Mindray Medical International Ltd. Q2 2008 Earnings Call Transcript

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 |  About: Mindray Medical International Limited (MR)
by: SA Transcripts

Operator

Thank you for standing by for Mindray’s second quarter 2008 earnings conference call. At this time all participants are in listen-only mode. After management’s prepared remarks there will be a question and answer session. Today’s conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the call over to your host for today’s conference, May Li, Mindray’s Investor Relations Manager. Please proceed.

May Li

Welcome to Mindray’s Second Quarter 2008 earnings conference call. Our financial results were released last night and are available on the company’s website as well as on news wide services. In addition, an archive of this conference call will be available on the investor relations section of our website at www.mindray.com.

Joining today’s call are Mr. Xu Hang, our Chairman and Co-Chief Executive Officer, Mr. Li Xiting, our President and Co-Chief Executive Officer, Ms. Joyce Hsu, our Chief Financial Officer, and Mr. Chen Ming Ha, our Executive Vice President of Strategic and Business Development.

Ms. Hsu will deliver her prepared remarks, and afterwards management will be available to answer your questions.

Before we continue, please note that this section today will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Security Investigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be different from the views expressed today. The number of potential risks and uncertainties are outlined in our public findings with the SEC. Mindray does not undertake any obligations for any forward-looking statements except as required under applicable law.

I will now turn the call over to Mindray’s Chief Financial Officer, Ms. Joyce Hsu.

Joyce Hsu

Good evening, ladies and gentlemen, and thank you for joining us today. We’re very pleased to announce our continued strong results in the second quarter of 2008. Mindray GAAP net profit increased more than 54.7% over the second quarter of last year. Our growth and net margins decreased slightly as we incorporated May and June operating results from our newly-acquired business of Datascope.

We have always prided ourselves on strong, balanced growth across core product segments as well as sales-geographies. We are pleased to have achieved that again this quarter.

Our relevant financial data have been included and released last night, so here I will just add additional comments to these numbers in my prepared remarks. I will start with our domestic international result for the quarter.

In China our whole market delivered a very strong quarter with net revenue growing 59.4% year over year. This is the fifth consecutive quarter of over 40% domestic growth. This growth was due primarily to strong uptake on our high end patient monitoring devices, as well as continued demand on our diagnostic equipment and imaging systems from rural areas and developing regions.

We continue to see strong government spending in rural areas. Government tenders accounted for approximately 12% of our domestic sales in the second quarter. While ten-year sales contributed a lower percentage of overall sales than one year ago, we continued to receive strong sales orders from our leading domestic distribution network composed of approximately 2,000 distributors.

Our leadership in the domestic China medical device sector is undisputed, and our growth continues to outpace the sector.

Looking forward, we expect our domestic sales to have a forward growth in the third quarter. Historically, this has always been a seasonally weaker quarter given the summer holidays. This year over-all business activity was slower due to the Olympics and some of the government funding for tenders were over-shifted to the earthquake relief effort. We can’t yet quantify the impact on all government tender levels. That said, we believe that the growth for the domestic business will likely resume the higher growth rate in the fourth quarter this year.

We are confident that our sales team will continue to deliver growth exceeding 40% in the second half of this year. Mindray products are now in over 30,000 hospitals and clinics in China. This is more than any other company in the industry. We have increased our exposure in tier-1 hospitals as our high-end patient monitor, the beneview series, becomes more accepted as a replacement alternative for foreign brands.

We also continue to build our sales force and our channels to better service our end users. We have very good momentum and look forward to continue our leading market position in China by leveraging our research, sales and service teams.

We are taking advantage of the tremendous growth opportunity that is available in the rapidly-developing general application market segments in China.

Internationally we achieved nearly 139% international growth in the second quarter. Our high-quality, competitively-priced product was supported by the DPM acquisition. We also benefited from continued global trends, such as aging populations, health care affordability, and increasing pricing pressure in hospitals and clinics in developing markets around the world.

One of our goals over the next 24 months will be to leverage the sales force to further penetrate the US and Western European markets with products under both Mindray and Datascope labels.

Our EVP of international operations, Mr. Ronny Eit, will be giving the integration update shortly.

We achieved well-balanced growth across geographies. In addition to Datascope, we continue our commitment to strategically invest in overseas infrastructure, recruiting and localizing staff to increase awareness of our Mindray brand. We will also leverage the highly-regarded after sales support and service network of DPM, which delivered roughly a third of sales in the division last year.

