The share price of China's Mindray Medical ($MR) rose 16% last week on the New York Stock Exchange amid rumors that it will be taken over by private equity firms, including the country's state-owned investment company.
A takeover by the state-owned Citic Group, the country's largest conglomerate, would be a signal of tighter government control over the country's med tech industry, which is considered a strategic, priority industry in China's 5-year economic plan.
The government is promoting a policy of import substitution of medical devices, by calling upon hospitals--especially more advanced urban ones--to buy more domestic equipment, though there has been little evidence that the policy is actually being implemented.
May Li, Mindray's chief investment officer, referenced the development during company's most recent earnings call, saying, "Another development in China includes the government's recent initiatives to encourage hospitals to prioritize the purchase of products from domestic brands. In the long run, we certainly think that we'll be a beneficiary of this policy, although it takes time for the policy to materialize into business opportunities."
During the call, the company reported revenues of $324 million, representing 9.6% growth year over year. Sales in its home country accounted for slightly less than half the company's revenue and grew 17.9% year over year to $156 million. That's compared to 2.8% growth in international markets, or sales of $169 million.
Mindray is strongest in supplying China's midsized county-level hospitals, but is making a push for more sales at private hospitals, which tend to be larger and located in urban areas, Li said. In August the government announced 100% foreign-owned hospitals could open in 7 cities.
Li also said "that in third quarter we are seeing an increased contribution to overall China sales from low-end distributors," adding "there was some flexible pricing particularly towards low-end product lines in China. And more specifically the private hospital channel related to certain patient monitoring and ultrasound products."
The company has three divisions: patient monitoring and life support products, which had quarterly revenues of $118 million; in vitro diagnostics ($92.5 million); and medical imaging systems ($82.5 million). Orthopedics, accessories and services contributed $31.6 million.
Mindray is a player in the U.S. as well. In October, the company launched the portable, color M9 Ultrasound System in the country.
Barron's says that Mindray's high gross margins off 55% make the company attractive to private equity companies, while slowing revenue growth means it is losing favor in the stock market, where it trades below its five-year average price to equity ratio.
Morningstar analyst Debbie Wang said the rumor originating from market research outlet dealReporter is "just speculation based on some rumors," but added that "there is some expectation that a PE firm could potentially operate it in a more efficient way and grow that business," according to Barron's.
Since the first report of a possible deal late last week, Mindray's stock has shed some of its gain but still trades above the prerumor price. The possible sale will be at the top of investor's minds during the company's earnings call tomorrow.
- read the article in Barron's