Medtronic Moves to Widen China Footprint

HONG KONG -- Medtronic Inc. is buying a 15% stake in a Chinese medical-device maker for 1.73 billion Hong Kong dollars (US$221 million) and is launching its first joint venture in Asia.

The Minneapolis company agreed to buy 80.7 million newly issued H shares of Shandong Weigao Group Medical Polymer Co. at HK$11.14 a piece. H shares are shares of mainland Chinese companies that are listed in Hong Kong. As part of the investment, Medtronic is also buying unlisted shares of existing Weigao shareholders.

"Strategically for us, China is where we wanted to expand our footprint," said William Hawkins, chief executive officer of Medtronic.

Medtronic and Weigao will form a partnership, in which Medtronic will have a 51% stake, with Weigao owning the remainder. Medtronic also will have the right to nominate two nonexecutive directors to the board of Weigao, based in China's Shandong province.

The deal is subject to approval of Chinese regulators and Weigao's shareholders. Under the terms of the transaction, both companies will contribute products focusing on the treatment of spinal injuries and orthopedic ailments. Through the joint venture, Medtronic will distribute devices used in spinal-fusion surgery, while Weigao will offer artificial knees and hips.

While Medtronic is attempting to widen its reach in China, Weigao's chairman, Chen Xue Li, said his company hopes to improve its product quality by collaborating with Medtronic as well as increase the array of products it offers in its home market.

China represents a potentially huge market for medical devices. It is estimated that tens of thousands of Chinese suffer spinal-cord injuries each year, both because of the country's large population and because of dangerous workplace conditions as China rapidly modernizes. Many patients are construction workers, coal miners and victims of the world's highest number of auto accidents. Meanwhile, Chinese companies have been tapping the technical expertise of their Western counterparts.

Medtronic already does some manufacturing in China, as well as sales and marketing of cardiac products, including pacemakers. The company currently gets between 2% and 3% of its $12.3 billion in annual revenue from China. By comparison, Japan, Medtronic's second-biggest market by sales after the U.S., accounts for about 5% of its revenue.

"We think that within five to 10 years, China will surpass that," Mr. Hawkins said.

Medtronic has also undertaken small-scale research and development on the mainland. For instance, in June, it unveiled Chinese-language programmers used to monitor pacemakers following implantation. The programmers, which resemble laptop computers, allow physicians to adjust the settings of a pacemaker to accommodate the level of activity of a given patient's lifestyle.

The version developed in China was also about one-quarter the size and weight of Medtronic's standard product, making it easier to transport.

Mr. Hawkins estimates that there are around six million people in China who have heart problems that could be treated with pacemakers.

*** The crown jewel of Weigao is 50% of JWMS, contributing 25% of net profit in weigao for 2007 and at least 30% net profit in 2008.