Chinese Orthopedic Implant company acquired for $35.5M (4.6 X annual sales of $7.7M)
Mindray Medical Jumps Into Orthopedic Implants (Investors.com)
China’s Mindray Medical International, (MR) the world’s No. 3 maker of patient monitors, expanded into a new field last month by acquiring Wuhan Dragonbio Surgical Implant, a maker of orthopedic products such as hip implants.
Mindray, which makes diagnostic equipment and ultrasound devices for export, paid $35.5 million for a controlling stake in Dragonbio. Orthopedics is a stretch from Mindray’s core business.
Dragonbio had sales of just $7.7 million last year, solely in China. But analysts say its market is a good one.
“Mindray’s acquisition underscores orthopedics as a very attractive growing market,” Cowen & Co. analyst Katherine Lu told IBD.
Oppenheimer & Co. analyst Ingrid Yin agrees. She estimates China’s ortho implant revenue will grow at a compounded annual rate of 16% through 2015, “with high profitability.”
“The orthopedic implant market in China has a lot of potential,” Yin told IBD.
China will surpass Japan to become the world’s No. 2 orthopedic implant market in 2015, behind the U.S., says research firm Frost & Sullivan. China has a rapidly aging population, a rapidly rising number of traffic accidents and a low penetration rate for orthopedic products, especially in rural areas.
Moreover, China’s government is investing heavily to upgrade the country’s health care infrastructure, and is moving toward the idea of universal health coverage. “With government reimbursements, more people will be able to afford orthopedic implants than in the past,” Yin said.
Yin says Wuhan, China-based Dragonbio has 24 sales offices across China. It was founded in 1999 under the name Hubei Tianhui Science Technology Development and reorganized under its present name in 2005.
Analyst Lu says Dragonbio has won 39 unique product approvals since 2004, including 13 in trauma, 10 in spine and eight in hip. She says this makes Dragonbio one of the few Chinese companies with offerings across all three of these key orthopedic product lines.
But Lu says that in a recent phone call, Mindray executives gave her the impression they might not pursue more acquisitions in this field. She says this will limit the strategic value of the Dragonbio acquisition in a market where it faces stiff competition.
“Success in China’s orthopedics market will depend on scale,” Lu said. “That’s why Mindray needs to make more acquisitions.”
Yin agrees. “To become a leader in orthopedics, we believe MR needs to ensure smooth integration and make more technology acquisitions,” Yin said in a report.
Mindray’s push into orthopedics puts it up against another rising player: Kanghui Holdings (KH), a maker of orthopedic implants for China’s market.
Kanghui, based in Changzhou in China’s coastal province of Jiangsu, boasts a budding export business in India and other emerging countries. It posted 2011 revenue of 327 million yuan, or $51 million. Yin says it’s at least six times bigger than Dragonbio.
Other rivals in China’s orthopedic products field bigger than Dragonbio include Trauson Holdings and Aikang.
Lu says Mindray’s been busy making other M&As on the medical equipment side to take advantage of China’s health care boom. Since early 2011, it’s bought four local makers of medical equipment.
Lu has a neutral rating on Mindray’s stock, but Yin rates it outperform, with a price target of 34.
Mindray’s shares are up 18% in 2012. It has an IBD Composite Rating of 89, putting it among the top 11% of all U.S. companies based on a number of key factors, including profit and sales growth.