A Changing Landscape in Medical Devices

Asia Population Density Map
Image by jeffmcneill via Flickr

The usual suspects (Medtronic, St. Jude, J&J, Boston Scientific, Olympus, Stryker, Zimmer, Covidien, GE Healthcare, Hologic and others) continued their usual growth-via-acquisition strategies in 2010. Last year I wrote about two of the more notable medical device exits: St. Jude’s option to purchase CardioMEMS, and Medtronic’s deal to acquire Ardian.

However, a less-noticed acquisition in December 2010 may turn out to be the most notable medical device deal of all. This relatively small acquisition heralds the entry of a significant new player into the medical device industry, and marks the beginning of a shift in the geographic landscape of the medical device industry.

While the rapidly growing economies of China and India continue to capture business headlines, Korea is the Asian country I’m watching in medical devices. On December 14th, Korea’s Samsung Electronics made its first significant foray into the global medical device market via its purchase of a controlling 43.5 percent stake in Korean ultrasound system manufacturer Medison, as well as 100 percent of Prosonic Co., Ltd., a manufacturer of transducer probes and cables for ultrasound devices.

In their press release Samsung stated that the investment comes “as part of strategic focus on medical devices.”

The ultrasound diagnostics device segment provided a logical entry point into the healthcare equipment market due to technological similarities and potential synergies with Samsung’s existing consumer electronics and IT products and technologies.

“We aim to combine Medison’s expertise and advanced technology in diagnostics ultrasound devices with Samsung’s resources, global network, design and other technological capabilities to create differentiated medical diagnostic solutions for the global market,” said Sangwon Bang, Senior Vice President and Head of the Health & Medical Equipment (HME) Business Team, Samsung Electronics.

In the same release, Samsung also publicly announced that it launched its first healthcare equipment product in June – a portable, professional-use blood analysis device, initially available in the South Korean market.

Earlier in the year, on May 11, 2010, Samsung announced its plan to grow its business via investments in several new sectors, including medical devices:

Samsung today announced a long-term plan to invest … 1.2 trillion won in development and manufacture of electronic healthcare equipment with an initial focus on external diagnostics tools such as blood testing devices. Expected to create revenue of 10 trillion won annually and employ 9,500 people by 2020.

At today’s exchange rates, that’s $1B of investment targeted at a $9B annual run rate by 2020.  That’s serious growth.

According to an article on Bloomberg:

The purchase is more significant as a signal of Samsung’s direction than for any financial impact. Medison’s revenue amounted to 154 billion won ($134 million) in the first nine months of the year.

Samsung bought 68 percent of Ray Co., a closely held South Korean dental-equipment maker, Chenny Kim, a Samsung spokeswoman, said on Sept. 1.

And, according to the Wall Street Journal:

The decision to enter the medical-products field mirrors that by manufacturers in other countries—including General Electric Co. in the U.S. and Philips Electronics NV in the Netherlands—in decades past as the competitive landscape changed and earnings from consumer electronics faded. GE today is only a marginal player in electronics, while Philips gets only about one-fourth of its revenue and profit from electronics.

While we shouldn’t make too much of just one (albeit deep-pocketed) Korean company, I won’t be surprised to see others follow. Samsung is a business leader in Korea. As Samsung begins to achieve success, I expect other Korean manufacturers to follow Samsung into the device space. I spent 2008 and 2009 developing aesthetic devices, and Korean aesthetic device startups were beginning to turn out good products at low price points. So I’ve seen what’s possible. Korean companies are strategically focused and professionally managed. Korea has built large world-class firms in several industries. The business and legal infrastructure is set up for success.

Contrast Korea with China. In a recent post, Flybridge Capital’s Michael Greeley laments the “structural issues in the Chinese economy” and the “poor operating and financial conditions of many Chinese enterprises.” Having sold product into China, I agree that the business and legal infrastructure there is not yet what it needs to be.

I could be wrong and the medical device landscape could still shift more strongly towards China and India.   China’s Mindray Medical is building a global medical device business.   Taiwan-based contract electronics manufacturer FoxConn (maker of the iPhone and iPad) just announced a $15M biomedical investment fund.   India’s Opto Circuits recently acquired US-based Cardiac Science.  But with the data available today, I’m keeping a closer watch on Korea.

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