 23%, customer advances tied to the proton project fell by 64.5%, and the parent company allocated more capital to Starget, the Sheba accelerator, and the Ichilov angel club. In other words, public shareholders are no longer just buying a medical-distribution platform. They are also buying a capital-allocation layer, which may create value, but also consumes time, cash, and attention.

The active bottleneck for 2026 is therefore twofold. The core business has to restore operating quality, especially in diagnostics, where there is no backlog to hide behind. At the same time, management has to prove that the capital flowing into innovation and venture-style investments is buying a valuable option rather than simply diluting the clarity of the operating story. The stock itself also has an actionability constraint: market value is around NIS 678 million, but the latest daily turnover was only about NIS 266 thousand, and short interest is negligible at 0.11% of float. That means there is no strong external short signal, but also no deep liquidity cushion.

The right economic map for Ilex in 2025 looks like this:

Events and Triggers

The first trigger: the Ichilov proton project is no longer a side note. This is the 2023 agreement to sell two proton systems for roughly EUR 55 million, plus four years of maintenance after the warranty period, with an option to extend maintenance by up to ten more years. The manufacturer has already completed production, but installation is only expected to begin in the first quarter of 2027 and continue through the second quarter of 2028. This is exactly the kind of project that looks attractive in backlog form but still requires patience, execution, and balance-sheet capacity.

The second trigger: Medtechnica's backlog is now clearly material. Product and service backlog together stood at NIS 351.9 million at year-end 2025, and NIS 314.7 million at the report date. That is large relative to a company with a market value of roughly NIS 678 million. But the composition matters. A meaningful part comes from one project, and the service component extends well into 2030 and beyond. This is a long-tail backlog, not immediate cash.

The third trigger: the SANBS contract extension in South Africa for another five years matters more than its headline weight might suggest. Management estimates average annual reagent revenue of roughly NIS 40 million from the contract. This is not a dramatic growth event on its own, but it is a useful signal that part of the international activity still rests on deep operating relationships, not just one-off deals.

The fourth trigger: Starget completed an initial closing in February 2026 for a financing round totaling USD 18.2 million, after Ilex had already invested USD 4 million through a SAFE in the third quarter of 2025 and another USD 3 million in the first quarter of 2026. After the SAFE conversion, Ilex held about 39.64% of issued share capital and 32.75% on a fully diluted basis. The investment documents also leave room for up to another USD 1.8 million to be raised by April 16, 2026. Beyond funding, Starget received approval in December 2025 for a first-in-human trial in Australia, subject to additional conditions, and is also working toward a separate U.S. clinical start.

The fifth trigger: the innovation layer is no longer just an idea. Ilex committed USD 10 million to the Sheba accelerator, paid the first USD 5 million in January 2025, and is expected to pay the second half during 2026. It also committed up to USD 5 million through the Ichilov angel club, of which USD 2.5 million had already been placed in a designated account in the third quarter of 2025. No specific investment had yet been made through the club by the report date. The implication is simple: part of the cash that could have reinforced the core business is now being redeployed into option-like assets.

The sixth trigger: the sale of Flight in November 2024 removed the discontinued-operations noise from the consolidated picture. That improves comparability, but it also strips away one layer that had helped obscure the erosion in the core business. Without Flight, 2025 is cleaner to read, and therefore harder to excuse.

Efficiency, Profitability and Competition

The central paradox of 2025 is straightforward. Revenue rose 1.1% to NIS 930.8 million, and profit from continuing operations rose 21.6% to NIS 55.6 million. But both core segments earned less. Diagnostics fell from NIS 53.5 million to NIS 47.5 million of operating profit before other income. Medtechnica fell from NIS 18.6 million to NIS 14.9 million. Anyone reading only the bottom line is reading a financing story more than an operating one.

This table shows where the improvement actually came from:

Diagnostics: a strong customer base, but weaker margins

Diagnostics revenue declined 2.1% to NIS 440.3 million, but the profit hit was larger. Operating profit before other income fell 11.2% to NIS 47.5 million, and gross margin slipped to 27.2% from 27.5%. That is not a collapse, but the direction is clear. Management explicitly describes growing price erosion in traditional core diagnostics as competition intensifies, and the numbers are consistent with that pressure.

What still supports the segment is not aggressive growth but depth of franchise. 96.3% of diagnostics sales come from customers with more than five years of history. In Israel, 55% of diagnostics sales come from public customers and another 13% from private customers, with South Africa and Sub-Saharan Africa contributing another 32%. That is a solid stability layer, but stability alone does not create margin expansion.

The fourth quarter was a reminder of that. Segment revenue rose 1.3% to NIS 107.2 million, but operating profit before other income fell to just NIS 5.6 million, versus NIS 19.0 million in the third quarter. That does not mean the fourth quarter alone defines 2026, but it does mean the core business is not stable enough to justify an automatic quality premium.

