Shenzhen medical-equipment maker leaps to No 3 in sector Mindray Medical International, the mainland's largest medical-equipment maker, expects a significant boost in sales across the United States and Europe after its acquisition of medical-technology assets from American rival Datascope last quarter. Shenzhen-based Mindray, whose products are distributed to medical facilities across the mainland, in March paid US$202 million for the patient-monitoring systems division of Datascope, a 40-year-old business with annual revenue half that of Mindray. That acquisition vaulted Mindray, which only began exporting products in 2000, into third place among the world's largest suppliers of patient-monitoring devices, with a 9 per cent market share, according to research firm Frost & Sullivan. The patient-monitoring segment is led by Dutch firm Royal Philips Electronics, with a 38 per cent share, and GE Healthcare, with 27 per cent. At the end of last year, Mindray sold more than 312,350 devices in about 140 countries. In the second half of 2006 revenues generated from international markets exceeded domestic revenues for the first time in the company's history. North America accounted for 6.8 per cent, roughly US$20 million, of Mindray's US$306 million total revenue last year. The business acquired from Datascope recorded US$161.3 million in sales last year, 70 per cent of which came from the US and the rest from Europe. The acquisition was not well received by investors when it was first announced, said Jinsong Du, analyst at Credit Suisse. The share price of Mindray underperformed the MSCI China index by 12 per cent in March, after its Datascope purchase. Cheng Minghe, one of Mindray's founders and its executive vice-president of strategic development, said: 'We have developed the US market for over three years. Although the growth is great, our base is too small. The move will significantly increase our size and our infrastructure there.' He said the Datascope acquisition could solve a key challenge Mindray faced in its expansion in the US. 'Unlike those in China, most hospitals in the US market buy their equipment through group purchase organisations (GPO). Without a connection to the GPO and a local service team, they will not consider a product, even if the price is good.' Datascope has a direct sales force and a direct service team covering the US, as well as connections to all the major GPOs, such as Amerinet, Healthtrust and Broadland. It also has operations in France, Germany and Britain, covering the western European market. One fund manager said he believed operating margins could improve from zero to 10 to 15 per cent if Mindray did a good of job cutting costs. 'Mindray's management is pretty good, but, yes, there are some risks as it is their first acquisition,' he said. Mr Du believes improvement in Datascope's margins is easier and simpler to achieve than the market expects. An improvement to an operating margin of 30 per cent looked achievable, he said. But the two companies are very different from each other. Mindray is a fast-growing, high-margin company, with over 60 per cent growth in profit and a more than 25 per cent increase in net margin. Datascope is an ageing business with 5 to 6 per cent annual growth and nearly no profit margin. The poor record of Chinese foreign acquisitions - TCL's acquisition of Thomson, for example - also raises concerns. In the near term, Mindray will keep most of the existing 440 staff, and all of its 30 top managers. Gradually, it would move more and more research and manufacturing to China, said Mr Cheng. This should be easier to do than the market expected because Datascope had outsourced most of its research and manufacturing. Also, Mindray had already been a contract manufacturer for Datascope for six years, making two models of the company's patient-monitoring devices, he said. Starting from the third quarter, some of Datascope's outsourced research work would be done by Mindray's team in Shenzhen, and from the fourth quarter some of Datascope's components would be made in Shenzhen, Mr Cheng said. He expected a net gain of US$30 million from cost savings and a faster introduction of new products by 2011. In addition, there would be opportunity for using the Datascope sales and service network to promote other Mindray products in the US, such as its ultrasound imaging system and in vitro diagnostic products. The fund manager believed the acquisition would be worthwhile if Datascope's network could be used to sell Mindray products. However, he was concerned about cultural differences.