As a reminder, the third quarter is also a seasonally weaker quarter for international sales given the summer holidays, particularly for our DPM and business in developed countries. Our sales channel integration will also intensify in the third quarter, including some adjustments to our sales team in some of the key areas.

Therefore, the over-all sales level will be impacted slightly. We expect that fourth quarter growth will be higher than the third quarter, as we have always seen in the past. This is similar to DPM’s historical trends as increased hospital spending tends to rise before the year end due to the budget flush.

Looking at some additional quarterly highlights across our three product lines, our patient monitoring and life-support product segments gained market share. According to the latest Solomon report, Mindray has 50% of the domestic China market. Despite a high market share, our domestic sales force continued to deliver growth in this segment.

Internationally, both Europe and North America generated strong demand. The international growth of this line will be strongly supported by DPM integration.

In terms of products, our Beneview series led our growth in both domestic and international markets. New products, such as Anesthesia, also contributed to the growth in China.

Our PM 9000 series contributed to growth in emerging markets, such as Latin America and India. DPM launched and then upgraded the GPM machine during this quarter, and we are on track to release a significantly upgraded model for our PM 9000 series called the IPM series as well as a new product line of defibrillators by the end of this year.

Our visual Diagnostic products segment delivered 62.3% growth year over year. In terms of the products our chemistry line led our growth, particularly the DS 400 series. Domestically, our three-part hematology sales continued to take market share as we saw more demand from the second year and third year cities which benefited from increased government spending.

Internationally we saw the most growth in India and the Middle East as our five-part differential hematology analyzer and BT 400 became more accepted by our customers.

We launched our new five-part hematology analyzer this quarter, as well as five new [inaudible] year to date. We are on track to release our B 380, biochemistry analyzer, which holds a significant amount of potential in domestic and international markets.

Our medical imaging systems segment grew 51.3% year over year due primarily to excellent growth throughout Europe, notably in Spain, Italy, and the Commonwealth of Independent States, or the former Soviet Union.

On the product side, black and white ultrasound products performed well overall, lifted by demand from tier-1 and tier-2 hospitals and some domestic government tenders. On the colored ultrasound side, the DC 6 series continues to receive small updates and was the largest contributor to growth during the quarter.

Internationally, our color ultrasound sales, boosted by the newly-launched M5 and hand-carried color ultrasound continue to exhibit strength in Latin America, Eastern and Southern Europe and Asia.

Now to operations. We achieved non-GAAP gross margin of 54.8% in the second quarter. The non-GAAP gross margin was lower than the previous quarter due to product mix as we integrated the newly-acquired DPM business. We believe we will continue to hold a very steady gross margin with a target to achieve a long-gap gross margin of 53-54% for the full year. We are actively pursuing various strategies to improve the gross margin of our newly-acquired DPM business and believe that we should be able to enjoy some synergies starting at the end of this year.

Our non-gap operating margin also has re-set at a lower level to 27.5% due to the acquisition. For the full year we are expecting a non-GAAP operating margin to settle around 23-24%. We are confident that we will be able to manage our operating margin for the combined business with prudent pricing strategy and disciplined cost management.

I highlighted some products when I reviewed the divisions, but I will add some additional highlights on BC3, BC 5300 and finally the agents launched during the quarter.

BC3 is designed to have extensive applications and is very well-suited to high-priced sensitivity customers, doctors’ offices and emerging markets both domestically and internationally.

BC 5300 is the second model that we introduced for five part hematology analyzer, allowing them to expand the market segments. The five new agents are expected to contribute to our fast-growing reagent cells division. Our reagent business grew faster than the over-all segment sales growth in the second quarter this year.

We have also added five more FDA approvals to sell our products in the US, including one from DPM. The Beneview T5 T8 will bring our total FDA approved products in the US to 19 products. In addition, we have another 9 products that are FDA approved from the Datascope patient monitoring business.

As you know, in order to facilitate a DPM integration in June we appointed Mr. Ronald Eit as Group Vice President of International Operations. Ronny has many years of management experience in international operations, particularly in the US. This will allow him to help us realize Datascope and Mindray synergy while expanding our presence in North America and Europe.

With that I will now hand the call over to Ronny to walk us through the GPM integration and the progress we've made so far.

