The race to help China’s 181 million elderly with artificial joints and implanted spinal supports is making targets of Trauson Holdings Co. (325) and a unit of Shandong Weigao Group Medical Polymer Co. (1066)
Medtronic Inc. (MDT:US), based in Minneapolis, last month announced the $755 million takeover of orthopedic implant maker China Kanghui Holdings Inc. in a nation where the senior population may more than double by 2050. That deal may spur a pursuit of rivals including Trauson, whose screws and scaffolds hold backs together, and Weigao’s orthopedic business that makes metal plates to stabilize bones, Barclays Plc said. Both companies are more profitable than at least 92 percent of similar-sized Asia- Pacific medical equipment and device makers, according to data compiled by Bloomberg.
Orthopedic implant sales in China will almost double to $2.7 billion by 2015, vaulting it past Japan as the biggest market after the U.S., Frost & Sullivan said. Even after Weigao stock rose 50 percent this year and Trauson leapt 110 percent as of yesterday, Oppenheimer & Co. says the companies are still attractive because of their potential to win business in provincial China. Buyers may be overseas rivals or Mindray Medical International Ltd. (MR:US), said Core Pacific-Yamaichi International (H.K.) Ltd. and Fortune CLSA Securities Ltd.
“China is where the growth is, and it has very few pure- play orthopedic companies,” Jason Mann, a Hong Kong-based health-care analyst at Barclays, said in a telephone interview. “Some people wonder whether Medtronic’s competitors will be forced to make an acquisition to stay in the game. Trauson is the obvious next partner in terms of an acquisition target.”
Trauson rose 2.7 percent to HK$3.79 in Hong Kong at the close of trading today, and Weigao climbed as much as 3.8 percent before closing up 0.2 percent at HK$10.50.
Trauson, which has a market value of HK$2.9 billion ($374 million), is China’s largest maker of pelvic reconstruction plates and other orthopedic products used in trauma surgery.
It competes with Kanghui and Weigao as one of the top three domestic producers of spinal products, including rods and screws to keep backs stable. Changzhou, China-based Trauson, which began trading in Hong Kong in June 2010, made more than half its sales from trauma products and 21 percent from spinal products in the six months ended in June, according to its latest earnings report.
Weigao, with a market value of HK$47 billion, derives most of its operating income from consumables, such as syringes and blood bags. Still, its orthopedic unit, which contributed almost $13 million in 2011 operating income --10 percent of the company’s total, has takeover appeal, said Mann at Barclays and Ingrid Yin, an analyst at Oppenheimer.
“Weigao ortho can be a very attractive acquisition,” said New York-based Yin. “More than one multinational company would be interested in the space.”
Phyllis Chan, a spokeswoman for Weigao, and Alice Zhang, a spokeswoman for Trauson, declined to comment.
In its biggest overseas acquisition, Medtronic announced on Sept. 27 that it agreed to buy Changzhou-based Kanghui (KH:US) to add trauma, spine and joint reconstruction products. Medtronic is paying about 31 times New York-traded Kanghui’s 2011 earnings before interest, taxes, depreciation and amortization -- almost double the median multiple in medical-products deals in the past 12 months, data compiled by Bloomberg show.
Medtronic, a supplier of pacemakers and spinal implants, said the acquisition will strengthen its sales and distribution network. It removes one of three largest domestic orthopedic products makers in China and makes market leader Trauson a target for other overseas buyers, said Kevin Tam, an analyst at Core Pacific-Yamaichi in Hong Kong.
“The foreign players have an advantage in product quality, but their sales coverage is mainly in first-tier cities,” Tam said. “In China, the growth will be driven by inner cities and second- and third-tier cities. Domestic players have an advantage in this aspect.”
Trauson and Kanghui each have about 7 percent of the Chinese orthopedic market, according to Mann at Barclays. There’s no single dominant domestic manufacturer, he said.
Trauson had about 663 distributors supplying more than 3,840 licensed hospitals in China as of June 30, its interim report said. Sales will increase 36 percent to the equivalent of $80.8 million in 2012, according to the average of nine analysts’ estimates compiled by Bloomberg.
Overseas makers of orthopedic implants typically target wealthier patients in China, limiting their scope for growth, said Gideon Lo, an analyst at Nomura Holdings Inc. in Hong Kong. Depending on their strategy, teaming up with a Chinese company would enable them to tap a wider market, he said.
“If you want to do the mass market, that will require more effort to build up a local network,” he said. “That is the reason you require local partners.”
Surgeons in China are more likely to trust the quality of implants sold by a local supplier that has allied with an overseas manufacturer, said Jacqueline Mei, an analyst at CLSA. That’s because foreign producers typically make more durable, more expensive devices, she said.
Weigao’s orthopedic business may become a target for a buyer once a joint venture between Weigao and Medtronic ends, according to Yin, the health-care analyst at Oppenheimer. She expects them to end their venture in the middle of 2013.
Medtronic has an option to buy the rest of the distribution venture with Weigao and the Chinese company’s entire orthopedic business for 2.5 billion yuan ($400 million) to 4.4 billion yuan, according to a stock exchange filing. Medtronic isn’t likely to exercise that option, said Yin.
Part of the appeal of Chinese orthopedic manufacturers is their profitability, Jason Siu, a Hong Kong-based analyst at OSK Investment Bank Bhd., wrote in an Oct. 3 report.
Trauson made 45 cents of operating profit from each dollar of sales in its most recently reported 12-month period that ended in December. That’s the fourth-highest margin among 181 companies with market values higher than $100 million in the Asia-Pacific region that participate in the medical equipment and devices industry, and for which margin information is available, according to data compiled by Bloomberg.
Weigao, with a 27 percent operating margin in its most recent 12-month period, is 17th.
New York-listed Mindray, a medical device maker based in Shenzhen, China, is looking for more opportunities to acquire technology and products, including in orthopedics, said Cathy Gao, a spokeswoman. The company agreed in June to pay $35.5 million for a controlling stake in Wuhan Dragonbio Surgical Implant Co., a manufacturer of trauma, spinal and joint products. Mindray had $710 million in cash (MR:US) at the end of June.
China has 181 million people over 60 years, triple the number in the U.S. and more than in any other country, the United Nations Population Fund said in a report this month. By 2050, China will have 439 million seniors, accounting for a third of its population, the UN group said.
“Many Chinese elderly people don’t drink milk or may not have adequate calcium intake, making osteoporosis a bigger problem,” said Peter Chiu Kwong-yuen, a professor at the University of Hong Kong’s department of orthopedics and traumatology. “Trauma due to osteoporosis will become a big problem in mainland China.”
Hip and joint surgery in China will become more common with increasing public awareness of the benefits, he said.
While Chinese-produced products may cost as little as a 10th of the price of those made overseas, foreign companies aren’t likely to cut prices, said Mann at Barclays. Rather, overseas companies could tap a larger share of the market in China if they owned premium as well as local brands, he said.
Larger Chinese implant makers, such as Trauson and Weigao, may be more attractive than smaller ones because they are more likely to win contracts to supply Chinese hospitals as tenders become more centralized, said Yin at Oppenheimer. While smaller companies may cost an acquirer less, they may be less successful in winning such contracts, she said.
“China is the hottest area globally in the device space,” said Mann at Barclays. “Some companies might feel like they need to make something happen.”
To contact the reporters on this story: Natasha Khan in Hong Kong at firstname.lastname@example.org; Angus Whitley in Sydney at email@example.com
To contact the editors responsible for this story: Sarah Rabil in New York at firstname.lastname@example.org; Jason Gale in Melbourne at email@example.com