Check on China: China Medical Technologies, Inc.
In the wake of a rash of tainted Chinese-made products such as the blood-thinning drug Heparin, Beijing has made encouraging moves to overhaul and strengthen its food and drug safety regulations.
As a result, China's State Food and Drug Administration (SFDA) and the General Administration of Quality Supervision, Inspection and Quarantine, which oversees food and drug exports, are working diligently to ease global concerns and crack down on substandard drugs and counterfeit medical devices. Together they already have implemented nationwide quality-control inspections and are setting up SFDA offices in three Chinese cities.
The promise of lasting reforms along with the prospect of cutting costs and tapping an ever-growing Chinese market is attracting large medical device makers to China. General Electric Co. (NYSE:GE), Koninklijke Philips Electronics NV (NYSE:PHG), Siemens AG (NYSE:SI), Medtronic, Inc. (NYSE:MDT) and others are stepping up their manufacturing presence in the mainland.
One domestic player unfazed by the arrival of multinational giants is China Medical Technologies, Inc. (Nasdaq:CMED). The Beijing-based biotech company develops, manufactures and markets non-invasive medical devices that include advanced in-vitro diagnostic products utilizing a high-intensity focused ultrasound (HIFU) therapy system to treat solid cancers and benign tumors; and enhanced chemiluminescence (ECLIA) technology and fluorescent in situ hybridization (FISH) technology, used in the detection and monitoring of various diseases and disorders. China Medical's two key products, HIFU and ECLIA, have about 70% market share in China. And the company's R&D lab is close to the cutting edge of being one of the country's most productive sources of innovation in advanced in-vitro diagnostic systems and high-intensity focused ultrasound products.
The HIFU system, which uses high-intensity beams to destroy cancerous tissues and tumors, has been used to treat tumors (breast, kidney, liver, pancreas, uterus, pelvis, bone, limbs and superficial tissues) in more than 40,000 patients in China since 1999. HIFU is primarily sold to state-owned hospitals, which make up the majority of health-care facilities in China, but the Korean Food and Drug Administration has granted approval to use the devices in South Korea. China Medical has also inked deals with distributors for the Japanese, European and Russian markets, and most significantly, HIFU is currently undergoing clinical trials at the University of Washington Medical Center in Seattle, a stepping stone to FDA approval and access to the American market.
ECLIA is an increasingly popular procedure used to diagnose diabetes, hepatitis, SARS, Down Syndrome, thyroid disorders, liver fibrosis, tumors, as well as to measure infertility factors. In Janury 2008, the company completed its $28.8 million cash acquisition of Beijing Bio-Ekon Biotechnology Co., Ltd, a fast-growing ECLIA player in China. The move is expected to strengthen China Medical's position in the ECLIA market in China.
FISH is an imaging analysis tool that uses a probe with fluorescent dye that allows technicians to analyze DNA (under a microscope) for signs of hereditary disease, the early detection of cancers, and for pre-natal and post-natal screening. China Medical acquired FISH technology in March 2007 and began selling FISH machines in China in June 2007. FISH has experienced breakneck growth since its launch last year, realizing profit margins in the 80% range.
The Chinese medical device market is booming and the company is riding a wave of success on soaring sales in its diagnostics business. Last month China Medical beat Wall Street's expectations when it reported 74% growth in quarterly revenues year over year to $40.5 million. Net income came in at $15 million, or $0.53 per American Depositary Share for the fourth quarter ended March 31, 2008. The company has impressive operating margins of 51% and a PEG ratio of only 0.47 below the current industry average of 1.42, making it a relative bargain. Pundits are bullish. Credit Suisse, which maintains an "outperform" rating on China Medical, views the firm as a long-term growth play that is undervalued.
As the nation becomes increasingly prosperous and more Chinese adopt unhealthy lifestyle habits, the incidences of serious health problems are on the rise. Consequently, heath-care spending is on the upswing. The need for adequate health care for China's still-growing population of 1.3 billion will no doubt provide a fertile market for the company's products.
And according to the National Population and Family Planning Commission of China, there are more than 300 million women of child-bearing age in China and one in 10 couples experience infertility problems, a fact that should play into the hands of China Medical's ELCIA business, which is growing faster than any other segment. Investing in CMED could prove to be a healthy move.
Shares closed at $43.07 on Wednesday. The stock has traded between $27.35 and $57.50 over the past 52 weeks. The Street has a $54.50 consensus one-year target.