Ronald Eit

Hi everyone. As you all know we concluded our acquisition of the Datascope patient monitor division in May and have made excellent progress in integrating the two companies. As we continue to integrate we are focused on managing the stability of our business, leveraging the combined entities to reduce costs, and to further grow the business. We see a significant opportunity to increase gross margins on Datascope’s patient monitor division. The division’s stand-alone monitors and enhanced product offering with our R&D capability.

To reiterate, we expect to achieve approximately $30 million of runaway affinities per year in manufacturing, [inaudible] and R&D within three years. In particular, we have been leveraging Datascope PM’s well-established path in direct sales and service teams in the US and Europe. We want to enhance and better distribute the existing product lines. We also now can gain better understanding of the market needs through DPM’s installed base in US hospitals and through contractedr relationships with GPO’s.

As you may know, our approach in our largest market, China, does not rely on group purchasing organizations, but rather on much more decentralized sales forces conducted by thousands of distributors across the country. Additionally, efficient component sourcing in our world-class China-based R&D team provides the opportunity to tailor functionalities to DPM’s product line.

Now I would like to point out some integrating highlights. Within the 2 1/2 months since the integration of the DPM division. We have spotted several projects to drive forward the objectives we set before the purchase. These projects range from sales team integration in major key markets to integrating R&D of new product developments. Particularly, we have projects started in the following areas: cost reduction in engineering, R&D’s outsourcing support for development projects, integration of trade shows, combination of sales force in certain key markets in cooperation of service supply for the US market, manufacturing opportunities from [inaudible]. We are happy to report that all these projects are progressing well and track with our initial expectations.

In our view, the key factor in successful integration is people. We are proud of the job everyone has done to begin to leverage our synergies. The Mawa team has been engaged and instrumental in this process. Additionally, the transition of the original team, including senior management in Mawa, has been progressing well. As David Gibson, President of our DPM division in Mawa has said before, this acquisition has the potential to unlock tremendous growth for us as a corporation. We obviously agree and believe the complementary advantages by the [inaudible] and Mawa operations can create more value than the two individual companies.

We look forward to continuing to work together to build a much stronger organization.

I will now hand the call back to Joyce to discuss our guidance.

Joyce Hsu

Thank you, Ronny. Regarding the closing of our DPM acquisition, we are maintaining our full-year net revenue in 2008 in the range of $560-580 million. The full year 2008 non-GAAP net income guidance remains in the range of $132-135 million, taking into consideration a 15% effective income tax rate after certain government tax incentive and rebate. This translates into a non-GAAP EPS in the range 1.16 per share to 1.18 per fully diluted share based on an estimated average diluted share count of 114 million for the year.

The non-GAAP EPS guidance range represents a 47-50% growth year over year, much higher than our goal to deliver annual 40% growth.

With our work on EDP integration to date, we believe that the DPM acquisition will have a neutral impact on our non-GAAP EPS this year. We will consider this as well as the over-all Q3 performance and the four-year outlook as we re-visit our 2008 earnings guidance at the next call.

As we mentioned previously, our subsidiary has enjoyed a certain percent tax rate due to our status as a new and high-tech enterprise in the past. The implementation for the definition of a new and high-tech enterprise will issue on April 14, 2008. Based on those rules, we are very confident that we will continue to qualify as a new and high-tech enterprise company. The company is waiting for the formal acceptance of our application for the high-tech enterprise and qualification by the relevant government authority. As a reminder, before the approval for the qualification to be a high-tech enterprise, the company is required to pay income tax in accordance with the transitional income tax arrangement where the income tax rate is 18% in 2008 and 20% in 2009. We will continue to accrue 18% tax expense for the Szenzhen subsidiary until we receive the final approval from the government authority.

At this time I would like to thank you all for your continued support of Mindray. We’ll now go to the operator to open the call to questions.

Questions and Answers Session

Operator

Ladies and gentlemen, if you wish to ask a question press star 1. If you would like to withdraw from the queue press star 2. Questions will be taken in the order received. Press star 1 to begin and as a courtesy please limit yourself to one question. If you wish to add more than one question you must rejoin the queue. We appreciate your cooperation. Please stand by.

Our first question comes from the line of Jin Sang Du with Credit Suisse. Please proceed.

