Seeking Alpha: Owens & Minor And Medical Action Industries Find A Win-Win

Mutually beneficial deals may not be all that common in the med-tech world, but I think Owens & Minor's (OMI) acquisition of Medical Action Industries (MDCI) fits the bill. I was bullish on Medical Action Industries back in December and even though Owens & Minor is paying well above my fair value estimate, Owens & Minor has what I think is unique cost leverage in this deal to justify the price. The added value from this deal does push up my fair value estimate for Owens & Minor above today's price, but I'm still not exceptionally bullish given the harsh realities of the medical distribution industry.

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Owens & Minor And Medical Action Industries Find A Win-Win

Seeking Alpha: Medical Action Coming Along

When I last wrote on Medical Action Industries (MDCI) in April, I thought the shares looked like an interesting idea given management's intention to pare away less profitable products and really focus on improving margins. Since then the shares are up more than 40% and the company has followed through on their stated plan of self-improvement. Between ongoing margin improvement and a debt refinancing that created valuable breathing room, I believe these shares are worth more now and still have around 20% upside.

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Medical Action Coming Along

Seeking Alpha: Most Of The Action At Medical Action Will Come From Margins

When most med-tech companies trade at an EV-to-sales multiple of 2x to 4x, Medical Action Industries' (MDCI) 0.4x multiple is a pretty clear signal that something is very different about the company. In this case, we're talking about a small medical disposables company that has not only been seriously growth-challenged, but also had to absorb significant gross margin pressures. Although patient value-oriented investors may want to consider Medical Action Industries for its margin improvement potential, investors should keep in mind that the market seldom give full credit to companies with weak internal growth prospects.

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Most Of The Action At Medical Action Will Come From Margins

Investopedia: CareFusion Looking Safe And Sound

There is ample evidence out there that these are not good times for health care companies, so it makes sense for investors to play defense. That makes CareFusion (NYSE:CFN) an interesting opportunity in today's environment. As the company continues to find its way after spinning out from Cardinal Health (NYSE:CAH), CareFusion offers investors a chance to buy into not only a modest topline growth story, but an improving margin story as well - and all at a very reasonable price. 

A Decent End to the Fiscal Year  
To be sure, CareFusion is not going to excite the growth crowd. Top-line growth for the fourth fiscal quarter was just 3.7%, and only about 2% on a constant currency basis. Growth was helped by better than 7% growth in the critical care business (where infusion grew by double-digits) and offset by an 8% contraction in med tech/services where 14% growth in ChloraPrep was overpowered by divestitures. On a like-for-like basis, this segment would have grown about 5% this quarter. 


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Investopedia: Teva And Mylan Show Some Value Remains in Generics

Generic drug company stocks have been all over the map this year, with companies like Teva (Nasdaq:TEVA) struggling, companies like Watson (NYSE:WPI), and the likes of Mylan (NYSE:MYL) and Impax (Nasdaq:IPXL) falling somewhere in between. While the sector is still broadly benefiting from popular branded drugs going off patent, pressures from large buyers like AmerisourceBergen (NYSE:ABC) and Cardinal Health (NYSE:CAH) and declining patient-doctor visits are making for a more challenging operating environment. 

Mylan - Good Here, Not So Good Over There  
Mylan reported 15% revenue growth (10% in constant currency), with North American sales rising over 27%. Asia-Pacific sales also grew by 17%, but Europe was flat as reported and down double-digits on a constant currency basis due in part to government-mandated price cuts in many European markets. 


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Investopedia: MHS-ESRX Merger Will Force Intersting Choice In Washington

When Express Scripts (Nasdaq:ESRX) announced its intention to acquire Medco Health Solutions (NYSE:MHS) last week, it lit the fuse on what is likely to become one of the most far-reaching (if not most interesting) developments in health care in some time. At a bare minimum, this deal is going to force the current U.S. administration to make some very interesting choices when it comes to market competition and health care costs. 

The Deal  
To offer a quick review, Express Scripts is proposing to acquire its larger rival (in terms of prescription share) for total consideration of $71.36 at the time of the announcement. This consideration will be broken up between $28.80 in cash and 0.81 shares of Express Scripts. Assuming the deal goes through, it will deliver Medco shareholders a 28% premium to its pre-deal price and Medco shareholders will hold about 41% of the new company. 


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MHS-ESRX Merger Will Force Interesting Choice In Washington (ESRX, MHS, ABC, CAH, TEVA, UNH, WAG, CVS)

Cardinal Puts Some Cash To Work

Large piles of cash seem to tempt people into making bad decisions. At the corporate level, large cash balances often attract so-called "activist investors" looking for quick paydays or to embolden management into ill-timed buybacks or illogical acquisitions. That does not seem to be a problem with Cardinal Health (NYSE:CAH), though, as this large medical distributor has used almost $2 billion of its cash on hand to make a pair of acquisitions that seem to make a lot of sense. 

Kinray and Independent Pharmacies
Almost two weeks ago, Cardinal announced the acquisition of privately-held Kinray Inc for $1.3 billion in cash. A pharmaceutical distributor focused mostly on New York City and the Northeast U.S., Kinray will enhance Cardinal's exposure to independent pharmacies. While major chain pharmacies like Walgreen (NYSE:WAG) and CVS Caremark (NYSE: CVS) are a huge part of Cardinal's revenue base, the company makes a lot more money (on a margin basis) serving smaller customers, so expanding that customer base should be pretty accretive for Cardinal.

Buying Further into China ...
On Monday, Cardinal announced its latest deal - paying $470 million in cash (and assuming $60 million in debt) to acquire Zuellig Pharma China. Part of Zuellig Pharma (which in turn is part of the even larger Zuellig Group), Zuelling Pharma China is one of the largest distributors of pharmaceuticals and medical devices and supplies in China. Serving over 123,000 independent pharmacies and 49,000 provider locations, this Zuellig buy certainly enhances Cardinal's scale in what is almost sure to be a major market for medical distribution for some time to come. (For more, see Top Factors That Drive Investment In China.)

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CareFusion Looks To Pump Up Returns

Even though many sectors of the economy have shown some signs of life in recent quarters, a real recovery has yet to take hold in the healthcare space. Hospitals saw their capital funds decimated by investment losses, insurance companies have fought hard to minimize their medical loss ratios, and would-be patients have stayed at home because they either lost health insurance, could not afford the co-pays or did not want to risk taking time off work for recuperation. 

All of this is bad for a company like CareFusion (NYSE:CFN). While it is true that CareFusion does not sell multi-million dollar equipment like Intuitive Surgical (Nasdaq:ISRG) or Varian (NYSE:VAR), drug pumps are not exactly free and the company - along with peers Baxter (NYSE:BAX) and Hospira (NYSE:HSP) - have suffered from sluggish procedure volume. Selling a lot of relatively low-priced disposables and instruments is a great business, but it is not an invulnerable one. 



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