In 2005, a Beijing-based company formerly known as “Legend” acquired IBM’s venerable line of PC computers. At the time, Legend was a 21-year-old manufacturer of PC components like the famous Han-card which allowed PCs to efficiently process Chinese characters. Legend was public on the Hong Kong exchange, having raised $30 million in an IPO in 1994 and then an additional $212 million in 2000.
In 2005, Legend stunned the computer world by successfully acquiring IBM’s PC line of computers. The U.S. Congress criticized the deal—as it had in years earlier criticized (and blocked) CNOOC’s attempt to purchase Unocal or Chinese appliance maker Haier Group’s bid to buy Maytag.
Legend, which had changed its name to Lenovo, was ultimately successful where other Chinese firms had failed and paid $1.2 billion to buy IBM’s computer business including the trade name ThinkPad.
Why did Lenovo succeed? Part of the reason is that the PC was becoming an increasingly commoditized product and therefore didn’t represent the loss of critical intellectual capital. Also Lenovo agreed to maintain IBM’s North Carolina assembly plant which diffused the argument that jobs would be leaving the U.S. for China.
In retrospect, the Lenovo purchase of IBM’s PC business has been an unqualified success for consumers, IBM, the employees in North Carolina who assembled ThinkPads and the company formerly known as Legend.
Lenovo is now third largest computer maker in the world by volume and, as a brand name, is synonymous with superior quality and innovation. Who remembers the IBM PC brand? Who cares?
Who Is MicroPort Scientific and Why Are They Buying Wright’s Recon Business?
Last week (June 19), Wright Medical Group, Inc. announced that a Chinese firm named MicroPort Scientific Corporation had bid $290 million to purchase its hip and knee implant business. In 2012 Wright’s sales of hip and knee implants were $269 million. The brands are DYNASTY and CONSERVE hip implants, PROFEMUR modular stems, SUPERPATH minimally invasive hip surgical instrumentation and ADVANCE and EVOLUTIONmedial-pivot knee implants.
Considering that global hip and knee recon market is about $14 billion, MicroPort’s bid gets them just 2% share of the global market. But MicroPort has zero share of the Chinese hip or knee recon market so these brands should attract, at a minimum, an equivalent share of the $1.3 billion Chinese recon market for another $30+ million bringing the total business size, prospectively, to $300 million.
From all appearances, MicroPort is tracking the Legend/Lenovo play book.
Like Lenovo before it, MicroPort has literally no brand equity outside of China. Furthermore, it’s buying a well known, though declining and increasingly commoditized product platform but with very good manufacturing facilities deep in the U.S.
Could MicroPort confound conventional wisdom and become as well known and respected in its target market (orthopedics) as Lenovo did in computers?
We think that could absolutely happen—because, like Legend/Lenovo, MicroPort is employing quality and innovation (not cheap manufacturing) as tactics to reach market leadership and has, courtesy of the Hong Kong Stock Exchange and Chinese medical community (now among the largest in the world) the wherewithal and scale to make it happen.
The MicroPort Story
In 1995 a vice president of R&D named Zhaohua Chang for Atlanta-based Cryomedical Sciences Inc. (which sold to Endocare Inc. in 2002) attended a business development conference in Shanghai. Dr. Chang, who’d been raised in China and earned a master’s degree in cryogenics in China (his Ph.D. degree in biological science is from the State University of New York), realized that China was changing rapidly and that the market for a Chinese-based medical device company was forming.
In 1998 this scientist, author of more than 40 peer-reviewed articles and holder, at the time, of five patents, founded MicroPort Scientific. His first products were minimally invasive surgery (MIS) devices for cardiac catheterization and stent implantation. At the time, only 3, 000 patients in China had had coronary stents implanted (vs. 700, 000 in the U.S.).
In 1999, with strong Chinese government support, the new MicroPort company launched a balloon dilation catheter. The company would not turn a profit until 2002—but Chinese hospitals began to learn that MicroPort was capable of supplying high quality and reliable implants and instruments. Before then, Chinese hospitals were nearly 100% dependent on imported cardiac instruments and implants.