Jin Sang Du - Credit Suisse

Joyce, I understand that you might not want to [inaudible] from the rest? Could you shed some light on the profitability level of the DataScope side? And also you said earlier that the four year impact from DataScope might be accretive instead of the mutual impact that you set last quarter. So what made you more confident on the contribution from DataScope in 2008?

Joyce Hsu

Why don’t I answer the second part of the question and then maybe I'll ask Ronny to ask any additional colors on the business level in case I missed anything.

In terms of the accretive comment that I made earlier in my remarks, I think today, after we already have almost five months of working together with the DPM team, at this time we have identified various areas as Ronny has mentioned from R&D to manufacturing that we are able to identify and create some synergy together as a combined company, and that has changed our view from the last call that we expect DPM would yield a mutual impact to [inaudible]. That said, this impact has not yet been reflected in our current guidance and that’s why I said in the earlier guidance remarks that we will visit this together with other factors in both our DPM performance as well as our organic growth performance to revisit guidance in the next quarter.

Jin Sang Du - Credit Suisse

Alright, thank you. I’ll go back to the queue. Oh. I’m sorry. Could you ask Ronny to comment on the profitability levels?

Ronald Eit

This is Ronny. I understand you are interested in looking at the DPM as a loan operation. But as you know the DataScope patient monitor business after we acquired this business it becomes part of our patent monitor operation for the entire Mindray operations. Also you can understand that there were also some inter-company sales in the past too. So it is not to look at it as an independent operation. That’s why we combined those operations and we focused on a combined patient monitor operation as a whole. And I think from a data point of view, I think that Joyce has provided in terms of overall guidance and in terms of progressing of the integration as I mentioned earlier in my prepared remarks, we are quite satisfied to this in terms of the progress we have in terms of integration.

Jin Sang Du - Credit Suisse

Looking at it directionally, DataScope’s contribution in the 2nd quarter, is it maintaining the same as before in terms of margins? Is there improvement or is it slightly down from previously, just compared to the Datascope patient monitor business before the acquisition. .

Ronald Eit

We have not seen any major differentiation I can identify or to see anything different from previous quarters working as a separate company. However, as I mentioned earlier, there are.a lot of interrelated company sales operations and other things which have made the comparison irrelevant.

Jin Sang Du - Credit Suisse

Alright, thanks a lot. I will go back to the queue.

Operator

[Operator Instructions]

Our next question comes from the line of Ben Li with Morgan Stanley. Please proceed.

Ben Li of Morgan Stanley

Thank you. Joyce, welcome back. My question is on the top line performance. Your domestic business had about a 59% year on year growth, which is pretty high. Can you quantify the effects of benefit was? My calculations say that on a constant currency basis your domestic business grew about 45%. Can you confirm that? Also, on the Ultrasound revenue, it grew about 51% year on year for this quarter, which is lower that the 70% we’ve seen. in the past few quarters. Can you give more color on tha?. Why is there a little bit of blight on that business?

Joyce Hsu

I’ll answer the first part o the question. Mr. Xiting will take the second part.

The first question is on domestic business. We continue to a see very strong market environment in China. As you know, in the past two or three years the Chinese Government has increased substantially the spending in the healthcare sector.

And luckily, fortunately, as the market leader in China, we are probably one of the largest beneficiaries of that medical equipment spending.

In addition, we also have a number of new products which we have been pushing for a year now, particularly the Beneview Series. It was launched in the end of 2006.

After one year of marketing and promotion, we are starting to see that effort to build through in this year, bear fruit.

Our color ultrasound continues to be very strong. Our diagnostic, particularly the biochemistry business, is also very strong in China.

The overall thing, I would just comment, even though, as I said in the prepared remarks, even though the tender accounted for a lower percentage this quarter We are very satisfied with the results and this has far exceeded our original expectation of this year.

On the Ultrasound I’ll turn it over to Mr. Xiting to comment on the Ultrasound sales for the second quarter.

Li Xiting

Thank you Joyce

[Foreign Language]

Joyce Hsu

Hi.This is a rather long answer. But, generally speaking we think, what you commented on was the gross rate for the overall Ultrasound line. But, we can actually show more details on this Ultrasound line with you.

In terms of domestic sales we saw very strong uptake on the color ultrasound line and especially with DC3 and the M5 launched respectively in the 2nd Quarter and the 1st Quarter, domestically. We started to see very positive results since both products are very well accepted by the market domestically. And also, as you may be aware of, with the increasing proportion of sales contribution from the color ultrasound rather than black and white ultrasound, the margin level in the medical imaging system product line has picked up significantly and why the gross rate is relatively lower than last quarter.

