cmt-shells-out-345-million-for-new-technology

CMT shells out $345 million for new technology

The latest acquisition by China Medical Technologies comes with a price tag of more than five times its 2008 earnings, reflecting the Chinese firm's hunger for new technology to boost its prospects.
Beijing-headquartered medical equipment company, China Medical Technologies, has entered a $345 million agreement with Molecular Diagnostics Technologies to purchase its HPV-DNA biosensor chip and surface plasmon resonance analysis system.

The technology CMT is buying is used in the detection of human papillomavirus, which causes cervical cancer and sexually transmitted disorders. CMT is in the process of diversifying both the composition of its revenues and its product offering to secure its future revenues. And the technology acquisition continues a shift in focus: from therapeutic products to diagnostic equipment. In vitro diagnostic equipment is expected to account for around 80% of total revenues in fiscal year 2009.

The deal comes a little under two months after CMT issued $240 million worth of convertible bonds, with the stated aim of funding acquisitions. Credit Suisse advised the company on the latest acquisition and also arranged the CB together with Morgan Stanley.

The company will use available cash to pay for the technology in instalments, over a period of one year after finalising the deal. No regulatory approval is needed and the transaction is expected to close by January next year.

CMT is paying aggressively for the new technology; $345 million is equivalent to over five times its net income in fiscal year 2008. This suggests that the company is both hungry for new products and confident that this purchase will boost its revenues and profits. In a statement the company says that in fiscal year 2009, it expects the HPV Chip to bring in between Rmb160 million ($23.6 million) and Rmb180 million.

For the same year, it believes that the purchase will quickly be accretive to its earnings per American depositary share (ADS), based on a diluted share base of 36.2 million ADS, by between Rmb1.1 and Rmb1.4 in fiscal year 2009. It expects significantly higher increases in later years.

A Citi research note says that "the deal makes a lot of sense", considering the size of the HPV market, estimated to reach up to $700 million. CMD has its own direct sales force, which can bundle the HPV chip with its existing portfolio of diagnostic tools, namely the FISH probes, which are used in the confirmative diagnosis and prognosis of a range of cancers.

Other HPV detection products are available in China, with prices ranging from $35 to $40 per chip. CMT expects to sell between 800,000 and 1 million chips in the first year of sales at the lower price range of between $24 to $33 per chip. The HPV chip has a gross margin of around 80%.

Citi says that CMT "has been trading off significantly recently based on market weakness" and adds that it believes the acquisition is "a positive and removes an overhangö. As a result Citi has changed its earnings estimates for the company. The fiscal year 2008 earnings per share estimate was lowered after the convertible bond was issued, and Citi has reduced it by 6% to $2.87 from $3.06. Its estimate for 2009 remains the same at $4.03, while the 2010 estimate has been increased by 4% to $4.85.
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