There is still a real upside case. Microbiology and automation remain attractive growth pockets, the company had already implemented an AI-supported microbiology solution at one customer in 2024, and it won two additional large tenders in 2025 and 2026 that are expected to be implemented in 2027. AMG also continues to deepen the genetics and oncogenetics layer. But those are medium-term quality engines, not a fast fix for 2025 margin pressure.

Medtechnica: more revenue, lower earnings quality

Medtechnica delivered most of the group revenue growth. Revenue rose 4.2% to NIS 488.0 million, and fourth-quarter revenue rose 9.8% to NIS 137.9 million. But gross profit fell 1.7% to NIS 90.4 million, gross margin declined to 18.5% from 19.7%, and operating profit before other income fell almost 20% to NIS 14.9 million.

This is one of the report's key tensions. On one hand, management has been trying to shift the mix toward consumables and technology-heavy categories where customer payments are spread over years. On the other hand, a meaningful part of the activity still depends on capital equipment tied to hospital and HMO budgets. The result is a business with genuine service and distribution advantages, but also limited control over gross-margin quality.

The Ichilov project supports revenue recognition, but it does not yet create a clean economic picture. In 2025 it contributed to revenue, while customer advances linked to the project fell from NIS 100.0 million to NIS 35.5 million, and the designated short-term deposit of NIS 25.9 million was redeemed in the fourth quarter and paid to the supplier in early 2026. In practical terms, 2024 enjoyed a larger customer-cash cushion. 2025 already looks more like a bridge year between advances and execution.

Competition: the real edge is service and relationships, not price

In both diagnostics and medical equipment, competition is tightening around price, technology, and service. This is not a business with an untouchable moat. Ilex's edge lies in global suppliers, installed base, service capabilities, and the ability to run complex projects. That is real value, but not enough to prevent price erosion. The right read of 2025 is therefore not that the company is weak, but that the business is stronger than the raw operating line suggests and less clean than the bottom line suggests.

Cash Flow, Debt and Capital Structure

On an all-in cash flexibility basis, Ilex finished 2025 almost flat. Cash and cash equivalents slipped from NIS 177.2 million to NIS 175.6 million after NIS 72.9 million of operating cash flow, NIS 46.6 million used in investing, NIS 27.3 million used in financing, and NIS 0.6 million of FX effects. The business still produces cash, but not at a level that lets investors ignore actual cash uses.

On a more normalized operating-cash view, the picture is still reasonable. NIS 72.9 million of operating cash flow on NIS 55.6 million of profit from continuing operations is acceptable. But even here there is erosion versus NIS 81.6 million a year earlier. Working capital is the main explanation. Inventory rose by NIS 36.3 million, current receivables rose by NIS 16.5 million, and contract liabilities fell by NIS 64.5 million. Anyone who benefited from the larger customer-cash cushion in 2024 is now looking at a harder 2025 balance-sheet profile.

Another point the market may miss is the gap between group economics and parent-company access to value. The parent ended 2025 with NIS 77.4 million of cash, NIS 24.3 million of fair-value financial assets, and NIS 25.1 million of equity-accounted investments. At the same time, it received NIS 28.2 million of dividends from subsidiaries during the year while its own standalone profit was only NIS 1.2 million. That is the key bridge: consolidated profit is not the same thing as cash that is immediately accessible to ordinary shareholders.

The balance sheet looks strong, but it needs careful framing. The group had no loans as of December 31, 2025. That matters. But it does not mean there are no financial obligations. There are undiscounted lease liabilities of NIS 46.7 million, long-term obligations, supplier credit of NIS 140.8 million, and, importantly, bank guarantees of roughly NIS 106.9 million, most of them linked to the proton project. That is not classic debt, but it is still meaningful balance-sheet capacity tied to one major contract.

Capital allocation is the more important issue. Alongside the NIS 13.6 million dividend paid in April 2025, the company invested in the Starget SAFE, in the Sheba accelerator, in Ichilov Tech, and in Embark Medical Innovation through an equity-accounted structure. Based on the annual report, the board also declared another NIS 22.2 million dividend in March 2026. That means the company still has flexibility. It also means the market has to ask whether that flexibility is being funded by an improving core business, or by a strong balance sheet that is beginning to stretch across several fronts at once.

Outlook and Forward View

Before looking ahead, four non-obvious points need to stay front of mind:

1. The improvement in 2025 earnings came mainly below the core operating line, not through it.
2. The proton project created a large backlog, but it also moved the company from a year of customer advances into years of execution, guarantees, and working-capital pressure.
3. Diagnostics has no backlog. If profitability improves, it will have to improve through pricing, automation, service, and mix rather than through a visible order book.
4. The parent company still has cash, but a meaningful part of the next uses is already spoken for: the second payment to the Sheba accelerator, the second payment to the Ichilov angel club, and a broader innovation layer that has not yet converted into operating value.

