Article preview from IN VIVO - October, 2012
Last month Medtronic agreed to pay close to $800 million for Chinese orthopedics implant maker China Kanghui Holdings. To be sure, the purchase of Kanghui secures Medtronic’s footing in China, one of the fastest growing health care economies in the world. In addition, it likely will help Medtronic close in on its goal of bringing in 20% of its revenue from emerging markets.
Article preview from IN VIVO - October, 2012
Since taking the CEO seat at Medtronic Inc. last year, Omar Ishrak has set the multinational on two principal paths. The first path extends Medtronic’s reach into emerging markets, a popular destination for US and European health care companies seeking to tap into those countries’ surging economies to offset stagnant growth in their home markets. The second, less prominent, strategy is so-called reverse innovation, a philosophy Ishrak brought over from his time as CEO of GE HealthCare, the $12 billion subsidiary of General Electric. Historically, the US medical device industry has been rewarded for innovation that provides better clinical outcomes. But competing in emerging markets – and ultimately in developed markets – also might require device makers to produce tools that provide good-to-adequate outcomes at lower prices.
Medtronic brought both philosophies into play last month when it agreed to pay close to $800 million for Chinese orthopedics implant maker China Kanghui Holdings. To be sure, the purchase of the Changzhou-based Kanghui secures Medtronic’s footing in China, one of the fastest growing health care economies in the world. This likely will help Medtronic close in on its goal of bringing in 20% of its revenue from emerging markets. Ishrak, in phone calls with analysts over the summer, said he isn’t satisfied with the 11% generated from emerging markets in the company’s second quarter. Katherine Lu, analyst at Cowen & Co., calls China a “springboard for emerging markets.” A report by Cowen states that total Chinese orthopedics exports grew 200% in August, moderating from 325% year-over-year in July. Sale of trauma products accounted for much of the growth, with products growing 241% in August and 379% in July. Lu notes an agreement between Chinese and Venezuelan governments contributed to the sales.
Medtronic’s acquisition of Kanghui positions it for a potentially larger opportunity – a move into the orthopedics industries of the US and Europe, where it already is a leading seller of spinal devices. To understand the opportunity, one first must understand the appeal Kanghui held for Medtronic. In an announcement about the acquisition, Medtronic executives cited Kanghui’s position in China and its focus on emerging markets as the primary driver.
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