Medtronic’s $816 Million Bet on China Kanghui

Medtronic, Inc. is placing an $816 million bet on the Chinese orthopedic market by acquiring Chinese orthopedics company, China Kanghui Holdings, for cash.Omar Ishrak, Medtronic’s CEO, announced that he pulled the trigger on Medtronic’s biggest acquisition since he took charge at the company last year after the markets closed on September 27. He had been less than complimentary of previous acquisition choices by his predecessor, particularly in the spine business. But Omar promised to go global and not give up on spine just yet. He not only stayed committed to spine, but is adding trauma products made for markets outside the U.S.Ishrak said the deal represents a “significant” investment in China. Chris O’Connell, Medtronic’s executive vice president and president of the company’s Restorative Therapies Group (which includes spine), said Medtronic will now establish a “bigger and more direct local presence” in the country
“Kanghui brings Medtronic a broad product portfolio, a strong local R&D and manufacturing operation, a vast China distribution network and an exceptional management team. This move will provide Medtronic sustainable advantages in the fast-growing Chinese orthopedic segment, as well as a foothold in the emerging global value segment in orthopedics,” said O’Connell.It is unclear what the impact of the acquisition will be on the joint venture that Medtronic has in China with the Weigao Group. Back in 2007, Medtronic entered into a joint venture with Weigao with Medtronic taking a 51% majority stake. Medtronic also took a 15% equity stake in Weigao. “It appears there is significant overlap between Kanghui and Weigao product offerings; therefore we believe Medtronic’s acquisition of Kanghui will essentially replace Weigao,” wrote Wells Fargo analyst Larry Biegelsen after the announcement
Kanghui Products and Sales
Kanghui had $52 million in sales in 2011, of which roughly 60% are from trauma products, 30% are from spine products and about 10% of sales are in the value segment of the hip and knee market.The company specializes in trauma and spine products, particularly in the value segment, with about 80% of sales in China and 20% of sales in international emerging markets. Consensus revenue estimates indicate the company is expected to grow earnings 20% year-over-year in 2012 and 2013.BMO Capital Markets analyst Joanne Wuensch reports the company has nearly 40 products, including nails, plates and screws, and cranial maxillofacial plate and screw systems for the surgical treatment of bone fractures, and screws, meshes, interbody cages, and fixation systems for the spine segment.Key products in the trauma segment include: Monoloc LCP/Stanloc LCP system, a locking and compression plate system; Synplate/Stanplate basic plate and screw systems for bone repairs; Orienail & NeoGen nail/LJ Nail nailing system for lower-extremity fractures; and in the spine segment: L8 spine fusion system for thoracolumbar fusions; and PolyNices system, a premium thoracolumbar fusion system.In 2008, Kanghui acquired Chinese orthopedics company Beijing Libeier and since then sells its products under the Kanghui and Libeier brand names. The company’s proprietary orthopedic implant products consist of 36 product series of implants and associated instruments for trauma and spine indications. The company sells its orthopedics products through distributors with the bulk of sales in China but a significant portion in emerging international markets.
Warning Shot to Zimmer and Stryker?
Bob Hopkins, Bank of America’s device analyst, said this deal is Medtronic’s first foray into the trauma market and the hip/knee market but does not signal that the company is suddenly interested in competing with Stryker Corporation and Zimmer Holdings, Inc.
“Over time Medtronic is suggesting that this move could make them a larger competitor in orthopedics, but that will take time and that is primarily a comment on the growth outlook for the segment of the market where they are now positioned to compete. This deal will have little to no impact on Zimmer or Stryker near term, but it highlights the need for these two companies to put themselves in a position to benefit from the opportunities in this segment of the market. Zimmer acquired Beijing Montagne, a Chinese orthopedic player, in late 2010 and seems relatively ahead of the curve, and Stryker has talked about this opportunity but we have seen less action relative to Zimmer,” wrote Hopkin.
Source:Walter Eisner.http://ryortho.com.