Are These 2 Medical Device Makers Takeover Targets?

Mergers really haven't been a factor in the market recently, unless you focus on the health care sector. Tulipmania has practically taken over the hepatitis C market, with Gilead Sciences agreeing to buy Pharmasset for $11 billion and Bristol-Myers Squibbponying up $2.5 billion for Inihibtex (NAS: INHX) and its predominantly untested, early-phase-2 clinical hep-C drug, INX-189. Inhibitex was a top 2011 performer largely on strong phase 1 trial results and takeover speculation.

Considering that much of the health care sector would benefit from consolidation, it'd be foolish (with a small "f") to think that M&A activity is going to be strictly limited to the biotech sector in 2012. Of particular interest to me are two medical-device companies that appear to have the allure of takeover candidates. Please keep in mind, predicting a takeover is nothing short of lucky and these predictions should be taken as nothing more than pure speculation on my part.

ICU Medical (NAS: ICUI)
If the name sounds somewhat familiar, that's because I highlighted ICU Medical in May as one of my 10 Small-Caps To Rule Them All. ICU's primary product is the CLAVE, a needleless IV that prevents patients from getting blood-borne infections and medical staff from accidental finger pricks. The CLAVE, along with its other medical products, has produced consistent growth from both a sales and earnings perspective for shareholders. ICU has generally made a habit out of crushing analyst estimates and boasts an immaculate balance sheet ripe with $119 million in cash and no debt.

Consistent growth and tons of cash will generally make any medical device company a buyout candidate, but ICU already has a relationship in place with Hospira (NYS: HSP) that would make it the perfect acquisition target. Ironically, ICU purchased its current critical-care line from Hospira in 2009, but it's the two distribution agreements with Hospira that ICU recently extended through 2018 that make the match so perfect. ICU currently makes all of the custom-infusion IV sets that Hospira sells under the brand name SetSource, and Hospira almost exclusively uses CLAVE and ICU's oncology products.

The potential savings on Hospira's end in purchasing ICU Medical would be the catalyst of any deal. ICU likely won't come cheap, but it might make sense for Hospira in the long run.

DexCom (NAS: DXCM)
It's always easier predicting a buyout when a company's CEO admits that he'd be willing to shop the company for an appropriate price. Oh, yeah ... it also helps when your CEO is Terrance Gregg, a CEO who has been the name behind six takeovers, including MiniMed's purchase by Medtronic in 2001.

DexCom doesn't enjoy the same luxuries as ICU Medical in terms of profitability (DexCom is still losing money), but it does have arguably the best diabetes sensor on the market, called Seven Plus, and plenty of cash to bide its time until the company turns profitable. Just last week DexCom raised its fourth-quarter guidance and forecast sales growth of 29% to 40% in 2012, so even if profitability isn't right around the corner, at least losses should continue trending in the right direction. With a solid product and ample cash, now all DexCom needs is a buyer ... and I think I have one in mind.

Johnson & Johnson (NYS: JNJ) is already partnering with DexCom in developing Animas Vibe, a continuous-glucose-monitoring-enabled insulin pump with DexCom's CGM technology. DexCom's CGM technology is the only one currently available that allows the user to wear it for seven days -- considerably longer than previous products. Johnson & Johnson has more than enough cash to purchase DexCom and it would clearly benefit by reducing costs at its subsidiary company, Animas. Considering the size of the diabetes market, I wouldn't be surprised if this deal happened before 2012 is over.

Foolish roundup
Predicting a takeover is tricky business, but these two seem like they have a better chance of being bought out than not.

What's your take on my predictions? Am I all wet or do these matches make as much sense to you as they do to me? Share your thoughts in the comments section below and consider adding these two stocks to your free and personalized Watchlist so you can keep track of the latest news with each company.

At the time thisarticle was published Fool contributorSean Williamshas no material interest in any companies mentioned in this article. He stopped taking advice from his crystal ball more than 10 years ago. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong. The Motley Fool owns shares of Johnson & Johnson.Motley Fool newsletter serviceshave recommended buying shares of Gilead Sciences and Johnson & Johnson, as well as creating a diagonal call position in Johnson & Johnson. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policythat doesn't rely on a Magic 8 Ball for advice.

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