MicroPort aims to raise $198 million from Hong Kong IPO

The medical equipment maker is the second Chinese medical play to tap the Hong Kong market this month, testing investor confidence in the country's healthcare reforms.

MicroPort Scientific, a Chinese medical equipment maker, will start taking orders from Hong Kong retail investors today for its up to HK$1.54 billion ($198 million) initial public offering after launching the institutional portion of the sale on Friday. The company plans to use the proceeds to fund product marketing and an expansion of its distribution network.

Microport is the second Chinese medical play to tap the Hong Kong equity market this month after China Medical System, a pharmaceutical product marketing company, which kicked off its $129 million IPO on Thursday last week. The two companies will test investor confidence in China's healthcare reforms, which are crucial for the growth prospects of the nation's medical and pharmaceutical companies.

As health insurance in China is still very limited in terms of what it covers, getting sick can be a costly proposition. Most medical expenses are settled directly by household savings and drugs and treatments that are considered expensive may be ignored by patients -- something Microport views at a potential risk to its business.

“If patients are unable to obtain reimbursement from governmental or private health insurers for any product of ours, they may decide not to use that product,” the company said in its IPO prospectus.

Moreover, the regulatory environment and industrial misconduct have damaged and may continue to cause adverse impact to the company's operations and reputation, it said. The statement refers to an earlier bribery case which in late 2006 saw a former director of the division of medical devices at China's State Food and Drug Administration (SFDA), Hao Heping, being sentenced to 15 years in jail for requiring and receiving gifts and payments from several medical device manufacturers in China, including MicroPort.

Under the SFDA's procedures, Hao's signature was a required part of the approval process in respect of the issuance of a registration certificate for medical devices, MicroPort said in a statement. Former senior executives at MicroPort gave Hao around Rmb260,000 ($38,235) in total to obtain such approvals, and the executives were reimbursed by the company for part of those bribes, it added.

MicroPort is offering 252.74 million new shares, or 18% of its enlarged share capital, at a price of HK$4.60 to HK$6.10 apiece. That means the company could raise between HK$1.16 billion and HK$1.54 billion -- or up to HK$1.77 billion if a 15% greenshoe option is exercised in full.

The price range translates into a price-to-earnings (P/E) ratio of 25 to 33 times, based on the company's net profit in 2009, which amounted to Rmb186.4 million ($27.4 million). Its net earnings for the first half of this year are estimated to be about Rmb140 million, the company said.

The final price will be fixed on September 17 and the trading debut is scheduled for September 24. Credit Suisse is the sole global coordinator for the offering and also acts as joint bookrunner together with Piper Jaffray.

The Shanghai-based company produces and sells devices for keyhole surgery and treatment of vascular diseases and disorders. Its products were used in over 1,100 hospitals across China between 2007 and 2009. MicroPort has a marketing team of more than 130 staff, which promotes medical devices through direct visits to physicians in hospitals. Recommendations from physicians play an important role in the sale of its products, it said.

The prices of medical devices in China are falling around 10% each year, as the device producers compete by cutting costs to boost sales, and the government encourages all players in the industry to lower product prices in order to make medical treatment affordable to all citizens.

“We don't expect the prices to drop too fast [as] a price war will damage the development of the industry, which is still at an infant stage,” Wang Li, chief operating officer of the company, told reporters in Hong Kong yesterday.

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