I think there are a few reasons that contributed to this. One is DC3 and the M5, although started to contribute significantly to the gross of this product line, they were late in terms of launch schedule, particularly DC3, it was actually four months behind initially planned launch schedule, and secondly, we did have sales team integration and reshuffle in certain sales geographies in the 2nd Quarter, which had an negative impact on the color ultrasound line.

Thirdly, as you may have seen, actually we did not have any black and white new product launched last year and new products always start making contributions after 12 months of launch. So this year we haven’t seen significant contribution from our new products that were launched within the black and white product line. And also, because of the earthquake, we saw a negative impact from a lower government tender level on the black and white ultrasound line

But, if you look ahead with DC3, with M5, I think we are feeling very confident that the ultrasound line, especially the color ultrasound product line will pick up in the coming quarters and we have very high homes for this line in general.

Ben Li of Morgan Stanley

Have you finished sales force integration in North America, and why was DC3 delayed for four months, if you can explain that?.

Li Xiting

[Foreign Language]

Ben Li of Morgan Stanley

Thanks.

Ben Li of Morgan Stanley

So have you finished integration of the North America sales force and when should we expect that to come back to normal?

Joyce Hsu

I think just to clarify, there wasn’t any ultrasound sales team integration in North America. DPM is not going to run the ultrasound sales. But with regard to the reshuffling of the management team, in North American markets, I’m not sure if you were aware of this earlier, but we did have some senior management reshuffle in the first half of this year in North America, and as a result ultrasound sales were negatively impacted, and in terms of the delay in the DC3 launch, it’s mainly because, these are based on a completely new technology platform. That’s why the R&D process took longer. But with this technology platform being built, we think this will likely generate more gross opportunities for this color ultrasound line in the future.

This also is a contributing factor which is that we have actually [inaudible]

product launch tendered which might have contributed to the delay of the DC3 launch as well.

Ben Li of Morgan Stanley

Thanks

Our next question comes from the line of

Operator

Our next question comes from the line of Okey Luke with Citi Group. Please proceed.

Okey Luke - Citi Group

Hi. Thanks for taking my question. It sounds like you guys are expecting a weak 3rd Quarter. It sounds like traditionally it’s been weak and in could be even weaker this upcoming quarter. Sales of the 3rd Quarter last year accounted for about 26% of the entire year sales. Do you still expect it to be around the same percentage this year or do you think it’s going to be lower than that?

Joyce Hsu

Sorry, Okey.

It’s our policy that we don’t provide quarterly guidance. So I can’t really answer your question. But if I said in the 2nd half this year, one thing I want you to know is that we continue to expect very strong sales as well as income growth, and we are very confident in meeting the current guidance. We wanted to remind our shareholders as well as the research analyst community that 3rd quarter historically has been a slower quarter and this year, because of some of the special impact, we’re expecting much of the growth to come in the 4th Quarter rather than in the 3rd Quarter, in the second half of this year.

Okey Luke - Citi Group

Okay, and then in your current guidance, what sort of exchange rate do you assume for your EPS and if the rate comes above your current expectation do you still expect to meet the guidance?

Joyce Hsu

The rate remains the same as last time, and then as we all know, in the second quarter of this year the R&D appreciation has slowed down, given the reversing trend in the Dollar strength.

Currently we can’t forecast where the currency is going to go. But at this point in time we don’t see any need to change our guidance.

Okey Luke - Citi Group

Okay, and third, just one last question; For the government tenders is was about R and B 260 million, last year. What is your expectation for this year based on what you’re seeing? If you could give us some comments, that would be great.

Joyce Hsu

I think we always thought from the beginning of this year, in this year’s guidance we have incorporated roughly around the same level of government tender for the domestic sales. That said, I think, one thing we do want to make sure is that our shareholders and the research community understand that the percentage of the tender business has very little impact on the overall domestic sales strength. As you can see in the 2nd Quarter, even though we only had 12% coming from the tender business, we still had as very strong domestic sales.

This year what we’re seeing is the overall tender activity is not likely to exceed last year’s level. If anything I think it may be lowered as we had witnessed in the 2nd Quarter. We think some of that activity in the 3rd Quarter will likely pick up before end of this year. But right now it’s hard to say where the final numbers will come out

Okey Luke - Citi Group

Okay, thank you.

