The recent pick-up in mergers and acquisitions has spilled over into MedTech companies too, with Covidien (COV) announcing the purchase of Aspect Medical (ASPM) in late September and Kimberly-Clark (KMB) announcing the purchase of I-Flow Corp (IFLO) last week. I didn't even know that KMB had a Healthcare division (6% of sales in 2008)!
While I am somewhat disappointed that my keen interest in the space hasn't yet yielded me any buyouts of companies I have purchased or recommended, I do believe that the buyouts signal that some big companies are on the prowl in the sector. Covidien, the former Tyco Healthcare, also bought Vnus Medical earlier this year as well as some private companies. One thing that I have noticed about the acquisitions has been that the targets have had very high gross margins and strong balance sheets. Further, the companies have had high recurring revenue due to the sale of consumables rather than capital equipment. With that in mind, I screened my 70-stock universe of medical consumables companies for the following:
- GM > 70
- Positive PE
- EV/Sales < 4X
- Net Debt to Capital < 0
Here is what came up, including ASPM and IFLO (click to enlarge):
- Most of the stocks are up YTD, with the median ahead of the market
- In contrast to most companies, sales are growing
- For the most part, these companies don't carry a lot of inventory
- Several companies are enjoying positive earnings revisions
As far as my specific views on these companies:
Immucor (BLUD) has always fascinated me with its small-footprint blood analyzer for hospitals doing blood transfusions. In late June, the company announced an FDA problem that killed the stock, but it has more than recovered since then. To learn more about the company, click here.
Align Technologies (ALGN) sells Invisalign, which allows dentists and orthodontists to offer an alternative to braces which is more aesthetically pleasing. They won a huge court battle a few years ago, leading to a quadrupling of the stock price. This story has had a lot more permanence than I would have expected. To learn more about the company, click here.
Surmodics (SRDX) is one that I have followed closely and wished that I had owned last week when they announced a licensing deal with Roche (RHHBY.PK). The company was a one-trick pony (coated stents for Johnson & Johnson (JNJ)), but it has diversified dramatically over the last few years. This is a technology company that is all over the place, with applications for drug delivery, diagnostics and devices. I owned it in 2008 when their huge deal with Merck (MRK) terminated - boy was I disappointed. It seems like the recent deal, also related to their eye drug-delivery technology, has pulled a lot of folks in, but I am not biting yet. While it is way up over the last week, it is way down from when I wrote about it 2 years ago. To learn more about the company, click here.
Cyberonics (CYBX), is located just up the highway from me in Houston. This company has been controversial for years, with founder and CEO Skip Cummins skipping out in late 2006. The company uses vagus nerve stimulation (through an implantable device) to treat depression and epilepsy. Boston Scientific (BSX) used to own 14% of the company but liquidated its remaining position in 2007. Icahn currently maintains a long-standing 7% stake. To learn more about the company, click here.
Kensey Nash (KNSY) is a neat little company. I actually spoke to the CFO in the summer. At the time, he said that he wasn't seeing any changes in ordering patterns that have plagued so many companies, but, due to their business model, they will be late to find out. Their growth has been a bit slower than I like in this space as well (7% sales growth over the past 5 years). I note that their inventory is up while sales have been falling recently. The company manufactures products that are distributed by other companies; Angio-Seal is the largest, while Orthovita's (VITA) Vitoss Foam is a more exciting growth product. The company has relationships with 30 companies involved in cardiovascular, endovascular, sports medicine, spine and trauma. To learn more about the company, click here.
I have never looked at Micrus Endovascular (MEND), which treats cerebral vascular problems (brain aneurysms) in a less invasive manner than traditional surgery. The CEO, who has led the company since 2004 and has an extensive sales and marketing background that includes stints with Guidant and Boston Scientific, owns 2% of the company (with insiders totaling 8%). To learn more about the company, click here.
Somanetics (SMTS) is one of my largest holdings in a portfolio I manage as well as in my Top 20 Model Portfolio. I wrote in depth about it recently. The company sells a monitor and sensors that help prevent strokes in cardiac patients as well as critical issues with infants and children who are having surgery or are in the hospital. I spoke to the CFO about the Aspect Medical purchase, given the similarities between the company and the fact that Covidien distributes for them in Europe, and I liked what he had to say. You can learn more about the company by clicking here.
Ditto on Synovis Life Technologies (SYNO), which is also in the portfolio I manage and the Top 20 Model Portfolio. I wrote in depth about it even more recently, though it has pulled back since it reported earnings. SYNO makes several different biological materials used in surgeries. I rank it as slightly more attractive than SMTS, as it has a terrific near-term driver in terms of the recent Pegasus transaction. You can learn more about the company by clicking here.
I never like to count on being acquired for an investment to make sense, and I certainly don't have any evidence than any of these 8 companies are likely to be purchased. They do share, though, several traits that could make them appealing to a potential buyer. In any event, these high gross-margin companies generally seem to be growing in a profitable manner and maintaining strong balance sheets and at least reasonable valuations. Happy hunting!
Disclosure: Long SYNO and SMTS in an account I manage as well as my Top 20 Model Portfolio