Chinese Medical Devices IPO: Highlights from Mindray's SEC Filing

 |  Includes: ABT, BEC, DSCP, GE, MR, PHG
by: Evelyn Rubin

Chinese medical device manufacturer Mindray Medical filed for a NYSE IPO with the SEC on Wednesday. Below are highlights excerpted from the company's F-1 filing:

Proposed Symbol: (NYSE:MR)

Maximum Offering: $276 million

Underwriters: Unnamed

Business Overview:

We are a leading developer, manufacturer and marketer of medical devices in China. We also have a significant and growing presence outside of China, primarily in other regions of Asia and in Europe. We offer a broad range of more than 40 products across our three primary business segments: patient monitoring devices, diagnostic laboratory instruments and ultrasound imaging systems. According to Frost & Sullivan, we had the leading market share in China by units sold, and the second leading market share by revenue, for the sale of patient monitoring devices in 2003, and we believe that we continue to be a market leader in China today. In addition, we believe we hold a leading market share position in China in diagnostic laboratory instruments and grayscale ultrasound imaging systems. Due to our leading market position, we believe we have one of the most recognized brands in the medical device industry in China.

We sell our products primarily to distributors, and the balance directly to hospitals, clinics, government agencies, original design manufacturers, or ODMs, and original equipment manufacturers, or OEMs. With over 1,950 distributors and 500 direct sales and sales support personnel, we believe our nationwide distribution, sales and service network is the largest of any medical device manufacturer in China. This extensive platform allows us to be closer than our competitors to end-users and enables us to be more responsive to local market demand. In addition, we sell our products internationally through more than 660 distributors and 75 sales and sales support personnel. This established and expanding international sales and distribution network provides us with a platform from which to build and expand our market position globally. To date, we have sold our products to approximately 25,000 hospitals, clinics and other healthcare facilities in China and sold over 170,000 devices worldwide.

We employ a vertically integrated operating model that enables us to efficiently develop, manufacture and market quality products at competitive prices. Our research and development team and our manufacturing department work closely together to optimize manufacturing processes and develop commercially viable products. In addition, they incorporate regular feedback from our sales and marketing personnel, enabling us to timely and cost-effectively introduce products tailored to end-user needs. Furthermore, our China-based research and development and manufacturing operations provide us with a distinct competitive advantage in international markets by enabling us to leverage low-cost technical expertise, labor, raw materials and facilities.

Financial Highlights:
Revenues are derived primarily from three segments: patient monitoring devices (40.5% H1 06 sales), diagnostic laboratory instruments (28.4%), and ultrasound imaging systems (29.9%). Geographically, the bulk of the company's sales are in China, however the company has seen increased penetration in Europe. For the first half of the year, Chinese sales declined from 61.1% to 56.3% of revenues, while European sales increased from 8.1% to 16.9% of revenues. Net revenues for the period increased by 54.9% (RMB240.0 million/US$30.0 million) to US$84.7 million, reflecting increased volume as well as a growth in exclusive domestic and international distributors to 600. Total net revenues grew 51.6% from 203 to 2004, and 54.6% from 2004 to $135 million in 2005. In this period, more than 25 new products were introduced comprising more than 35% of total 2005 revenues.

Cost of revenues increased in the first half of the year, from 44.6% to 45.4% of sales. The company attributes this increase to the elimination of value-added tax refunds and minor price decreases.

The largest OPEX item is selling expenses (15.9% H1 05, 14.8% H1 06 sales) followed by R&D (11% H1 05, 9.9% H1 06) and G&A (8.6% H1 05, 3.7% H1 06). Net income for the first half of the year increased from RMB80.2 million (18.3% net margin) in 05 to RMB164.8 million (US$20.6 million; 24.3% net margin). From 2003 to 2004, net margins grew from 22.8% to 26%. In 2005, net income grew from RMB181.7 million in 2004 to RMB205.1 million (US$25.7 million) with net margins decreasing substantially to 10.0%. The company attributes this decrease to "employee share-based compensation expenses, minority interests and research and development costs."

At the end of June, the company had $26.6 million of cash. At the end of 2005, the company had $5 million of contractual obligations comprising capital commitments, operating leases and $2.1 million in notes payable.

