by Louis Basenese, Small Cap & Special Situations Expert
Thursday, October 22, 2009: Issue #1121

With the healthcare debate still raging in Washington, this should shock you…

Healthcare mergers and acquisition (M&A) activity is at an all-time high.

You’d think with so much uncertainty surrounding the future of the industry, the dealmakers would be as lonely as a geek on prom night.

But that’s just not so.

• Based on the dollar value of transactions, roughly one-third of all deals in the United States this year involved healthcare companies – considerably higher than the historical average of 10%, according to Dealogic.
• And based on the number of transactions, about 13% of all deals in 2009 have involved healthcare companies. Again, that’s notably up from the historical average of 9%.

Let me share why we can expect the record-setting activity to continue – and, of course, three ways to capitalize on it.

What’s Greasing the Skids for Healthcare M&A Activity?

At first glance, you might question the savvy of healthcare executives to make acquisitions in such an uncertain climate. After all, healthcare stocks have significantly lagged behind in the S&P 500 rebound, rising only 9.6% compared to a 20.8% increase for the Index, year-to-date.

But rest assured, they’re not buying blindly. In fact, the companies at greatest risk of cost cuts (and, in turn, less profits) – insurers, hospitals and nursing homes – remain on the sidelines.

Instead, it’s companies in other categories – like drug makers, research labs, equipment manufacturers and healthcare technology companies – that are so acquisitive. Here’s why…

Regardless of the end result of the legislation in Washington, one thing is glaringly obvious: millions more Americans will get healthcare coverage. And that represents millions more potential customers.

Companies are simply jockeying for position, so they can capture a larger share of the new demand. And takeovers represent the quickest way to do so.

Healthcare Takeovers Expand Market Share Cheaply

In addition to being quick, takeovers are also a cheap way for healthcare companies to expand their market share.

Consider that the average healthcare stock now trades for roughly 12 times earnings – a bargain, considering the average stock in the S&P 500 trades around 20 times earnings.

So with healthcare reform imminent, companies don’t need to waste the time and money, or take the risk to try and expand organically. Not with so many attractive targets trading on the cheap.

And the fact that financing remains available for healthcare deals only makes the growth-via-acquisitions strategy more irresistible. You see, while banks shy away from lending to other sectors, they’re all too amenable to lend a hand to a completely recession resistant industry with strong growth prospects.

Case in point: Pfizer (NYSE: PFE) and Merck (NYSE: MRK) secured tens of billions in financing to fund their acquisitions during the darkest days for the market (in January and March).

With more healthcare M&A likely, here are three healthcare companies I strongly believe are takeover bait…

Put These Three Healthcare Stocks on Your Watch List

~ Bristol-Myers Squibb (NYSE: BMY): When Pfizer ponied up $68 billion to acquire Wyeth in January, it set the stage for more Big Pharma tie-ups. Sure enough, Merck stepped up to purchase Schering-Plough for $41 billion in March.

And making the case for someone to buy Bristol-Myers is easy…

• It recently divested non-core assets.
• It’s sitting on $8 billion in cash, which acts as an instant rebate.
• It boasts a solid pipeline of cancer drugs, which hold the potential for faster FDA approval and higher margins.
• Multiple suitors exist including Sanofi-Aventis (NYSE: SNY), GlaxoSmith Kline (NYSE: GSK), AstraZeneca (NYSE: AZN) and Johnson & Johnson (NYSE: JNJ).

The fact that BMY shares trade at their lowest valuation in a decade only makes a deal more likely. And it doesn’t hurt that we get paid a 5.4% dividend yield while we wait.

~ Onyx Pharmaceuticals (Nasdaq: ONXX): If you’re looking for the next biotech deal, Onyx could be it. In Nexavar, it boasts the first FDA-approved drug for liver cancer, the third-deadliest form of cancer. And it just made a move to strengthen its pipeline by acquiring privately held Proteolix. The potential for additional applications for Nexavar should entice the company’s current partner, Bayer AG, to make a move to acquire ONXX before someone else does.

~ Medidata Solutions (Nasdaq: MDSO): The $787 billion federal stimulus package includes roughly $20 billion for healthcare information technology (IT) – a sum that only serves to accelerate the trend to bring the healthcare industry into the digital age. And that bodes well for Medidata.

I’ve outlined the fundamentals for Medidata here before. In short, its products eliminate millions of dollars in waste from each clinical trial. And suitors would be buying the fastest growing company in the space – the company’s revenues jumped 32% last quarter.

