An unexpected wave of consolidation is cresting, but not where the pundits may have expected. Medtech and medical devices have always been segments ripe for playing the buyout game, but why now and who is next? Recent notable aquisition announcements include Thoratec (Nasdaq:THOR, http://www.thoratec.com) buying Heartware, Inc. (Nasdaq: HTWR, www.heartware.com) for $282 million, Medtronic purchasing both Ablation Frontiers (www.ablationfrontiers.com) for $225 million and CoreValve, Inc. (www.corevalve.com) for a whopping $700 million. The simple fact is that larger players are looking down the road past the current financial meltdown to a world that will certainly include healthcare reform and probably a slowdown in innovation due to lower funding and reimbursement levels. Scooping up the best new technologies with cash on hand may be a play to maintain and build future market share in specialized large markets such as heart failure and atrial fibrillation that are underserved today.
So how do investors capitalize on the next moves within the industry? One approach is to look at technologies that are gaining market share in the largest markets. One target could be Endologix (Nasdaq:ELGX, www.endologix.com), which has invented a means of treating abdominal aortic aneurysms with a stentlike device (http://www.youtube.com/watch?v=rgMDdlOnMLE). Endologix has been quietly taking market share from their larger competitors but their share price has been falling. Acquired or not, it’s likely a good place to find value.
In interventional medicine, Angiodynamics (Nasdaq:ANGO, http://www.angiodynamics.com), Endocare, Inc. (Nasdaq:ENDO, http://www.endocare.com) and ATS Medical (Nasdaq:ATSI, http://www.atsmedical.com) each have been growing steadily in their respective segments and are structured conveniently for purchase.
Another market segment that seems ripe for consolidation is molecular diagnostics. As more and more predictive and prognostic technologies are invented and as personalized medicine becomes the norm, oncologists and other physicians are going to tire of sending out samples to a dozen specialized labs for analysis. Single technology labs such as Genomic Health (Nasdaq:GHDX, http://www.genomichealth.com) or specialized molecular testing centers such as Clarient (Nasdaq:CLRT, http://www.clarientinc.com) or Genoptix (Nasdaq:GXDX, http://www.genoptix.com) seem like great candidates for acquisition by cash-rich, larger players such as Myriad Genetics (Nasdaq:MYGN, http://www.myriad.com) or even more traditional labs such as Quest Diagnostics (NYSE:DGX, http://www.questdiagnostics.com) that want to bolster their high-end testing reportoire.
Take your pick of these or other smallcap candidates- just make sure the market is large, sales are growing, and that clinical advantage over larger competitors is present.