Mindray, Zonare merger in works

Mindray Medical International Ltd's acquisition of a US maker of high-end ultrasound machines gives China's largest medical equipment maker a strong sales force in North America and Europe that will help it reach its goal of becoming a leader in the market for premium imaging products, an analyst says.

"The ultrasound market is about to get transformed with the combination of Mindray and Zonare (Medical Systems Inc)," analyst Chris Katje said.

Shenzhen-based Mindray two weeks ago agreed to acquire Zonare, a California maker of high-quality ultrasound devices for the radiology industry, for $105 million. The deal, which requires regulatory approval, is expected to close in the third quarter. Ultrasound uses sound waves to create images of the inside of the body.

In 2008, Mindray acquired Datascope Corp's patient monitoring business to become the third-largest player in the global patient monitoring industry, aiding its expansion in the US and Western Europe.

With the Zonare acquisition, Mindray gets a 14-year-old company which is yet to turn a profit, but which has R&D capabilities seen as feeding Mindray's appetite for new products. Mindray, seen as a bellwether for the Chinese medical technology industry, has maintained revenue growth by bringing out several new products each year.

"Look for Mindray Medical to acquire more companies and introduce several new products in the American market in 2013," Katje wrote.

The acquisition is also expected to help Mindray develop high-end ultrasound machines for the Chinese markets and emerging markets - a potentially significant source of sales, Katje said. Zonare has a direct sales force in the US, Canada, Germany and the Scandanavian region.

Mindray has said it expects to see strong sales in China and emerging markets this year. Zonare has over 70 patents, but no intellectual property in China.

Mindray has been boosting market share in the competitive ultrasound business since 2011, helped by acquisitions. Katje sees the segment as key to the company's growth, as sales slow in its largest division, patient monitoring. Growth in medical imaging, its smallest business, will "increase rapidly" with the acquisition, Katje said. Zonare is known for its Zone-Sonography imaging technology which it sells to the high end of the market worldwide.

Zacks.com, however, cautions that Mindray's competitive advantage in the premium ultrasound-radiology market it plans to enter is unclear. "Also, on the negative side, health care reforms in China and the US may reduce demand for Mindray's products," Zacks wrote in a June 17 note to investors. "Competition is fierce and leads to price erosion over time."

Mindray said it plans to maintain Zonare's management team, which is led by President and CEO Timothy Marcotte. Marcotte said the deal "will create a global ultrasound company that is better positioned to serve the healthcare market on worldwide basis". He said customers would "continue to benefit from the high level of innovation, quality and services provided by the Zonare brand".

The acquisition is expected to reduce Mindray's full-year earnings this year and next.