Orthopedics is simply one of the foundational pillars of all medicine. Demand for orthopedic medical products and services will likely never, ever decline. Whether the issue is trauma (fractures, wars, auto accidents) or arthritis or congenital defects like cerebral palsy or back pain…global demand currently exceeds supply and will be rising for as long as anyone cares to forecast.
Any company that aspires to be a diversified provider of medical products and services eventually comes to orthopedics. The only other sector that could arguably approach orthopedics in terms of universality and rising demand is wound care. But even wound care doesn’t reach the sheer patient volume and diversity of orthopedics.
So when MicroPort, the Shanghai-based (and Hong Kong exchange traded) medical device company decided to diversify it went to orthopedics AND the United States.
This impressive two-fer is, in retrospect, a notably smart strategic coup. Since MicroPort’s purchase, Smith & Nephew plc bought ArthroCare Corporation, Zimmer Holdings, Inc. bid for Biomet, Inc. and Stryker Corporation is evaluating the purchase of Smith & Nephew. Orthopedic equity values are rising as buyers are realizing that the number of large joint recon suppliers is rapidly shrinking.
There is a scarcity value to large joint reconstruction companies.
Who Is MicroPort?
Simply put, MicroPort is the most interesting company in large joint recon.
This 16-year-old company was founded by the former VP of R&D for Atlanta-based Cryomedical Sciences, Inc.—Dr. Zhaohua Chang. Dr. Chang was raised in China where he earned a master’s degree in cryogenics (his Ph.D. degree in biological science is from the State University of New York) and realized the clear need for a Chinese-based medical device company.
So in 1998 this scientist, author of more than 40 peer-reviewed articles and holder, at the time, of five patents, founded MicroPort Scientific Corp.
MicroPort’s first products were 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.).
With the backing of the Chinese government MicroPort 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. Eventually it hopes to hold the #1 share in China’s orthopedic 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.
As befits a company whose founder comes out of research about 20% of MicroPort’s employees are in research & development and the company invests 16-18% of revenue on R&D.
Innovation Economics, Not Scale Economics
In the five months since MicroPort (MPO) closed on its $290 million purchase of Wright Medical’s large joint recon business, a clear (and increasingly unique) direction is emerging—innovation over scale.
Said Ted Davis, CEO of MicroPort Orthopedics and Chairman of MicroPort’s InterContinental Executive Committee (IEC) responsible for businesses outside of China: “This is the time to turn the innovation engine back on. This year we doubled our historic rate of R&D spending. Wright Medical had a strong history of innovation in large joint reconstruction. But in recent years that was shifted in favor of increased investment in extremities.”
Indeed, for the past several years, it seemed as though Wright Medical, as it was investing in foot and ankle, biologics or hand and wrist technologies, was harvesting the large joint recon business to fund extremity R&D.
Such an explicit commitment to innovation stands in contrast to what appears to be scale economics driving decisions at the larger hip and knee recon firms. Indeed, hip and knee reconstruction appears to be consolidating into three firms—Zimmer, DePuy and Stryker.
Commenting on his industry’s recent urge to merge, Davis said: “Orthopedics is seeing price compression for the first time in 20 years. How to deal with price pressure? Larger players with larger infrastructures are cutting pay for distributors and looking for ways to economize wherever they can, for example with synergies from mergers.”
Added Jonathan Chen who leads MicroPort’s International Businesses and is co-chair along with Davis of MicroPort’s IEC, “for MicroPort this is a great opportunity. Our purchase of Wright’s large joint business was the first of the current merger wave and we’ve had a full year to bring these two companies (MicroPort and Wright’s large joint recon) together. We can now play offense.”
MicroPort’s Growth Plan – Innovation and Geographic Leadership
In 2013, Wright’s sales of hip and knee implants were $231 million (FYI – 2012 was $269 million). The brands are DYNASTY and CONSERVE hip implants, PROFEMUR stems, SUPERPATH minimally invasive hip surgical instrumentation and ADVANCE and EVOLUTIONmedial-pivot knee systems.
Considering that the global hip and knee recon market is about $14 billion, MicroPort starts with just under 2% share of that market.
Leveraging off MicroPort’s strong reputation in China, these former Wright Medical large joint implants and instruments should attract, at a minimum, an equivalent share of the $1.3 billion projected Chinese recon market in 2018 for another $30+ million, bringing the total business size, prospectively, to $300 million.
Added Chen, “Geographic expansion of the Wright Medical’s brands was part of our original thesis for the acquisition and it is coming to fruition—especially in the Chinese orthopedic market. Demand for MicroPort Orthopedics in China is strong and exceeding our forecasts. We can’t produce instruments fast enough to meet demand.”
MPO’s biggest challenge, said Chen, was access to Western surgeons with familiarity of the Wright instruments and implants to train the Chinese surgeons. While the company only has 2% global hip and knee market share currently, according to Davis and Chen, there is 98% upside.
THE Fast Recovery Company
According to Davis, MPO’s vision is to use innovation to drive market penetration and, at the hospital level, economics and improved outcomes. There are two elements to MPO’s vision:
- Design implants, instruments and procedures which speed up hip surgery recovery. In this vision, the sale is less about the “widget” and more about the procedure. MPO’s focus is on becoming THE fast recovery hip surgery company via innovative implants, instruments and procedural innovation.
- MPO begins with a strong medial pivot knee platform. Wright Medical made a strategic decision to invest in its extremities business and didn’t allocate the resources to push the medial pivot since the development of the EVOLUTION system. As a result it never really captivated the U.S. market. That’s changing under MPO, said Davis. The key is data and, Davis told OTW, the company is approaching 15-year data on its medial pivot knee. Fifteen-year data is indeed a strong platform upon which to launch a renewed effort to capture knee market share.
#1 Chinese Ortho Company: Made in Memphis
Every company in orthopedics has a China strategy. But MicroPort IS China.
Both Davis and Chen made it clear that MicroPort’s goal is to become the orthopedics market leader in domestic China—currently the second largest economy but if growth continues at current rates, could soon be #1.
Wright Medical’s large joint recon business had a presence in approximately 60 countries, including China, before MicroPort. With MicroPort, these implants could quite possibly become the largest selling hip and knee implants in China. That those implants would be designed, forged and packaged within hailing distance of Beale Street is, well, quite the deal.
To support this long term plan, MicroPort announced this past week that it would expand its Arlington, Tennessee, headquarters operations to include a surgeon training facility and invest $100 million over the next five years “in product design, manufacturing capability, and world-class training and education facilities.”
The expansion is expected to create 171 jobs.
Said CEO Davis: “The team at MicroPort Orthopedics is excited to partner with the state of Tennessee to expand our operations. Together, MicroPort and Tennessee will create high-quality jobs, attract and retain top caliber employees, and manufacture world-class medical devices for the global orthopedic market. We truly appreciate the support we have received from our state and local officials, especially those working in the Department of Economic and Community Development.”
MicroPort Orthopedics: the most interesting hip and knee company in orthopedics.
