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Medtronic's New Chinese Partner

Posted by: Bruce Einhorn on December 18, 2007

Back in March, Medtronic Inc., the big American medical device manufacturer, announced plans to form a joint venture with a Chinese company called Shandong Weigao. For months after that announcement, though, there was no news. No good news, that is. Both Medtronic and China’s medical industry had their share of bad publicity. Medtronic had to recall lead wires, used for heart defilibrators, in October after the company said that they may have been linked to the deaths of five patients. The stock price plunged on the news. Medtronic also had to deal with the fallout from growing worries about the safety of drug-coated stents. Meanwhile, companies like Weigao that manufacture in China had to cope with all of the Made-in-China scare stories about tainted toys, food and drugs.

Ironically, the Made-in-China scandals involving other Chinese manufacturers may actually have helped Weigao by differentiating it from the pack. The scandals have not tarnished the company, which hasn’t been accused of any wrongdoing. Moreover, its reputation got a boost early this year when Weigao received a $20 million loan from the World Bank’s International Finance Corp. Weigao’s investors certainly haven’t appeared worried: The company’s Hong Kong-listed stock price is up 111% so far this year.

And today comes news that the deal with Medtronic is indeed happening. The Americans are paying $221 million for a 15% stake in Weigao and the two companies are forming a JV to “market therapies in the joint and orthopedic sector,” according to the companies’ press release.

Medtronic investors should be happy. The deal gives Medtronic entry into what could turn out to be a lucrative market as the Chinese population continues to age (thanks to the one-child policy) and more elderly Chinese can afford expensive health care (thanks to economic growth). Weigao investors might not be so pleased, though: Medtronic is getting a pretty big discount, paying about HK$10.25 for each Weigao share it buys, compared to Weigao’s most recent closing price $17.50.

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