Medical Device Maker Rides Chinese Health Care Spending Spree

• Amy Reeves
• On 5:46 pm EDT, Friday October 30, 2009

Politicians in Washington are still debating how much U.S. health care reform will cost. But China is already putting big bucks behind its own plan.

National and local Chinese governments are expected to spend some billion renminbi, or $124 billion, on health care over the next three years. Twelve percent of that should go to infrastructure projects such as building, supplying and staffing hospitals, according to analysts.

That's good news for Mindray Medical International (NYSE:MR - News), the leading Chinese medical equipment company. Founded in 1991, it made its name with patient-monitoring devices, then branched into medical imaging gear. More recently, it started building an in vitro diagnostics line.

Mindray says it didn't see the government's new money start to come in until June. That's because the spending plan is "very back-end loaded," says analyst Ding Ding of Susquehanna Financial Group. Some 86% of the total government device funding should come next year and in 2011, she says.

The bright domestic spending outlook should help alleviate Mindray's foreign troubles.

Already the leading medical device exporter in China, it made a big move last year to penetrate the biggest foreign market of them all. In May 2008, it paid $209 million for the patient-monitoring operations of New Jersey-based Datascope.

A few months later, of course, the economy hit the fan. Then came the presidential election and the still-unfinished battle over health care reform. In the second quarter of this year, Mindray reported that international sales fell 4.2% vs. the year-ago quarter, and it named a slowdown in U.S. capital spending as a major culprit.

"For the U.S. market right now, well, it is what it is," said May Li, the firm's head of investor relations. "Everybody's in the same situation, facing the uncertainty created by the health care reform proposals."

Still, Li says this isn't all bad. Low prices are among Mindray's chief selling points, so cost-conscious hospitals may be open to switching brands.

The Datascope integration plan calls for overhauling the new branch's cost structure, which should help keep prices down. The firm has also already started launching new products in the U.S.

Those new products include ultrasound equipment, which was not part of Datascope's legacy business but is a growth engine for Mindray elsewhere. In September, the firm appointed Michael Thompson as vice president for sales at Mindray DS. Thompson had previously worked at Datascope and at ultrasound developer Zonare Medical Systems. Mindray hopes he will provide the experience to build an ultrasound sales network in North America.

"The Datascope service team won a very high reputation in the industry over the years for its commitment to serving the needs of hospitals," Li said. "We will be able to combine that legacy with the high-value Mindray ultrasound products we will bring to the U.S. market."

Still, Chinese sales, which contribute 47% of total revenue, are driving growth these days. In the second quarter, domestic sales jumped 31.3% from a year earlier, more than making up for the drop in foreign sales.

Overall, revenue rose 10% to $160.1 million, while profit gained 38% to 29 cents a share. Not bad, but certainly a slowdown from the torrid growth that investors have come to expect from Mindray since it came to the NYSE in 2006.

Li says Mindray doesn't expect the fastest future growth from the patient-monitoring business, which is the product line with the highest exposure in developed countries, and the most mature and saturated market. The in vitro diagnostic products have the largest addressable market, but the offerings and the sales channels aren't quite ready for prime time, Li admits.

So medical imaging should drive the biggest growth in the near term. Since Mindray went into the color ultrasound sector in 2006, it has launched three new systems, including a laptop-size ultrasound device that is growing faster than the overall ultrasound market, Li says.

Further out, Mindray plans to expand both geographically and technologically. The firm's products are sold in more than 190 countries, but outside the West it relies on indirect sales. Li says Mindray will probably expand its on-the-ground presence in some of the larger emerging markets, such as India.

Another major buy like Datascope probably isn't in the cards, but there are plenty of opportunities to buy more technologies. Analyst Ding says devices like CT and MRI scanners would be natural brand extensions for Mindray. She also expects Mindray to start moving up the value chain.

"They need to move up to more high-end products and stay away from the fierce competition at the low end," Ding said.

Analysts polled by Thomson Reuters are expecting sluggish results for the next two quarters, adding up to $1.11 a share for the full year, 16% above last year. Next year, though, they expect a 29% increase to $1.43 a share, accelerating to 34% in 2011.

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