Will Sorin's expansion into new markets provide significant growth?
Sorin has recently updated its strategic plan, looking ahead to the period between 2012 and 2017. The company identified the Heart Valves business as an area for growth; it also identified additional growth opportunities that include investment into two new growth platforms that address heart failure and mitral valve regurgitation. The company is also targeting revenue-generating acquisitions that aim to increase Sorin's critical mass in markets in which it is already present or in adjacent business segments. The acquisitions and investments that have taken place over the previous year, especially in November, have affirmed the company's business position.
The most recent of Sorin's investments is in HighLife, an early-stage company focused on the development of a transcatheter mitral valve replacement system to treat patients with mitral regurgitation. Sorin has also gained an exclusive option to acquire HighLife in the future. Sorin has also invested, with an option to acquire, Cardiosolutions, an early-stage company focused on the development of an innovative percutaneous system to treat patients with moderate-to-severe mitral valve regurgitation. Furthermore, in September, Sorin acquired California Medical Laboratories, a company that develops, manufactures and distributes a range of cannulae, catheters and accessories for cardiac surgery. This acquisition adds to the growth of the company's cardiac business and expansion of the number of products that require minimally invasive procedures, which should give Sorin's products an advantage, as few heart valves are inserted without open heart surgery.
In addition, Sorin has implemented accelerated geographic expansion initiatives in emerging markets, primarily in the BRIC (Brazil, Russia, India and China) region. With the modernisation of healthcare and increased spending on medical devices, these markets could potentially be lucrative for Sorin. BRIC markets favour the long-term durability of mechanical valves, and due to prevalence of diseases that damage valves, these are replaced earlier and need to last longer. However, Europe and other western markets are moving towards the use of biological (tissue) valves, which last around 15 years, in patients aged over 65 years. Sorin's revenues from mechanical heart valves contracted in the third quarter compared with 2011, in line with the shift to biological valves in developed countries, but the move into the BRIC countries could have a positive impact on the company's mechanical valves revenue in the next few years.
Sorin appears to have no foothold in South America yet, has a few offices in Central Eastern Europe, and is slowly expanding in Asia, with offices in Japan, Singapore, China and Dubai, and an office in Australia. The company plans to add to or establish R&D or manufacturing sites in emerging market locations, Sorin currently seems to be concentrating its efforts in the Asia region, where the heart valve business is growing, GDP per capita is increasing and healthcare spending has risen, with more of the population paying for expensive procedures. According to Business Monitor International, healthcare spending in Asia will have risen to US$1,477 billion in 2012, an increase of around 7 per cent from the previous year and a CAGR of 5.6 per cent for the 2012-2017 period; medical device sales will have accounted for around US$73.9 billion, a 9.1 per cent rise from the previous year and a CAGR of 8.6 per cent for the 2012-2017 period. Japan now accounts for around 10 per cent of Sorin's revenues and this is set to increase with more of the company's products being marketed there. Its MitroFlow aortic pericardial heart valve received approval in Japan in November, and its distribution partner, Japan Lifeline Company, will sell the product in the country. If Sorin can transfer the success it has had in Japan to other Asian markets, capitalising on increased healthcare expenditure, the company could increase its revenue stream, partially counteracting any downturn in western markets.
Sorin, a pure play cardio company, might not have the capabilities to take on the emerging markets and prosper, in comparison with the big device companies, such as Medtronic or Edwards LifeSciences, that have the greater resources and expertise needed to succeed in these markets. However, the addition of Sorin's growing therapy areas to the expansion into new markets, should provide growth for the company in the mid-to-long-term, and help offset any losses from the decline in growth in western markets.