Medtronic expands its Chinese presence

$221 million stake in China's orthopedic market could be a gamble

The Commercial Appeal
January 4, 2008
By Daniel Connolly

Medical device maker Medtronic is making a large investment in a Chinese state company, a strategic bet that could result in increased sales of Memphis-designed spinal surgery products in a fast-growing market.

Minneapolis-based Medtronic is buying a 15 percent stake in Shandong Weigao Group Medical Polymer Co. Ltd., which makes a wide range of medical products and whose shares are traded on the Hong Kong stock exchange.

Medtronic plans to buy 80.7 million shares of Weigao stock for approximately $221 million.

The two companies also plan to create a joint venture to sell surgical products in China. The firms will sell Medtronic's spinal surgery products as well as Weigao's line of products for trauma surgery and operations on joints.

Medtronic said the agreement is subject to approval by Chinese regulators and Weigao's shareholders.

Memphis is home to Medtronic's spinal surgery unit and workers here handle tasks that include research, sales and distribution. The spinal unit makes most of its products in Warsaw, Ind.

Medtronic is one of many American exporters that are pushing hard to expand sales in China, a country with a fast-growing economy and an estimated 1.3 billion people.

Medtronic has had a presence in China since 1989. Its 800 employees there handle the manufacturing of pacemakers, sales and other tasks, said spokeswoman Marybeth Thorsgaard.

But the joint venture represents a new level of commitment.

"China is key to our global strategy as we continue to expand our geographic footprint," Medtronic president and CEO Bill Hawkins said.

Thorsgaard declined to comment on the possibility that the joint venture would lead Medtronic to place more manufacturing resources in China.

China is a one-party dictatorship with millions of poor people but also increasing numbers of middle-class and wealthy people who may want Western-style health care.

Analysts say that by working with a Chinese company, Medtronic can benefit from partners' experience in a health care environment that is radically different from that in the United States.

"In a place like China, I think local knowledge is important," said analyst Les Funtleyder of Miller, Tabak & Co. in New York.

He said China's orthopedic market is almost certain to grow, but said the partnership is unlikely to yield quick profits for Medtronic.

Funtleyder said he'd found little information about the orthopedic market in China, which underscores how new it still is. Orthopedic surgeries are much more common in wealthy, developed countries like Japan.

Funtleyder said he knew little about Weigao, but some basic facts are available on the firm's Web site. It's based in Weihai in China's eastern Shandong province, and in 2006 had revenue of 786.9 million yuan. That was a sharp 38.1 percent increase over the previous year and represents $108.1 million at the current exchange rate.

Thomas Gunderson, an analyst with Piper Jaffray in Minneapolis, agreed that partnering with a Chinese firm was a good move for Medtronic.

He said that to be successful, Medtronic should work to identify and develop top-tier surgical centers. He was more optimistic than Funtleyder about the joint venture's short-term prospects, saying it could have a positive impact on Medtronic's revenue within two years.

"If you put somebody who knows the local market together with somebody who has a top technology . . . it has, in my opinion, a great chance for success," he said.

Weigao

The Chinese government created this company to commercialize medical products invented by state research programs.

Headquarters: Weihai, in China's Shandong province
Chairman: Chen Xue Li
Employees: 5,456 as of Dec. 2006. Nearly eight out of 10 work in production.
Key products: Cardiovascular stents, orthopedic surgical products, syringes
Web site: weigaogroup.com/english/

- Daniel Connolly: 529-5296