China Medical Technologies (CMED)

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Nathaniel Whitney

Zach Scheidt

Business

China Medical Technologies was originally called Beijing Yuande Biomedical Engineering Engineering Limited. It has benefitted over the years since 1999, by government grants for research and development, primarily for a system to ablate tumors using high intensity, focused ultrasound to heat the tumors. For some time the company focused on marketing its HIFU (High Intensive Focused Ultrasound) product, which is used to treat various tumors. The system had most acceptance in fibroid tumors of the reproductive system, but was reported to be used in tumor ablation as a last resort, after more conventional treatments. Their main competitors in China, Chongqing Haifu and Shanghai A&S Science and Technology, have questioned their reported sales numbers. Their target market was the larger, major city hospitals. HIFU, and particularly HIFU that required repeated treatments to ablate, such as the CMED unit, achieved popularity, mostly due to the profitablity of the treatment for the hospital, which included repeated, highly profitable medical imaging to view the tumors between sessions. Some of the units placed were on revenue sharing arrangements rather than outright purchases. The opportunity to sell more units domestically dwindled. But rather than accept a slowing growth trajectory, management began exploring opportunities to sell their products outside of the mainland. According to CMED financial reports, the success in the international markets was little and the major, reported market remained in China. Despite the dwindling market, CMED reported very impressive sales growth each year.

As early as 2004 Yuande developed an enhanced chemiluminesence immunoassay system (ECLIA) for analysis primarily for infectious diseases and markers in the blood. Chemiluminesence is the technology being employed by the major foreign companies who dominate the segment in China. In contrast, the local manufacturers compete only with ELISA technology, which is not as accurate. The CMED system was far more manual than the foreign brands and received acceptance only in the lower level hospitals with fewer tests being done. These lower level hospitals have suffered financially and have not been able to compete with the large institutions for patients able to pay.

In 2007, the HIFU business was sold to a company owned by the founder and chairman of CMED, Mr. Xioadong Wu, who then had difficulty getting US FDA approval and the renewal of the Chinese SFDA certification. CMED company filings show that Mr. Wu requested a refund of some of the payments because of this situation. It is unclear how this business is currently doing or would have done if not sold, as it was taken private, and lost transparency..

At about that time, an acquisition allowed the company to step into the diagnostic equipment business and molecular diagnostics, effectively re-tooling the company’s path and core business. CMED purchased the FISH (fluoresence in-situ hybridization) business for $138 million from Jin Pu Jia, when little was known in the China marketplace about this company. Recently the name of the company has been changed to GP from Jin Pu Jia.

Nearly two years after the acquisition, the new FISH product line (Fluorescent In Situ Hybridization) now accounts for a large portion of the company’s reported revenues. CMED has spent the last two years aggressively building the installed base of machines across the country. CMED has used the internet to actively promote a program whereby a laboratory can become a researcher using the CMED FISH hardware and receive free reagents. This program offered both the hardware and reagents for free with a membership fee of approximately $30,000. However, some of the labs who could not pay were allowed to participate without a fee. The offering by CMED was less costly than the successful foreign brands such as Abbott and Roche, but used technology that was less sophisticated, such as three optical filters in the imaging system vs. five optical filters in the foreign brands.

FISH and diagnostics, in general, are not expected to run into into the same issues it faced with the therapy systems because these product lines use a significant amount of reagents to perform the tests. These reagents now provide the company with a stable, reliable revenue stream and are a very profitable part of the company’s business. With historic gross margins at nearly 80% for the consumable products, the company should continue to benefit from the growing number of diagnostic machines being used.However recent reports from the company indicate that the competition in ECLIA are driving their prices down, and they have annocunced a 30% price reduction..[1]

Valuation The company has a March fiscal year end and is reporting slower revenue growth. Recent earnings reports from the company indicate that the management was hampered by an internal investigation arising from an anonomous letter to their auditors of fraudulent practices, to which they had to respond. Their internal audit has found no wrongdoing and they have since replaced their auditor. The stock price has been wavering around 15 for some time now despite huge growth in the China IVD market, government stimulus package and $125 billion in new Healthcare reform spending for 2009, 2010 and 2011, and very positive press releases from the company.

Trends and Forces

Geographic Reach

CMED’s primary market is China, but the geographic reach of the company is beginning to expand. With positive announcements in Korea and potential Japan and Russian deployments, the addressable market could quickly ramp higher. While it would likely take several quarters to grow the installed equipment base to a level that generated strong reagent sales, the long-term fundamentals point to some very exciting potential growth initiatives.

Acquisitions

future acquisitions are expected to be a key part of the company’s growth strategy. Management has proven its ability to seek and purchase new business lines which enable its sales team to leverage their relationships by selling new products to many of the same clients. In January, the company announced the purchase of Beijing BioEkon, which is a small diagnostic company. The purchase brings a new automated diagnostic system into the suite of products offered and should propel reagent sales even further. Additional acquisitions should be expected over the next several quarters.

References