Medtronic Swallows Kanghui, More M&A on Tap?
I’ve written lots about the huge potential that China offers for drug makers as Beijing rolls out a multibillion-dollar reform of the country’s medical system. But there’s also huge potential for medical equipment makers, whose devices will fill the thousands of smaller local clinics being set up as part of a massive national plan to provide basic medical coverage to hundreds of millions of Chinese who lack access to such services. That potential was on display with the announcement by US-based Medtronic (NYSE: MDT), one of the world’s top medical equipment suppliers, that it would buy New York-listed Chinese peer Kanghui Holdings (NYSE: KH) for a nifty $816 million, in what looks like the biggest acquisition of a Chinese medical device firm by a western company.
This deal follows a near non-stop string of related tie-ups between western pharmaceutical giants like Merck (NYSE: MRK), Bristol-Myers (NSYE: BMY) and Pfizer (NYSE: PFE) with Chinese counterparts, all designed to tap into the massive spending spree as Beijing sets up its national network of local clinics to serve most Chinese who currently lack medical insurance. We haven’t really seen many actual acquisitions yet, but Medtronic’s purchase of Kanghui could well mark the start of a new M&A wave that may see some of the drug makers purchase their Chinese production partners, and also for more acquisitions in the device arena.
The western firms probably see such investments as less important for the actual acquired assets, which are usually less advanced than existing drugs and medical devices in the west. Instead, these Chinese firms probably look attractive for their sale channels and government connections, which the western firms can use to sell their own products into the bureaucratic and fast-changing Chinese health system.
Let’s take a look at the actual deal for Kanghui, an orthopedic equipment maker that was one of China’s largest US-listed medical device makers before the announcement. (company announcement) Its shares jumped 20 percent after the deal was disclosed and now trade near the offer price of $30.75 per American Depositary Share, giving Kanghui a market capitalization of about $700 million. In the announcement, Medtronic makes special mention of Kanghui’s “vast China distribution network” as one of the company’s major attractions.
In an interesting related development, shares of Mindray Medical (NYSE: MR), the only other major US-listed Chinese medical device maker, have risen 5 percent since the Medtronic-Kanghui deal was announced. Clearly some investors are betting that Mindray could become the next acquisition target, although its much bigger market cap of $4 billion would make it a bit more difficult to swallow for any but the largest global rivals.
From my perspective, Mindray and any of the Chinese companies that have entered partnerships with big western firms all look like potential targets that would fetch nice premiums if they were to be acquired. Such names include the likes of Simcere Pharmaceutical (NYSE: SCR), Wuxi Pharmatech (NYSE: WX) and Hisun Pharmaceutical (Shanghai: 600267). As the western companies become more familiar with China and their Chinese counterparts, look for a handful of new tie-ups to emerge in the next year, including equity tie-ups and perhaps even one or 2 more major acquisitions.
Bottom line: The purchase of Kanghui by Medtronics marks the start of a new wave of M&A of Chinese drug and medical device makers by western firms, with 1 or 2 more deals likely in 2013.
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