Out of 14 multinational med tech companies with beachheads in China, Medtronic ($MDT) is best positioned to take advanced of the country's expected surge in healthcare spending, according to a new analyst report.
With China spending billions of dollars to modernize its healthcare system, Morningstar concluded in its latest Healthcare Observer that the Minnesota device giant has taken the strongest steps to get its devices and med tech products into the country, and ensure it has an effective distribution network to get them to hospitals and patients.
The analyst firm gave particular note to Medtronic's $816 million buyout of China's Kanghui Holdings in late 2012, an orthopedics company that makes trauma, spine and joint reconstruction devices. It is Kanghui's massive distribution network that helps put Medtronic in the lead, the Morningstar report concluded. With Kanghui, Medtronic bought one of the country's largest device companies, tapping into an already-established distribution network with plenty of local customer relationships. Morningstar said the strategy is savvy, something that companies including Stryker ($STK) have also followed.
"Medtronic faces far more upside than other device manufacturers because of its extensive product portfolio," the Morningstar report stated. "With the addition of Kanghui's strong distribution network, Medtronic now has an avenue through which to move all of its devices into Chinese hospitals, including pacemakers, implantable cardioverter defibrillators, insulin pumps and heart valves."
Morningstar added that Medtronic's timing is key--just as access is improving, demand is growing, and the government has added conditions such as Type 1 diabetes to its list of illnesses covered by insurance. Medtronic has also invested in Shenzhen's LifeTech Scientific, pursed a joint venture with Shandong Weigao, and launched a Beijing patient care center. What's more, Medtronic makes pacemakers in a manufacturing facility in Shanghai that has been operating for years.
To be sure, Medtronic is far from the first med tech company to establish a presence in China. Morningstar notes that Becton Dickinson ($BD), for example, has had a manufacturing and R&D facility in Suzhou since 1995 that employs 3,000 people. Johnson & Johnson ($JNJ) also has a research center there and snatched up a major company--Guangzhou Bioseal Biotech. Many of the top 14 multinational med tech companies have some sort of research or manufacturing presence now in China, the report points out.
But there are some sobering numbers. According to Morningstar, a number of the top 14 don't have any China distribution partners yet, including Becton Dickinson, Boston Scientific ($BSX), Edwards Lifesciences ($EW), St. Jude Medical ($STJ) and Smith & Nephew ($SNN). Even Covidien ($COV), which has an R&D and technology center in Shanghai, is aggressively looking for local distributors, Morningstar said.
As China strengthens its intellectual property laws and modernizes its healthcare system, other companies will surely catch on. Boston Scientific, for example, is rapidly growing in China and working to have 1,000 employees on tap in the country. And while sales in areas such as stents may be slow to grow there, other med tech products are in increasing demand. Morningstar gives Medtronic points for entering the China market early (plans call for doubling its employment there to 2,000 by 2015), and for taking more steps at this point than its rivals to shore up its competitive position there. It will be interesting to see how the others continue to follow suit in the months ahead.