China has around 200 million people over the age of 60 now, with 8 million adding to the count each year. At this rate, by 2050, China would have a whopping 400 million people over 60 years old, a number that is greater than the entire current population of the United States. The aging population could turn into an Achilles' heel for China's leadership in the coming years, but could serve the orthopedic industry very well. Due to the aging population, the demand for orthopedic surgery -- primarily sought by people over 60 years of age with osteoporosis conditions -- has risen very quickly in China.
My previous article, "China Orthopedic: Steered by Aging Demographics", discusses the factors that make the market attractive. They include:
- Strong growth profile at a CAGR of 18%: According to Frost & Sullivan, China's orthopedic implant market is expected to grow to RMB16.6 billion in 2015, representing a CAGR of 18.1% from 2009.
- China to become 2nd largest orthopedic market by 2015: China's orthopedic implant market is estimated to grow from the eighth largest in 2005 and the third largest in 2010 to the second largest in 2015, surpassing Japan.
- Large addressable market: Aging is generally considered to be one of the most important factors for orthopedic conditions, as the wear and tear of the musculoskeletal system of the human body tends to decrease the quality of bones and create degenerative medical conditions in the elderly population.
- Low Implantation rates represent considerable room for continued growth: Although China's orthopedic market has experienced 18%+ annual growth over the past several years, it is still less than one tenth of the U.S. market.
The orthopedics market in China is highly fragmented, especially in the low-end markets, where the majority of domestic Chinese companies compete. Overall, MNCs take the lion's share of the orthopedics market in China due to a high entry barrier, especially in the spine and joint product categories. We will first look the U.S. companies with exposure to the China's orthopedic market, followed by the domestic players listed in the U.S..
Johnson & Johnson (JNJ): The Company's DePuy subsidiary is one of the largest players in China. The DePuy unit reported sales of $5.4b in 2009, accounting for about 9% of J&J's total sales. DePuy was acquired by JNJ in 1998, and holds leading positions in knee, hip, spine trauma and sports medicine. The company opened a $100 million complex in Suzhou, China, and employs about 150.
Zimmer Holdings (ZMH): is the market leader in the $12 billion worldwide market for replacement hip and knee prosthetics. Zimmer generates some of the best profitability ratios in all of medical technology, with gross margins around 75% and operating profit margin percentages of more than 20%. The company has been a very aggressive player in the Chinese market, even acquiring local firm Beijing Montagne Medical Devices to strengthen its distribution network in 2010.
Stryker (SYK): is a leading provider of orthopedic implants and hospital equipment. The company maintains the No. 3 position in the $4.9 billion global prosthetic hip market and the No. 2 position in the $6.2 billion worldwide market for knee implants. The company also has solid positions in the global spine, trauma, and craniomaxillofacial (CMF) markets. The firm opened its operational facility at Suzhou Industrial Park, China, in 2009.
Wright Medical Group (WMGI): is a diversified provider of orthopedic implants, with a leading position in the foot and ankle market, one of the fastest-growing segments in all of medical technology.
Now, the locally bred players:
China Kanghui Holdings (KH): is a U.S. listed Chinese firm. The company is a domestic developer, manufacturer and marketer of orthopedic implants in the People's Republic of China. Its orthopedic implant brands are Kanghui and Libeier. It sells two lines of orthopedic implant products, trauma and spine. Its major trauma products, used in the surgical treatment of bone fractures, include a range of nails, plates and screws.
Also, there have been have been 2 listed players entering the market through the M&A route. The Hong Kong listed MicroPort Scientific Corporation acquired Suzhou Best for $17 million in 2010. This was followed by the U.S. listed Mindray Medical (MR) acquisition of Dragonbio Orthopedics for $35.5 million in June 2012.
2012 EV/ EBITDA
2013 EV/ EBITDA
2014 EV/ EBITDA
Wright Medical Group
Figures in US $, millions