Deal focus: CPE backs MicroPort's medical devices agenda

Heart disease is the number one cause of death globally, but its treatment has become cheaper and safer for patients in recent years following the introduction of minimally invasive therapies in place of open-chest surgeries.

MicroPort CardioFlow Medtech (MCM), a spinoff of Hong Kong-listed MicroPort Medical, is at the forefront of this movement in China as a manufacturer of artificial valves that are installed through minimally invasive processes. It targets valvular heart disease, where the valves become too narrow and hardened to open or close fully.

In 2019, approximately 213 million patients worldwide suffered from the disease, which caused 2.6 million deaths, according to Frost & Sullivan. It is also increasingly prevalent in China, with the number of cases expected to reach 40.2 million by 2025, up from 36.3 million in 2019.

MCM listed in Hong Kong on February 4, raising HK$2.5 billion ($324 million) through the sale of 205 million shares at HK$12.20 apiece. The stock ended its debut day at HK$22.20. On February 9, it closed at HK$19.24, which translates into a market capitalization of HK$45 billion ($5.8 billion). Investors include CPE, CICC Capital, Hillhouse Capital, GIC and Taikang Life, among others.

CPE led a $130 million pre-IPO round for MCM at a valuation of $1.2 billion last April, making an individual contribution of $50 million. It put in another $20 million as a cornerstone investor in the IPO and currently holds a 3.89% stake.

Ties that bind

This is just one aspect of the private equity firm’s relationship with parent company MicroPort. CPE participated in a private placement for MicroPort last year – the stock has since gained 130% - but the company’s appetite for spinouts is what really drew its attention. These began with MicroPort Endovascular MedTech (Endovastec), a manufacturer of stents and other surgical equipment.

“We had been following MicroPort for a long time on the secondary market. When it applied for a Star Market IPO for Endovastec in 2019, we realized there would be more spinoffs. Endovastec’s successful IPO provided a clear exit channel. This was a critical point for us in deciding to back the group’s other spinoffs,” says Chen Chen, a principal responsible for healthcare investment at CPE.

The GP has since supported two more spinouts. Last August, it participated in a RMB300 million ($43 million) investment in MicroPort EP MedTech, a manufacturer of surgical equipment used to treat irregular heart rhythm, and one month later co-led a RMB3.5 billion ($512 million) round for surgical robot division MicroPort MedBot. Both are prepping for Star Market IPOs.

Pursuing IPOs in different markets is intended to put businesses in front of investors who understand them the best, explains Chen. Overseas investors might have a strong grasp of valve-related medical devices because there is a comparable company listed in the US, Edwards Lifesciences. Meanwhile, MCM’s direct competitor Venus Medtech went public in Hong Kong in 2019 and has been well received by investors.

MicroPort MedBot is targeting the Star Market in part because of Tinavi Medical Technologies, another surgical robot player that listed there last July. Tinavi’s stock soared on debt, and despite then falling back, it still trades at a 230% premium to the IPO price.

CPE’s support for MicroPort spinouts is rooted in a confidence in the company’s R&D capabilities and its platform-based strategy.

“In the past, Chinese medical device companies made single-point breakthroughs with a single product. This is risky from the investment perspective. If the product price fluctuates or further R&D fails, the overall risk is much higher than for a company with a long product line,” says Chen. “With a matrix of products, there is scope to share sales channels, which creates synergies in commercial development and sales cost controls.”

The spinouts appear to inherited their parent’s platform approach. MicroPort MedBot has four kind of robots: one in the clinical registration stage for laparoscopy, a second for orthopedic joint replacement, a third for vascular surgery, and a fourth that can be used to test for lung disease.

Building a platform

MCM’s core product is a transcatheter aortic valve implantation (TAVI), an artificial valve that is deployed within the malfunctioning old one.

Known as VitaFlow, it is one of five approved or commercialized TAVI products in China and the first to use more durable bovine materials. Meanwhile, the motorized delivery system is said to be a global first. It is an important component because when the valve enters the heart it pushes against the blood flow, which generates high pressure. Electronic controls increase the stability and accuracy of the operation.

Approximately 2,400 TAVI procedures were performed in China in 2019. The penetration rate was 0.3% compared to 23.4% in the US. Frost & Sullivan projects the number of procedures in China will reach 42,000 by 2025, which will cause the overall market value to rise from RMB392 million to $5.1 billion.

MCM is building out its portfolio with a second-generation TAVI product undergoing clinical trials in Europe. Other products address the full range of mainstream viable transcatheter valve therapies, including those targeting the mitral and tricuspid valves.

“Many of technologies behind these products are interrelated. After a breakthrough on the technology platform, and the application of the technology to one product, others will follow. We are optimistic about this technical platform model. From the perspective of market size, aortic valve products are only one-third that of mitral valve products, so the potential for follow-on products is even larger,” says Chen.

MCM started generating revenue after the commercialization of VitaFlow in August 2019. Sales came to RMB21.5 million in 2019 and RMB48.4 million for the first seven months of 2020. Its net losses more than doubled to RMB144 million over the course of 2019 due to high R&D expenses.

CPE currently has about $17.6 billion in assets under management. Around 30% of its investments are in the health care sector. Check sizes range from $50 million to $200 million.

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• Topics
• Greater China
• IPO
• Healthcare
• China
• Citic Private Equity
• manufacturing