A Trend to Low-Cost Imaging?

Mid-cap firm  Mindray Medical  has stepped on the toes of the 800 pound gorillas in the medical device space by offering high-quality imaging devices at cheap prices in the Chinese market. The firm now seeks to make a bigger footprint abroad, by emphasizing its value proposition in the emerging and developed world. In our January issue of Morningstar Healthcare Observer, we took a look at this low-cost provider as well as other trends in the radiology industry, including reimbursement and teleradiology.

The story of Mindray begins in Shenzhen, China. Founded in 1991, the firm develops, manufactures, and markets three product lines: patient monitoring, in-vitro diagnostics, and medical imaging. Within medical imaging, Mindray specializes in producing ultrasound machines and has recently entered the market for digital radiography, a type of X-ray that produces digital images as opposed to traditional photographic film, and emits less radiation. The firm offers 15 different ultrasound systems that can be used in medical fields such as urology, gynecology, obstetrics, and cardiology. The medical imaging segment has displayed strong growth rates; since 2006, it has grown at a compound annual rate of 58%, achieving about $139 million in sales during 2008. While the growth trajectory slowed to 16% in 2009 due to weakness in capital spending markets, we think Mindray has created a strong sales model offering basic and innovative products at competitive prices.

Mindray's marketing pitch rests on three pillars: pricing, development, and distribution. Mindray competes with the multinationals, such as  General Electric (GE), by offering its devices at a 20%-30% discount to those of its international competitors. The firm's devices also garner a 20% premium versus local players, due to its brand name and reputation for quality. A low-cost production structure has enabled the firm to sustain such discounting without decimating margins; gross margins have remained in the mid-50% range since 2006. Mindray's net margin also benefits from a special tax rate of 15% for new and hi-tech enterprises in China. Another key aspect of the firm's profitability is its vertically-integrated production model; Mindray can develop technology tailored to hospital needs, and produce it in-house. Combined, all of these factors afford Mindray a local advantage over its larger rivals, providing support for its pricing strategy.

This research and development structure has also formed another pillar of Mindray's strength. Its large staff of 1,400 people (with 390 dedicated to medical imaging) churned out nine new products during the first nine months of 2009, including digital radiography systems. Mindray supports this staff by investing about 10% of revenues in development each year.

The final pillar of Mindray's strength comes down to its expansive distribution network. Mindray has its own sales and service staff of 1,000 people in China plus 2,000 distributors. About half of these distributors are exclusive. This network enables the firm to reach rural and mid-market hospitals that were once ignored by the multinationals.

For more on Mindray's advantages as well as how we think Mindray fares against its competition, please see the link below.

	Get further analysis, including our take on the future of the radiology industry, at Morningstar Healthcare Observer.		Leveraging Morningstar's comprehensive industry coverage, Healthcare Observer examines complex health-care topics and trends to provide critical insight. Click here to subscribe.