The Next Deals Are in Hospital

 | Jul 07, 2014 | 11:18 AM EDT
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We know there are going to be more deals. David Faber says it every day. We know that Echostar (SATS) is virtually in play and no one seems to think Lorillard (LO) will be independent much longer.

But where else are the logical deals?  I think they are in the hospital. That's right, I think that we are being blinded by tax considerations and not thinking strategically. For example, there is much more to the Medtronic-Covidien merger than just lower taxes. The team-up is terrific for one-stop shopping. I think we are considering way too much about what could be the next Covidien, because of its tax situation and not as much thinking about what could be the next Medtornic (MDT) out of defense.

The three that naturally come to mind happen to very cheap because they are all engaged in some new product development that could pay off big are Boston Scientific (BSX), Edwards Lifescienes (EW) and St. Jude Medical (STJ). While I am not as familiar with BSX other than to be recommending it as a turnaround forever, I have recently interviewed St Jude and Edwards Life Sciences and, while the latter is expensive, the former is way too cheap given all of its new products. I can't believe it hasn't been bought yet by someone eager to expand its heart portfolio. EW recently got approval for a breakthrough product that doesn't require the cracking of the rib cage to improve heart function, which is vital for aging baby boomers.

All three of these companies have to be looked at by pretty much everyone who isn't looking at Smith & Nephew (SNN) which I still think will be snapped up.

Have you noticed the recent action in Perrigo (PRGO), a generic drug company based in Dublin, Ireland? How about a merger of equals with Mylan (MYL), which we know has been on the prowl for ages? Talk about a deal that raises numbers. Home run for both and no one has ever said that Perrigo isn't for sale.

You have to wonder what Baxter (BAX) is going to do when its biotech spinoff occurs next year, leaving it a pure play on devices and hospital product. You have to bet that it wants to get more growth once it separates, not unlike what Covidien did when it was spun off from Tyco (TYC) in 2007 or what Mallinckrodt (MNK) just did with its controversial Questcor (QCOR) buy.

Wouldn't Becton, Dickinson and Company (BDX) and Bard (BCR) want more growth and heft? I find it surprising we haven't heard from them yet.

And, of course, big pharma needs partners just do get any growth. Pfizer (PFE) has an M&A team going. Merck (MRK) is loaded with cash. Lilly (LLY) pretty much has to do a deal. Bristol Myers (BMY) needs to shore up its cancer franchise after a series of setbacks.

I have to believe that some of these deals must come from pressure from the big hospital chains. Others come from a sense that the market isn't going to value these companies the way it was when the economy was throttled. Others just happen because there are so many bankers suggesting that the best way to get your stock higher is to buy another company.

Look for health care to be the next big thing. It's making too much sense not to be.

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