Medtronic has bought into 80% of China’s Tier-One Hospitals
MEDTRONIC BUYS ACCESS TO 80% OF CHINA’S TIER ONE HOSPITALS (Orthopedics Today)
What’s medical product distribution worth in China? Apparently about $250,000 per hospital (Tier One and Tier Two combined). Since its founding in 1997, China’s Kanghui Holdings (KH) has built a distribution network in China that, according to their U.S. filings, reaches into 968 Tier One hospitals (80% of the total) and 2,001 Tier Two hospitals (30% of the total).
Last week Medtronic announced that it was going to pay $755 million ($816 million excluding cash acquired) for China’s Kanghui Holdings and thereby purchase access to, effectively, 80% of China’s Tier One hospitals and 30% of China’s Tier Two hospitals.
How good was Medtronic’s purchase? It was a steal.
Fifteen-year old Kanghui was founded to create a domestic Chinese orthopedic implant manufacturer and distributor. After a decade and a half, Kanghui had become the largest domestic China manufacturer and distributor of orthopedic products. This year KH will likely distribute roughly $65 million in trauma and spinal implants through a network of 335 domestic Chinese distributors.
Medtronic paid 12x sales for Kanghui. The average price-to-sales for an orthopedic manufacturer in the U.S. is a little under 3x.
Either Medtronic CEO Omar Ishrak has been Shanghaied by a fast talking Kanghui exec or there is more to Kanghui than meets the eye.
It’s not manufacturing. The idea that Medtronic paid 4x the average price-to-sales ratio to get manufacturing capacity in China is improbable. Manufacturing capacity in China is cheap.
What we are witnessing, we think, is strategic wager on the rapidly evolving Chinese medical market.
It’s all About Hospital Access in China
Twenty-five years ago the cable TV business in the United States was going through a period of explosive growth and the capital markets were throwing money at it. Investors had a short hand way of pricing cable companies in those days. It was number of houses wired and the number of houses passed. Each house had a dollar value. A wired house was worth $150 – $200. A passed house was worth $40 – $100. Cable company pricing was easy. Number of houses times either $150 or $40 or some blend of the two numbers.
Medicine in China is the same way. Except the measure is hospitals. Hospitals under contract. Kanghui has access to 80% of the largest and most sophisticated hospitals in China.
China is also a country embarking on a major expansion of per capita access to healthcare.
China Will Grow Old Before It Grows Rich
The Chinese government now believes that China will grow old before it grows rich and realizing this, has mandated increased access to healthcare in China.
Thirty-five years ago Deng Xiapeng set in motion the engine of economic reform that moved his country away from such Marxist ideas as equal access for equal need. China’s economy grew at an average annual rate of 10% since 1978 and 500 million people moved out of poverty. A million millionaires form the top of China’s economic strata. The middle kingdom is the world’s second largest economy.
But this remarkable economy is also plagued with large income disparities. Since China’s economic reforms took hold, access to health services, especially for the poor and elderly, declined.
From 1978 to 2000, funding fell for state-owned health facilities and in keeping with the overall theme of economic self-determination the government encouraged hospitals to be more autonomous, self-supporting and profit oriented.
Among the many benefits of that approach was an extraordinary leap in access to advanced, Western style medical technologies, physician training and treatment capabilities.
But cutting hospital’s loose from the government mandated system also triggered soaring healthcare prices and sharply increasing in the number of days in the hospital. According to data from the Chinese Government’s China Health and Retirement Longitudinal Study (CHARL) database, the proportion of China’s population that could afford and get access to healthcare dropped significantly—particularly among China’s rural and 204 million poor people.
Income and proximity to urban centers, therefore, became the two most important determinants of access to healthcare in China.
China’s government wants to change that. Now.
Being Old in China
The old-age dependency ratio—defined as the ratio of those aged 65 and over to those between the ages of 15 and 64—will double in China over the next 20 years. At the same time the working-age population will start to decline after 2015. By 2050, 27% of China’s population will be elderly. This change in the age profile of the population has a direct impact on demand for hip, knee, shoulder and spinal care.
And that demand will place new burdens on China’s uneven health care system. So, as detailed in the CHARL database, rural seniors and females have significantly less access to hospitals or physicians but a higher need for physician visits.
The Government’s Response – Universal Healthcare Coverage
To address both, the current level of healthcare utilization inequality and the aging of its population, in 2002 China’s government set in motion a series of programs to expand access to healthcare by expanding access to healthcare insurance.
Specifically China’s Central Committee implemented two schemes to increase health insurance coverage for its rural, elderly, unemployed and poor. The two insurance programs were the New Cooperative Medical Scheme (NCMS) and the Resident Basic Medical Insurance (URBMI).
Underlying the new medical insurance schemes is the government’s decision to establish universal access to healthcare coverage and thereby diminish the role of income or wealth in determining that access. URBMI, which is a voluntary household-based insurance program extended healthcare coverage to the unemployed, students, children, and the elderly.
Quick reminder: China is ruled by a communist party. Socialism and improbably long agency names are in its DNA. The most recent mandate regarding access to healthcare in China came from, ready now, the Opinions of the Central Committee of the Communist Party of China and the State Council on Deepening Reform of Medical and Health Care System and the Implementation Plan for the Recent Priorities of the Health Care System Reform (2009-2011).
The new plan builds on the 2002 initiatives by increasing subsidies for the country’s two largest health insurance programs—the Urban Residents Basic Medical Insurance Program and the New Rural Cooperative Medical Program—and increasing reimbursement caps for the social medical expense pools of China’s three major government mandated medical insurance programs.
Long term, China is heading for universal healthcare coverage.
80% of China’s Hospitals To Be Rebuilt, Expanded or Relocated in 10 Years
China today has 18,396 hospitals with 4.2 beds per thousand people. China has 22% of world’s population but only 2% of world’s total medical resources. As China’s economy grows, that gap will close. In the next ten years, 80% of the Chinese hospitals will be rebuilt, expanded or relocated.