Barclays Capital Expert Analyst Picks Medical Device Stocks To Benefit From Long Term China Medical Expenditures Growth Rate

Wall Street Transcript

67 WALL STREET, New York - August 6, 2012 - The Wall Street Transcript Online has just published its Medical Devices Report offering a timely review of the sector to serious investors and industry executives.

Topics covered: Chinese Medical Device Penetration Rate - Orthopedics and Cardiovascular Medical Devices - Medtech Tax Affects Earnings

Companies include: Mindray Medical International (MR), Johnson & Johnson (JNJ), General Electric Co. (GE), Koninklijke Philips Electronic (PHG), Siemens AG (SI), FedEx Corporation (FDX) and many others.

The following excerpt is from an interview in the Medical Devices Report:

TWST: Please tell us about the Chinese medical device market.

Dr. Mann: The Chinese medical device market is in a period of rapid growth, and we favor this from an investment perspective for couple of reasons. One, it's rapidly growing. Versus global comparables, the penetration rate is still quite low.

To use orthopedic joint implants as an example, the implantation rate is still around 1% of what it is in developed Western markets. It's significantly underpenetrated and growing more than 20% a year.

The other reason we like it is because a lot of these products are still funded primarily out of pocket, and so it's more of a luxury consumer play. The drug space, as you may know, has been under significant pressure in the past two years. The government is focused on providing basic medicines across China. Of course, we support that from a clinical perspective, but for most of the manufacturers, it has been a challenging time with significant margin compression. By contrast, the device space has been relatively protected and still offers some interesting opportunities.

TWST: And within the medical device space, where are you focusing your attention?

Dr. Mann: Orthopedics is our current favored segment. The stent side was more attractive five years ago, but it has been quite competitive on price, as the three main domestic players really captured the market from the multinationals. The multinationals used to provide around 90% of the stents in China as recently as four years ago. At this point, they are less than 10%.

Through the process of localization, that market has shifted from imported products to domestic products. In order to capture share, as Chinese companies sometimes do, they competed primarily on price. Product became commoditized, and it became a volume game. And so the stent segment, from an equity investment standpoint, became significantly less attractive.

In contrast, orthopedics is still relatively protected; and from our conversations in that segment, we believe the executives have seen what happened on stent side. They are keen, obviously, to grow the market, but it's growing quickly enough organically that I don't see a strong risk at this point for a price war that would erode value in the segment.

TWST: And within the orthopedic space, are there many major competitors, or is it more fragmented?

Dr. Mann: It's still quite fragmented, and it's still quite split between the multinationals and the domestic players. The multinationals - the names that would be familiar to any device investor - are present in China. They have strong penetration at the very high end of the market, about the top 3%, but their products are fundamentally unaffordable to most of the market.

So the three major Chinese players are seeking to capture that growing middle-class segment. They are Kanghui (KH), which is listed in New York; Trauson (0325.HK), which is listed in Hong Kong; and Weigao (1066.HK), also listed in Hong Kong.

TWST: How does your coverage universe break down between domestic companies and multinationals, or even companies that are not based in China?

For more from this interview and many others visit the Wall Street Transcript. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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