Operator

Our next question comes from the line of Amit Hazan of Oppenheimer.

Amit Hazan - Oppenheimer

Hi. This is Michael Teu calling in for Amit Hazan. Thank you for taking my question.

Regarding the expectation of a tax reversal in Q4, we have heard that several companies, subject to the same application process, are seeing delays and now are expected to receive

The new tax status in 2009 provide us with some color as to what provides you to compensate; you’ll be able to obtain this new tax status by year-end?

Joyce Hsu

Hi. Based on our current discussion with the relevant government authorities activities. The indications have given us that we should be able to receive a approval before year end and so there may variance based on some local government; this has been carried out locally. Szenshen government has always been very helpful in terms of assisting our companies in enhancing the growth prospects so I think we are very confident in getting there before the end of this year and that variance may come because there’s some difference in terms in terms of government activities in various areas in China.

Amit Hazan - Oppenheimer

Therefore, your application hasn’t been accepted yet, but you do have some visibility that if it gets accepted, the timing in terms of turnaround should be pretty quick?

Joyce Hsu

No, we have been in close discussion with the social tax bureau and the Hi-Tech Enterprise bureau.

Amit Hazan - Oppenheimer

Does that local bill have a pretty decent amount of autonomy in terms of making that decision?

Joyce Hsu

Yes.

Amit Hazan - Oppenheimer

As a quick follow-up, this question is: I think you remind us that we have to go to the process again for 2009?

Joyce Hsu

No.

Amit Hazan - Oppenheimer

Once you get to 2009, it will be 15% effective tax rate as well?

Joyce Hsu

That’s right. The reason why this year we have the crew Asian percentage because of the change in law even though we have to be a partly Hi-Tech enterprise every year, next year we don’t anticipate the tender will be changed, Therefore we will likely qualify again. The delay this year is because the law has been changed and some of the tender has been changed as well.

Amit Hazan - Oppenheimer

If you have to define next year, and assuming that the standards do not change, would it be seamless, so at fourth quarter you have 15% effective tax rate and at first quarter 2009 you have 15%, or will there be a law where your caps will spike back up to 20% in the first quarter and then it will be reversed later on?

Joyce Hsu

I’m sorry; I don’t quite get your question just now.

Amit Hazan - Oppenheimer

For 2009, you have to apply again, and assuming that the standards don’t change, would it be seamless that you would have 15% starting first quarter 2009?

Joyce Hsu

Yes. That’s not has been our pattern in the past.

Amit Hazan - Oppenheimer

Great. Thank you very much for taking my question.

Operator

As a reminder, ladies and gentlemen, please ask one question. If you wish to ask any additional questions including follow-ups, you must rejoin the queue.

Our next question comes from the line of Jody Arna with Global Hunter Securities. Please proceed.

Jody Arna - Global Hunter Securities

Hello, everyone. Congratulations to our strong quarter. My question is about patient-monitoring business. It is a particular strong this quarter; do you think that mostly just comes from Datascope's contribution, and how much is that contribution? Or do you think that also started to benefit from the China earthquake? How do you look at our patient-monitoring cost rate going forward?

Joyce Hsu

Hi Jody, how are you? As we discussed earlier, we will not be disclosing Datascope numbers as standalone financials. IN the patient monitoring business while you are right: the result from the Datascope still haven’t been incorporated and so our own ultrasound monitoring has been very strong, as we discussed in the remarks earlier, partly due to the strong uptake in our Beneview series, and partly due to our overall strength and leadership in the Chinese market. Worldwide, I think we are also getting a lot of acceptance from our customers in the emerging markets and other countries alike. As for earthquake, I think there was a short spike in sales, but that is not the major contributor to the high growth patient monitoring sales in the second quarter.

Jody Arna - Global Hunter Securities

Will we see more in the third quarter then?

Joyce Hsu

More of what?

Jody Arna - Global Hunter Securities

Of the earthquake contribution, or you think that’s not second to second?

Joyce Hsu

No, it probably won’t be a significant contribution.

Jody Arna - Global Hunter Securities

Going forward, shall we expect patient monitoring keep as high as high growth rate as this quarter?

Joyce Hsu

I think the growth rate will continue with a high-entry patient monitor. We are just starting to see customers’ interest and also a strong demand for that product in both the domestic and international markets. In addition we also have a new product coming, including our Anasthesia machine, that was introduced a couple of years ago. This we added another additional product and we’re also adding additional new products such as surgical beds in the next 12-18 months.

