A spate of deals among domestic and international device companies in China could mark the beginning of a consolidation in a market that remains heavily fragmented. But rather than just seeking to grow, device companies in China are now taking a more strategic approach and deepening the share they control in their specific sectors or acquiring more specific expertise.
This careful consideration, once a rarity in this market, was exemplified this week when Fosun Pharmaceutical (Shanghai), a pharmaceutical and medical device company, reported plans to acquire Chindex International, a Nasdaq-listed healthcare services provider. A subsidiary of Fosun already had an investment in Chindex.
The transaction, reported Feb. 18 and expected to close in the second half of the year is worth $369 million. It includes a consortium led by Fosun, global private equity firm TPG and Chindex founder and CEO Roberta Lipson. The consortium will acquire all of Chindex's common shares at $19.50 per share in cash, a premium of around 14% over the current price. Lipson will remain as CEO.
"Bringing in the expertise of TPG and Fosun Pharma will be a win for our existing business, our expansion plans and the patients and communities we serve and hope to serve," said Lipson.
Chindex provides healthcare services through United Family Healthcare, a network of private hospitals covering Beijing, Shanghai, Guangzhou and Tianjin. It also provides medical capital equipment and products through its subsidiary, which has manufacturing and distribution businesses in Greater China.
"Over the last 15 years, Chindex has built its United Family Healthcare network into a premium brand, but we believe that new partners and committed financing are needed to achieve the next phases of these plans, including new facilities in our current service locations as well as significant geographic expansion," said Lipson.
The deal will also enhance Fosun's distribution network for its high-end medical devices, said Yu Yang, an analyst at Huachuang Securities.
In 2013, Fosun acquired a 95.6% stake in Alam Laser, an Israeli manufacturer of devices for aesthetic and medical applications.
In 2013, Chinese medical device exports reached $19.33 billion, up 9.92% for the year, and imports hit $14.97 billion, up 20.07%, according to the China Chamber of Commerce for Import and Export of Medicines and Health Products (CCCIEMHP). The CCCIEMHP predicts the medical device trade will grow 12% in 2014.
The government in Beijing is keen to see this type of growth continue and the sector strengthen. It recently issued the Medical Device Supervision and Regulation (Revised Draft), revising and streamlining regulations for the first time since 2000.
Taking up this mantle, domestic device companies are actively looking for opportunities that give them a strategic edge.
On Feb. 17, Sinocare (Hunan), a manufacturer of blood glucose testers and strips, became a distributor and shareholder in Bioime, a Taiwanese maker of blood glucose monitoring systems. Sinocare will exclusively distribute Bioime's high-end blood glucose monitoring systems and strips in China's retail market for 10 years. Sinocare will also purchase shares in Bioime in two stages, first 5 million shares at NT$120 ($3.96) per share and then another batch of no more than 6 million shares. The total purchase won't exceed NT$132 million ($4.36 million) and 20% of the Taiwanese company.
Other Chinese companies are also planning to invest in stakes that could give them an edge.
In late 2013, leading market player MicroPort Scientific acquired the OrthoRecon business of Wright Medical(Memphis).
Another large Chinese devices company, Mindray, acquired ultrasound maker Zonare Medical.
This spate of deals may mark the beginning of a consolidation in China's highly fragmented market and lead to the creation of fewer but stronger participants.
But these participants will continue to have competition among their larger international peers that are stepping up their presence in the market.
On Jan. 31, Miraculins, a Canadian medical diagnostic company, reported a deal with Cachet Pharmaceutical (Beijing), a drug and device distributor, for the distribution of the former's Scout DS Non-Invasive Diabetes Screening Test.
"As a distributor of major brands throughout China such as Bayer, Novartis, Johnson & Johnson, and Medtronic, executing an exclusive distribution agreement with Cachet would be a highly significant step forward as we continue our drive to see Miraculins become a world-class diagnostic, risk assessment and health screening force on the global stage," said Christopher Moreau, president/CEO of Miraculins.
On Jan. 13, Covidien (Dublin, Ireland), a global device company reported two transactions, one in Brazil and one in China. The later is a joint venture with Kangdi Medical, an open stapler product maker in Changzhou, Jiangsu.
"These deals accelerate our entry into an increasingly important customer segment that we believe will enable us to grow above market over time and increase access to affordable healthcare solutions," said Brian King, president (Emerging Markets) of Covidien.