Use of Proceeds:$75 million are to be used for building new headquarters and expanding manufacturing capacity; the rest is earmarked to general corporate uses.

Dividend Policy:
The company intends to pay dividends equivalent to 20% of net sales beginning in 2007. The company has paid out dividends in the past of RMB17.2 million, RMB86.0 million, RMB206.4 million (US$25.8 million) and RMB323.5 million (US$40.5 million), in 2003, 2004, 2005 and the six months ended June 30, 2006, respectively.


  • Patient monitoring devices. Domestic competitors are For domestic sales of patient monitoring devices, primary competitors are Draeger Medical (public in Frankfurt), GE Healthcare (NYSE:GE), Goldway Industrial, Philips Electronics (NYSE:PHG), Nihon Kohden (public in Tokyo) and Shenzhen Creative. In international markets, competitors are For international sales of patient monitoring devices, our primary competitors are Datascope (DSCP), Draeger Medical, GE Healthcare, Philips Electronics and Nihon Kohden.
  • Diagnostic laboratory instruments. For domestic sales of hematology analyzers, primary competitors are Abbott Laboratories (NYSE:ABT), Beckman Coulter (NYSE:BEC), Horiba (public in Tokyo), MEKICS Co., Nihon Kohden, and Sysmex Corporation (public in Tokyo). Additional competition internationally originates from Bayer Healthcare. For domestic sales of biochemistry analyzers, primary competitors are Biotecnica Instruments, Hitachi, Sysmex Corporation and UV-Vis Metrolab. International competitors include Beckman Coulter, Erber-Transasia, Furuno Electrics Co., Olympus Medical Systems, Roche Diagnostics, Tokyo Bokei and UV-Via Metrolab.
  • Ultrasound imaging systems. For domestic sales of ultrasound imaging systems, our primary competitors are Aloka (public in Tokyo) and South Korean companyMedison. International competitors include Draeger Medical, GE Healthcare, Philips Electronics, Teknova and Toshiba America Medical Systems.
  • Employees & Management: The company grew from 880 employees in 2003 to 2,438 at the end of June 2006. Currently, the largest number of employees (707) are in R&D, closely followed by manufacturing (694) and marketing and sales (607). Xu Hang, 44, is the Chairman and CEO; Li Xiting is co-CEO. It is unclear from their bios what their business background is:

    Xu Hang has served as the chairman of our board of directors and co-chief executive officer since 1991. Mr. Xu is one of our founders and the core managerial personnel of our company. Mr. Xu is responsible for strategic planning and business development. Mr. Xu received a bachelor’s degree from Tsinghua University Department of Computer Science and Technology, a master’s degree in biomedical engineering from Tsinghua University Department of Electrical Engineering and an EMBA degree from China-Europe International Business School.

    Li Xiting has served as our director, president and co-chief executive officer since 1991. Mr. Li is one of our founders and the core managerial personnel of our business. Mr. Li is responsible for our business operations and management. Mr. Li received a bachelor’s degree from University of Science and Technology of China.

    Current Ownership: Xu Hang and Li Xiting hold 24.7% and 21.6% of the company respectively. The GS Funds (Goldman Sachs affiliate) holds 9.6%. Tai Wai Tung, representing a group called Well Elite holds an additional 9.3%, and Nie Tong, representing a group called Scien-Ray holds 6.15%.

    Additional Noteworthy Issues:
    Intellectual Property: The company does have an IP strategy in place with 60 patents in China and 20 applications in the US. They note, however, that IP protection in China can be weak:

    Implementation of PRC intellectual property-related laws has historically been lacking, primarily because of ambiguities in the PRC laws and difficulties in enforcement. Accordingly, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other western countries. Furthermore, policing unauthorized use of proprietary technology is difficult and expensive, and we may need to resort to litigation to enforce or defend patents issued to us or to determine the enforceability, scope and validity of our proprietary rights or those of others. Such litigation and an adverse determination in any such litigation, if any, could result in substantial costs and diversion of resources and management attention, which could harm our business and competitive position.

    Regulation:The filing has a detailed section on regulation of the medical devices industry in China that is well worth reading.