Medtronic Closes on Kanghui Acquisition, Announces Second Quarter Earnings

As Medtronic closes on its $755 million purchase of Chinese orthopedic company Kanghui, its second quarter report for fiscal 2013 shows continued growth. The company reported worldwide revenue of nearly $4.1 billion for the quarter, an increase of 2 percent over the same quarter last year, adjusting for a hit of $118 million due to unfavorable foreign currency fluctuations. Net earnings for the quarter were $646 million, after the $245 million the company had to pay in litigation costs in its structural heart business. This represents a 25 percent decrease in profit from the same quarter last year, but the company still met Wall Street’s expectations.

“Our second quarter performance reflects the results of our ongoing focus to deliver consistent and dependable growth in a changing healthcare environment,” said Omar Ishrak, Medtronic chairman and CEO. “Our growth was broad-based across several businesses and geographies, driven by continued stabilization of our end markets and the ongoing successful execution of new product launches.”

Closing on Kanghui likely will have an effect on Medtronic’s orthopedics business, which includes surgical technologies, spine and neuromodulation. According to analysts at Leerink Swann, Medtronic fell short of expectation in spine sales. At $782 million, the number was $21 million short of Leerink estimates, showing a decrease of 5 percent as opposed to last quarters 1 percent positive growth. The decrease was mainly due to core spine which was sequentially flat, analysts noted, but Ishrak pointed out on the post-earnings conference call that Medtronic did gain share in its core spine business when compared to the same quarter last year.

Kanghui is Medtronic’s first ever acquisition in China. Based in Changzhou, the company produces trauma, spine, and surgical instrumentation. Soon after announcing proceedings to buy Kanghui, the company announced an agreement to buy another Chinese company, LifeTech Scientific Corp.

“Medtronic will establish a bigger and more direct local presence,” said Chris O’Connell, executive vice-president and president of Medtronic’s Restorative Therapies Group. “Kanghui brings Medtronic a broad product portfolio, a strong local research and development and manufacturing operation, a vast China distribution network and an exceptional management team.”

“We are proud of the company we’ve built and recognize there is a tremendous opportunity to accelerate our global vision by building on Medtronic’s size, scale and expertise as part of this combined organization,” said Yang Libo, CEO of Kanghui.

Lately, Ishrak has been emphasizing the company’s vision to penetrate emerging markets, and clearly China has been where it’s placing its feet firmly on the ground. Leerink Swann analyst Danielle Antalffy views the acquisition as Medtronic’s way of entering the value segment of orthopedics, not only in China but potentially in the United States as well:

“[Kanghui] opens up the possibility for Medtronic to enter the orthopedics market in the United States—these are hips and knees—so it complements their spine business, number one, but allows them to enter the market in the Unites States potentially in the value segment, but potentially also in the more premium priced market, and positions them fairly well,” Antalffy told Orthopedic Design & Technology.

However, as many have conjectured, the price paid for Kanghui seems a little high. The final cost was about 30 times most estimates of Kanghui’s valuation. “That’s at the higher end, particularly for what your getting—a value hip knee player in China,” said Antalffy. “You’re not talking about an established player here.”