Jody Arna - Global Hunter Securities

Thank you very much.

Operator

Our next question comes from the line of Bill Quart with Piper Jaffray, please proceed.

Bill Quart - Piper Jaffray

Good evening. Good question for you. Can you give us an update on the impact of the financial heightening in terms of hospital spending trends internationally?

Ronald Eit

Hi Bill, this is Ronny Can you repeat the question you were asking?

Bill Quart - Piper Jaffray

Certainly; if we look at geographies, particularly the US and Europe, there has been some apparent fallout from heightening financial standards for some of your larger competitors. and so I’m just trying to get Mindray's impression of that if you could talk a little bit, to whether or not that’s having an impact for the international business, I’m thinking largely, Western Europe and the US?

Ronald Eit

I think, particularly in the U.S., they calmly do show some slowness, and particularly in the bank near the mortgage housing sector, but usually those things are spread around into different areas. However, medical equipment is usually one of the industries less impacted by the economic crisis, and furthermore both the Legacy [inaudible], plus the newly acquired Datascope [inaudible] are focused mainly on the main healthcare market. The economic impact should not be serious and so far, at these stages, we have not seen any major slowdown in the market we focus.

Bill Quart - Piper Jaffray

Alternatively, is there an opportunity to as a value priced provider to potentially take some share here, whether hospitals do intent to purchase new equipment, or for that matter replace existing equipment, obviously heads off for pretty strong value proposition?

Ronald Eit

I think, as a copy, we’re all constantly looking to expand our market share and expand our penetration. Of course, we would take as many advantages as we could under the current circumstances.

Bill Quart - Piper Jaffray

Thank you. Just one quick follow up. Joyce, you mentioned that sales force shuffle in the ultra-sound product line. Have there been any shuffles in different segments within the company, or for that matter, any planned here in the near term.Thank you very much.

Joyce Hsu

I think that the shuffle already done was in the patient monitoring business, as well in key areas for the ultrasound business. There hasn’t been any shuffle management team or key sales team in the other segments or areas.

Bill Quart - Piper Jaffray

Thank you.

Joyce Hsu

Thank you.

Operator

Our next question comes from the line of Janet Sunn with UBS. Please proceed.

Janet Sunn - UBS

Congratulations for another strong quarter. The question is about DR. You launched the first DRE in the quarter. My question is: how about the feedback from the market on DR, and did it achieve any sales in this quarter?

Ronald Eit

For the Q2, we have SFDA delay, we just got SFDA approval in May, and because this is a big time product for us, we have not any revenue contribution for Q2. We expect to get some revenues beginning 2nd half of this year.

Joyce Hsu

One thing I do want to add. This year is primarily the first year that we’re pushing other DR products, so similarly in the past when we pushed other products, it takes some time to gain market acceptance, so we expect that the same situation will play out in our DR launch this year.

Janet Sunn - UBS

Thank you, Joyce. Some more questions,. About more products, Do you have a number of what percentage from new products launching in a few months?

Joyce Hsu

Janet, can I ask you to repeat the question?

Janet Sunn - UBS

By the end of 2007, you mentioned that [50% of revenue was from new products launching within two months. I want to ask if there’s an update of the number.

Joyce Hsu

Janet. I think for this quarter, given the combination with Datascope and also going forward, it’s hard to give out that apples to apples comparison because, as you know, part of the growth in this year was due to the combination of Datascope revenue, so we will not be giving out such a number in the future because it’s not an indication of our performance, given the new business combination.

Janet Sunn - UBS

Thank you.

Operator

Our next question comes from the line of Louis Fann with Brean Murray. Please proceed.

Louis Fann - Brean Murray

Hi, and thanks for taking my call. I just have a couple of really straight-forward question regarding the income statement. The first question is about the $6.6 million in-process R&D expenses for this quarter, which I assume is related to the data scope acquisition. My question is: is this a recurring expense? In addition, when you add the $6.6 million to the total R&D expenses that brings up this current quarter’s R&D over revenue ratio to 12.5%, which is higher than previously, so can we expect this kind of ratio will come down a little bit due to synergies going forward?

