Mindray Medical International: Device Maker on the Move

As China's middle and upper classes continue to see their disposable incomes increase, less healthy diets and more sedentary lifestyle changes are expected to have an increasingly negative impact on public health. Incidences of chronic disease and serious illness are already rising in record numbers, prompting a steady spike in health care spending, both by the government and private insurers (the Chinese government alone has increase spending almost four-fold in the past two years).

This, along with new guidelines put in place by China's State Food & Drug Administration to ease product and drug safety concerns, create more regulatory transparency and promote innovation in the healthcare technology and life science fields, has helped fuel a domestic medical equipment market that nearly doubled in size, from $9 billion to $17 billion, between 2003 and 2007. The Chinese marketplace is expected to continue to clock double-digit growth annually for the foreseeable future. According to "China Medical Device Market Research and Forecast, 2008-2010," China is the third largest medical device market in the world, after the United States and Japan, and will overtake Japan within 5 to 7 years.

In the dog-eat-dog world of medical devices, companies must confront and overcome serious obstacles that include ever-mounting competitive threats, quality issues and pricing pressures. According to industry experts at Standard & Poors, when evaluating a medical device company's competitive position, it is important to examine its track record of product innovation and its market share over time. Using that criteria, if any stock in the medical-device group qualifies as a strong holding in the Street's eyes, it's Mindray Medical International Limited (NYSE:MR). With a 1,000-plus member R&D team (it pumps roughly 10% of its annual sales into research and development), the medical device maker is holding its own in China, even as powerful global companies like Koninklijke Philips Electronics NV, Medtronic, Inc., General Electric Co. and Siemens AG are working aggressively to strengthen their ties with other Chinese players, move manufacturing operations to the mainland and capture more market share.

Mindray develops, manufactures and markets non-invasive medical devices including patient-monitoring and life support equipment that tracks things like heart rate, blood pressure, respiration and temperature; advanced in-vitro diagnostic (IVD) devices, which analyze on blood, urine and other bodily fluid samples for clinical diagnosis and treatment; and medical imaging systems, capable of producing real time images of anatomical movement and blood flow, ideal for practitioners in the fields of cardiology, urology, gynecology and obstetrics. The company specializes in providing low- to mid-end devices to rural and urban community clinics at affordable prices.

Headquartered in Shenzhen, China with U.S. research center, Mindray has sales and service offices in Seattle, Toronto, Vancouver, London, Amsterdam, Mexico City, Sao Paulo, Moscow, Istanbul and Mumbai, Mindray has a portfolio of over 60 products available in over 140 countries. It sells the majority of its products through distributors while the remainder are sold directly to hospitals, clinics, government agencies, original equipment manufacturers (OEM) and original design manufacturers (ODM).

Mindray confidently projects top and bottom line growth at an annual clip of at least 40% over the next three years, in line with its past performance. The company posted a strong second quarter that saw revenues and profits jump 48% and 54%, respectively. Previously, earnings had grown 78%, 67% and 67%, respectively in the prior three quarters, while revenue rose from 38% to 64% and 67% during the same period. In anticipation of this continued growth, the company plans to pursue an aggressive international expansion plan that will double its overseas sales staff to over 300 by the end of the year (with plans to challenge multinational giants in European and North American markets).

2008 has been a busy year for Mindray so far: In March, the medical device maker received 510(k) clearance from the U.S. Food and Drug Administration for its laptop-size M5 ultrasound imaging system and the BS-200, a portable automatic bio-chemistry analyzer, bringing the total number of products cleared by the FDA to 14 (the Chinese State Food and Drug Administration also gave the green light to the M5 as well as the company's DC-3 color ultrasound system); in May it completed the acquisition of the patient monitoring business of Datascope Corp., a Montvale, N.J.-based that does most of its business in the United States and Europe; and last month it received the FDA go-ahead to sell the DC-3 and its AS3000 next generation anesthesia delivery system (the AS3000) in the United States.

The $290 million cash buy from Datascope is likely to pay off big. The deal has given the company immediate access to an established network of American hospital customers and has propelled Mindray yet another step closer to  becoming a global leader in its niche (the acquisition made it the world's third-largest patient monitoring device maker). Mindray chairman and co-chief executive officer Xu Hang says the move ensures sustainable high growth for the firm's international business, and the company expects to achieve over $30 million in run-rate synergies (manufacturing, R&D and SG&A) from the acquisition in 2011.

The Datascope purchase comes at an ideal time, when the firm is eyeing increased expansion outside China (specifically, into Datascope's core markets). Over the last five years, international business has grown at a CAGR of 50%. Last year, just over 50% of its sales came from overseas. The buyout increases that number to 70% and is expected to be accretive to earnings starting in 2009. Brean Murray, Carret & Co. says the deal will give Mindray a presence in the higher-end and value-added market segment. UBS Securities analyst Janet Sun calls the purchase "an important step of its global expansion strategy."

Other financial minds also appear pleased with Mindray's efforts: Late last month, analysts Jinsong Du and Justin Liu of Credit Suisse, who maintain an "outperform" rating on the stock, they said believe now is a "good entry point." Morgan Stanley kicked off coverage with an "overweight" rating and a price target set to $50. While Investor's Business Daily noted Mindray has been "wending its way through an eight-month consolidation" since being a leader of last year's market rally, and says the company "seems to be finding support" at its 200-day moving average.

Chinese drug and product safety scares, its bouts with volatility and the anything-but-a-bargain trailing P/E multiple of 45 notwithstanding, Mindray's potential (with an estimated five-year earnings growth rate of 39%) is too promising to ignore. And the company's recent focus on its InVitro Diagnostic (IVD) business, which creates a predictable recurring revenue stream, is a smart move that, according to Morgan Stanley, could account for 80% of the company's business by 2010. Analysts at Citigroup recently said: "We expect Mindray to continue its solid performance with sales and earnings per share growth of 39 pct and 41 pct, respectively, over 2008-2010."

China's top medical devices maker continues to show strength across the board, and the company's extremely competitive price points and long warranty coverages have helped boost the global demand for its products. That demand is expected to continue to grow exponentially as Mindray makes its push into global markets.

Over the past 52 weeks, the stock has traded between $24.97 and $45.19. Thomson Reuters reports that analysts it polled expect full-year 2008 earnings to rise 54% to $1.11 a share, then 43% in 2009.

Our recommendation: Buy shares of Mindray Medical International Limited (NYSE: MR) at or near $37.60.

Shannon Roxborough
Analyst, Medtech Millionaire