In 2003, MicroPort received a license to sell its coronary products in Japan—which was a major milestone for the company since it meant that its products were of sufficient quality to compete in the very demanding international markets.
Also in 2003, MicroPort introduced the first Chinese produced drug-eluting stent (DES). Chinese physicians were openly skeptical that a domestically produced implant could match JNJ’s or Medtronic, Inc.’s or Boston Scientific Corporation’s quality. Very few physicians were willing to use such a technically complex and advanced domestic product. So MicroPort made clinical studies a particular focus. The resulting clinical data demonstrated the quality of MicroPort’s DES. MicroPort was one of the first Chinese medical device companies to overcome the country’s deep rooted prejudice against domestically produced complex implants. Today, it holds the #1 share in China’s DES market.
In 2010, in order to fund its expansion into markets outside of cardiovascular (electrophysiology (EP), diabetes and orthopedics) the company sold $198 million of its stock on the Hong Kong Stock Exchange.
The MicroPort Culture
MicroPort has the reputation and track record in China for developing innovative, possibly even disruptive, products. The best example of this is MicroPort’s third generation drug-eluting stent brand named Firehawk. Firehawk is an innovative DES stent which, by virtue of its highly innovative design, requires only half the dosage of drug as competing stents do yet with no decline in efficacy. MicroPort’s stent platform has been internationally recognized by the top clinical investigators in the world and have made it through a 1, 000 patient gauntlet clinical trial which compared its efficacy directly against the best-in-class DES from western multi-national companies. MicroPort has also brought to market innovative endovascular, electrophysiology and diabetes products.
Not surprisingly, therefore, about 20% of MicroPort’s employees are in research & development as befits a company whose founder is also a research scientist. Historically, the company has invested 16-18% of revenue into research and development.
MicroPort tries to represent not only what is best about Chinese culture, but also what is unique. As one manager at MicroPort was quoted as saying in an interview about his company (Source: Online Business School Case by Professor Zhang Wei and Xu Leiping of China Europe International Business School): “Chinese employees are hardworking and have a strong sense of responsibility, but they are also highly sensitive to their work scope and focus on their own job only. The Americans, on the contrary, are ambitious to exceed their own functions and take the other’s job once they’ve finished theirs. Chinese employees are able to endure hardships and are willing to pay additional time and efforts for better results. The Americans, in contrast, put more value on their personal life and seldom work overtime. American engineers are generally more inspirational and creative than the Chinese, but not as careful and detail oriented as the latter.”
Sound familiar?
MicroPort’s Orthopedics
Currently MicroPort’s orthopedic offerings are for spine and trauma indications. Here they are.
Orthopedic sales last year amounted to about 3.6% of MicroPort’s overall 931 million RMB (about $151 million) or about $5.4 million. MicroPort’s profits, however, amount to about 38% of sales, which is about $50 million annually. This is a very profitable company.
With a book value of about $377 million, this $290 million purchase is a significant step forward for MicroPort and represents a major commitment to the orthopedic markets.
What Wright Medical’s Recon Business Means for MicroPort.
Assuming this purchase bid is successful, MicroPort will be acquiring about $300 million in additional sales (assuming very modest incremental penetration into the Chinese orthopedic markets). It triples MicroPort’s sales. And it gives Microport an important beachhead in the North American and European orthopedic markets.
It also provides MicroPort with a high quality production capability in Memphis—the home, incidentally, of Federal Express. Perfect for overnight deliveries to any hospital in North America.
Could MicroPort’s prospective Memphis hub become the basis for new cardiovascular, endovascular, neurovascular, diabetes, electrophysiology and, of course, orthopedic devices for North American customers?
According to MicroPort’s press release and comments from Wright Medical’s analyst call, if all goes well with regulators, due diligence and other issues, the purchase should close before the end of 2013.
Through the course of 2014 MicroPort will be learning about how to do business in the United States using the solid foundation of Wright’s recon implants and instruments. MicroPort will also learn about managing a top flight manufacturing plant in Memphis.
In 2013, investors pushed MicroPort’s stock price up 93%. They clearly like this company and its emphasis on quality and reliability. In the world medical device markets, MicroPort intends to be, like Legend/Lenovo before it, a market leader.