Joyce Hsu

Hi Louis, thanks for getting on the call. The $6.6 million is really an accounting technology, given that as a business combination, we are required to expense all the in-process R&D and this is valued by a third-party appraiser given the project cash flow potential. This will be one-time and we will not be recurring in the future, and I don’t think it’s meaningful to come by such number to the over- R&D expenses, because the actual expense is what we list out here under the R&D expenses, and the $6.6 million will not be a recurring item going forward.

Louis Fann - Brean Murray

That’s good to know. The next is regarding interest expense. It seems like for this quarter, the interest expense almost reached about a $1 million. In particular, we noticed the bank loans increased from zero in the end of 2007 to the bank-loan related interest expenses to about $151 million this quarter. Could you give us a little more color on these loans? In addition, going forward, how can we expect the interest expense is going to be per quarter?

Joyce Hsu

The increase in the bank loan was due to the acquisition, and we expect this interest expense would be recurring on a going forward so only a loan is outstanding.

Operator

Our next question is a follow-up from the line of [Jin Fan Tu]. Please proceed.

Jin Fan Tu

Hello, I just like to understand more about the government tenders. Just now, I think she has mentioned that the government tender in black-and-white ultrasound slowed a little bit in the second quarter. Can you maybe give us a little bit more follow in terms of the sharp decline in government tenders, because I look to the fact of the historical government tenders: in the first quarter of 2008, it was a 100% yearly growth. The second quarter, it seems to me, and if I estimated correctly, it should be half of last year’s, so can you give us more color besides the slowdown in balck and white ultrasound what had other differences?

Joyce Hsu

Jin Tu, you want us to provide the tender [inaudible] in ultra cell, year-per-year differences?

Jin Fan Tu

No, that’s not what I’m asking. I’m asking: given the big difference between the first quarter growth in government tenders and the second quarter growth in government tenders…

Joyce Hsu

I will just give a short answer. I think given that this is a government activity, we have no control over it. For example, as you mentioned, in the first quarter, the tender as a percentage over domestic sales was double the year before, and in the second quarter, it was half the year before, and overall, as I said earlier, we are not expecting the government tender activity to come in above what we have achieved the last year the whole year. That said, this should not be an indication of how strong business is, because, in addition to government tender, we have 2000 distributors in China and now we have our products targeted at the high end; that typically does not fall under the tender difference.

Jin Fan Tu

Did you see that going forward, revenue from high end domestically into a growth for high end products will be much higher than a growth for low-end products?

Joyce Hsu

Now, with the addition of Beneview series, the color ultrasound, the five part hemotology, we will be up to expend our targets from just mid to low-end to also a high end customer.

Jin Fan Tu

Does that lead to a higher margin necessarily, or no?

Joyce Hsu

Yes, most of these products usually come in the higher margin than the other products.

Jin Fan Tu

Alright, thank you.

Jin Fan Tu

Thank you.

Joyce Hsu

Thank you.

Operator

Our final question comes from the line of Ben Lee, please proceed.

Ben Lee

Thanks for taking my follow-up question. If we can come back to the domestic growth: let’s look at the non-government tender component, which, by my calculation, it grew almost 70% for this quarter on a year-to-year basis. First of all, why would this be so strong and this is much stronger than the so-called level which is roughly about 40%, and more importantly, Joyce and Xitung, what do you think about growth rate going forward, especially in the context of Olympics which you made comment earlier. Should we expect that 70%-ish rate to return to the more of a normal growth rate, or it’s here to stay?

Joyce Hsu

I’ll just translate quickly as this is actually a repeated question. For the normal sales channel in the domestic market in the second quarter, I think what you have seen is strong growth given by our higher end product series and also new products launched in the last eighteen months which are Beneview series and our new five part hemotology analyzers and color ultrasound series, and it looks so for specifically for patient monitoring line not just that Beneview series, but also accelerated Anasthesia growth as contributed to the overall patient monitoring services as well, and so you will continue to see that normal business channel to driven by her in the product series; that growing posture in the future, in the coming quarter and in terms of the tender sales as we have always communicated to all of you, that there are a lot of uncertainties that are beyond our control and we are happy that normal business channels are becoming a more important contributing sales channel to our domestic sales.

Ben Li

Thanks.

Operator

This concludes our Q&A session for today. I will now turn the call over to May Li.

May Li

Again, thanks everyone, for joining the call today and thanks for your continuous interest and support for Mindray, and that conludes our call today.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day!

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

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