The main implication is clear. 2026 is a double proof year. The core business has to prove itself, and the innovation capital-allocation layer has to prove itself.

What has to happen in diagnostics

Diagnostics has to show that the 2025 margin pressure was not the start of a structural slide. The most credible way to do that is through automation projects, stronger microbiology activity, continued blood-banking expansion in South Africa, and continued AMG growth. But these are quality engines, not quick fixes. If the next reports still show stable revenue but weak profitability, the market may start reading diagnostics as a solid but mature business rather than as a margin recovery story.

What has to happen in Medtechnica

Medtechnica has to prove that the proton backlog is not just backlog, but a controllable project-economics story. The key issue is not only revenue recognition, but the quality of that recognition. Can the project move forward without another step-up in inventory, without further erosion in the margin profile, and without further reliance on balance-sheet support? At the same time, the activity outside the project has to show that the mix shift toward consumables and advanced technologies really improves earnings quality rather than simply supporting volume.

What the innovation layer has to prove

Starget is no longer a small side investment. After the latest financing round, Ilex owns a meaningful stake in a company entering the clinical stage. That can become a valuable option. But in 2025 the loss from associates already widened to NIS 10.6 million, mainly because Starget increased spending ahead of clinical work. The market will therefore need more than financing headlines. It will need visible progress on real milestones.

The Sheba accelerator and the Ichilov angel club add another layer. They may eventually create strategic value, access to technologies, and deal flow. But until there is a clearer path to monetization, they are first and foremost uses of capital.

How the market may read the next few quarters

Over the near term, the market is likely to focus on four questions. Can diagnostics rebuild margin. Can Medtechnica convert backlog without another working-capital squeeze. Do the 2025 finance gains repeat or fade. And does Starget deliver milestones that justify the larger ownership stake. If the bottom line stays attractive but the core business does not improve, market skepticism is likely to increase.

Risks

Currency risk: Ilex hedges part of its FX exposure with forwards and options, but the volatility has not disappeared. In 2025 the company recorded NIS 9.1 million of net FX gains and NIS 7.2 million of derivative fair-value gains. At the same time, the fourth quarter was hurt by shekel appreciation against the dollar. The sensitivity note says that a 10% weakening in the group's functional currency versus the dollar would have reduced pretax profit by roughly NIS 7.7 million. FX can therefore distort both the top line and the finance line.

Supplier risk: in diagnostics the main names are Abbott, Grifols, Biomerieux, and IL. In Medtechnica, the most important relationships are Philips and Boston Scientific. Those are not just technical suppliers. They shape product breadth, service capability, and competitive position. Losing one of the major suppliers is not the kind of problem a distributor fixes in a single quarter.

Legal risk: while the CPAP class action reached a settlement without payment by Medtechnica, there is still an approximately NIS 21 million customer claim against Medtechnica tied to replacement ventilators following the Philips safety notice. There is an indemnity agreement with the manufacturer, but it is conditional, and the company says it cannot yet assess the litigation outcome or exposure.

Concentration and healthcare-budget risk: Clalit alone accounted for 20.7% of group revenue in 2025. In Medtechnica, around 70% of sales go to hospitals, HMOs, and other public institutions. That is a high-quality customer base, but it is also one shaped by public budgets, tenders, and approval cycles.

Capital-allocation risk: Ilex does not look balance-sheet constrained, but the innovation layer creates another type of risk: diluted attention, delayed value capture, and a shift in the equity story away from proven medical distribution and toward options that still wait for clinical or commercial validation.

Conclusions

Ilex ends 2025 as a more resilient company than the yellow flags alone would suggest, but a less straightforward one than the headline profit implies. The core business still works, the balance sheet still provides room, and the company still pays dividends. But the operating business did not improve on a clean basis, and future value depends more than before on both the execution of a large proton project and an innovation layer that has not yet fully proven itself.

Current thesis: Ilex is now a combination of a high-quality but more pressured medical distribution business and a meaningful option on Starget and broader innovation capital allocation.

What changed from the older read: 2025 makes it impossible to read Ilex only through the lens of stable medical distribution. The company now has to be read through three different engines: the core business, the proton project, and the innovation investments.

Counter-thesis: the 2025 pressure was mainly temporary, driven by FX and mix, while the company is building real growth engines in diagnostics, the proton project, and Starget. If FX stabilizes and execution follows plan, 2025 may look like a bridge year rather than the start of deterioration.

What could change the market reading in the near term: visible margin recovery in diagnostics, clean execution on the proton project, and financing or clinical milestones at Starget.

Why this matters: because the market is not just pricing one year of profit. It is trying to decide whether Ilex remains a high-quality medical business with an option attached, or becomes a good business with too many layers that still require trust.

What must happen over the next 2 to 4 quarters: diagnostics has to stabilize profitability, Medtechnica has to convert backlog into revenue and cash without further balance-sheet strain, and Starget has to move from financial promise toward operational and clinical proof.