Moreover, a measly market cap of $362 million makes a takeover more compelling, as suitors could easily buy MDSO with cash on hand.

And remember… investing in a stock before a takeover announcement results in an average gain between 43.5% and 53.7%, according to the number-crunchers at FactSet MergerStat. So clearly, it’s a strategy worth pursuing.

Good investing,

Louis Basenese

by Louis Basenese, Advisory Panelist
Friday, September 25, 2009: Issue #1102

When it comes to the healthcare debate, let’s keep one obvious fact in mind: Expenses are out of control and must be reined in. That’s true with or without a massive reform bill.

And that plays right into the hands of Medidata Solutions Inc. (Nasdaq: MDSO).

The company is a leading provider of electronic data capture (EDC) and clinical data management systems (CDMS). In laymen’s terms, it helps drug companies go from the Dark Age into the Digital Age.

And it’s a transformation that we desperately need. Here’s why…

Anyone For a Tedious, Time-Consuming Paper Trail?

Roughly 75% of all clinical trials – the most critical function of drug companies, yet also the biggest drain on resources ($45 billion, annually) – are done on paper.

That’s right. Even in today’s high-tech world, in three out of four clinical trials, information for each patient is literally recorded on pre-printed paper, specifically a case report form (CRF). Ugh.

To make matters worse, each CRF isn’t typically uploaded to the main database for weeks. And it’s entered twice and screened for inconsistencies, which, ironically, only causes more data-entry errors.

From start to finish, it’s a cumbersome and antiquated process, with data taking four months to make it from observation into a database for screening and analysis.

Obviously, such a paper-intensive process results in significant complexity and cost. It’s a process long past due for an overhaul. And that’s where Medidata comes in…

Five Benefits of “Going Digital”

The company’s flagship product, Rave, allows customers to design testing protocols, in addition to capturing, managing and reporting clinical trial data through an easy-to-use, Internet-enabled platform.

So instead of the tedious (and error-prone) pen-and-paper rituals, researchers can enter data directly into any Internet-ready computer. Bingo. No waiting.

And as you probably suspect, going digital provides notable benefits:

• The data is instantly uploaded, screened, and available for analysis and even reporting to the FDA.
• Forrester estimates that EDC reduces the cost of Phase II trials by an average of 47% and Phase III trials by 54%.
• Data entry errors plummet 93% to 3.1 errors per 1,000 data points.
• Staffing requirements drop by 18%.
• The time in which data can be recorded, verified and analyzed sinks from an average of 10 weeks to just four days.

The last point is most crucial.

A Safe Way to Fast-Track Clinical Trials

With researchers able to gain almost real-time access to data, they can monitor interim results and abort clinical trials at the first sign that a patient’s health might be at risk. It also provides mid-trial leeway to alter the parameters – like dosage – to improve overall results.

Bottom line: Having data captured electronically safely accelerates the clinical development process and maximizes the commercial life of each drug. And in the process, it dramatically cuts costs and leads to safer drugs.

So it’s no wonder the market for such products is expected to triple in size in the next three years.

And the reason I’m so bullish on Medidata is simple: It’s already capitalizing on this growth potential…

Buy Now While Wall Street Snoozes

Medidata’s net second quarter revenue jumped by 32% to $8.3 million, compared to Q2 2008. That makes Medidata the fastest growing company in the EDC space. The company also reported a profit, compared to a loss last year.

In addition, it keeps adding customers to its existing blue chip and international client base, including Switzerland-based Roche.

Of course, few investors even know the stock exists, as it only went public in June. Fewer still understand its business enough to know that healthcare reform won’t impact it.

So before the rest of Wall Street catches on, now is an ideal time to buy.

Because rest assured, Wall Street will buy. Companies tapping into under-penetrated multi-billion markets, increasing profits, with a rock-solid balance sheet ($94 million in cash) don’t fly under the radar for long.

And this one is primed for more growth. As Medidata CFO, Bruce Dalziel, explains: “As a private company for nearly a decade, we have focused on building quality solutions for our customers, a global sales and services presence and, more recently, a robust public company infrastructure. Now that the majority of this scalable infrastructure is in place, we are focused on profitable growth.”

I recommend you position your portfolio to profit as Medidata helps rid the clinical trial process of wasteful spending. It’s just too bad it can’t do the same for Washington!

Good investing,

Louis Basenese