Large medical device makers that have lots of cash on hand are stepping up purchases of young companies with promising technology pipelines but scarce capital.
 
There has been a flurry of deals in the past few weeks, most recently the announcement by Medtronic that it plans to buy heart valve developers CoreValve and Ventor Technologies for more than $1 billion.
 
Analysts expect more deals this year while maturing large makers are looking for new ways to develop long-term growth.
 
“There are opportunities out there, and we’re going to see this continue throughout 2009,” said BMO Capital Markets analyst Joanne Wuensch, who expects Medtronic, which has $1.75 billion in cash and short-term investments on its balance sheet, to keep shopping.
 
“Medtech stocks have outperformed, so these companies still have a currency,” Wuensch said. “A lot are in hunker-down mode, but they are not in crisis mode.”
 
Meanwhile, small companies are running up against the challenge of raising capital at a time when credit markets are in lockdown mode.
 
“You’ve got receptive buyers and receptive sellers, and deals are getting done,” said Thomas Weisel Partners analyst Raj Denhoy. “Technological innovation and clinical advancement haven’t stopped just because the capital markets aren’t acknowledging it.”
 
Besides cash flow, big diversified healthcare companies have the regulatory and legal resources and global infrastructures necessary to bring new medical devices to market.
 
“The small guy is just the opposite —they have the idea but need the capital,” said Wise, who expects Johnson & Johnson, St. Jude Medical Inc., Abbott Laboratories Inc. and Stryker Corp. to swallow up smaller companies.
 
Last month, J&J completed the acquisition of breast implant maker Mentor Corp. for $1.07 billion. Abbott is in the process of buying Advanced Medical Optics, the leader in Lasik laser vision correction, for almost $1.4 billion, plus another $1.4 billion in debt.
 
Most analysts aren’t expecting blockbuster deals along the lines of Boston Scientific Corp’s $27 billion acquisition of Guidant in 2006.
 
“The larger companies generating strong cash flows and good balance sheets are going to use that to be opportunistic in the current environment and acquire earlystage companies that might otherwise have a tough time getting financing,” said Weinstein.