What to Watch at DexCom, Smith & Nephew, and Endo Health Solutions This Morning

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

Good morning, fellow Foolish investors! Let's take a look at three stocks -- DexCom (NASDAQ: DXCM  ) , Endo Health Solutions  (NASDAQ: ENDP  ) , and Smith & Nephew (NYSE: SNN  )  -- which could loom large in health care headlines this morning.

The FDA approves DexCom's CGM device for children
Medical device maker DexCom looks poised to open higher this morning, after the FDA approved the DexCom G4 Platinum (Pediatric), its new CGM (continuous glucose monitoring) device designed for children ages 2 to 17 with diabetes. The device is now the only approved CGM device for children as young as two years old, and had previously been approved for adults 18 years and older.

DexCom's device has a 20-foot wireless transmission range, a lightweight receiver which weighs 2.4 ounces, and easy to wear transmitters which are placed on the abdomen and upper buttocks. It is also the only sensor on the market which can be worn for up to seven days.

Last quarter, DexCom's product revenues, which are generated by sales of the CGM systems and the disposable sensors, rose 101% year-over-year to $42.5 million. The company is still unprofitable, but it narrowed its loss to $0.08 per share last quarter, up from a loss of $0.25 per share a year earlier.

In addition to its core products, DexCom also holds collaboration agreements with Animas (a subsidiary of Johnson & Johnson) and Tandem Diabetes Care. The Animas collaboration aims to create a new wearable artificial pancreas to rival Medtronic's first generation device, which was approved last September.

The newly approved pediatric CGM device should boost DexCom's revenue in the coming year, since diabetes remains one of the most common chronic diseases in children in the United States, affecting 151,000 people below the age of 20, according to the CDC.

Endo divests one business while acquiring another
Meanwhile, Endo Health Solutions wrapped up two deals -- the divestment of HealthTronics and the acquisition of Boca Pharmacal.

Endo completed the previously announced divestiture of HealthTronics, a provider of urologic services and products, to Altaris Capital Partners for an upfront cash payment of $85 million. Endo also received the rights to additional cash payments of up to $45 million, dependent on the future performance of HealthTronics under Altaris for a maximum consideration of $130 million.

Endo originally acquired HealthTronics for $223 million in 2010, so selling the unit for a maximum of $130 million isn't exactly a good deal. However, it could help Endo, which generated 21% of its revenue from the Lidoderm painkiller patch last quarter, streamline its operations to focus on its other pain medications (Opana ER, Voltaren Gel, and Percocet) instead.

Endo then announced that its Qualitest subsidiary had completed the acquisition of privately held Boca Pharmacal, a specialty pharmaceutical company focusing on controlled substances, semisolids, and solutions. The deal, which was made for $225 million in cash, is expected to enhance Qualitest's R&D pipeline of controlled substance generics.

Last quarter, Endo's earnings fell 25.2% year-over-year as its revenue fell 4.7%. Both deals could help boost its top and bottom line growth by streamlining its product portfolio.

Will Smith & Nephew make a higher offer for ArthroCare?
Last but not least, investors should also keep an eye on medical device maker Smith & Nephew, which agreed to acquire ArthroCare (NASDAQ: ARTC  ) for $1.7 billion in cash yesterday. ArthroCare is a maker of minimally invasive surgical products used primarily for sports medicine.

Some investors are skeptical that the deal will close at the currently offered price of $48.25 per share, which only represents a 6.3% premium over ArthroCare's closing price on January 31. After the announcement, shares of ArthroCare closed at $49.12, indicating that investors might be expecting Smith & Nephew to place a higher offer.

There are three reasons for this belief:

  • Price targets for ArthroCare are considerably higher than $48.25. Analysts at Canaccord Genuity and Craig-Hallum Capital currently have price targets of $56.00 and $60.00 for the stock.

  • The stock hit an intraday high of $49.95 on January 8, 2014.

  • ArthroCare is financially healthy. Last quarter, the company's total revenue rose 5.7% year-over-year to $91.9 million as its gross profit climbed 3.8% to $63.0 million.

Therefore, even though Smith & Nephew has agreed to those terms, the deal could still be rejected by ArthroCare shareholders.

Smith & Nephew has slightly lagged its main rival, Stryker, since the beginning of the year.

 

Qty. Earnings Growth (YOY)

Qty Revenue Growth

(YOY)

Profit Margin

YTD Price Performance

Smith & Nephew

(7.6%)

7.9%

12.7%

1.7%

Stryker

43.0%

5.6%

11.2%

2.5%

Source: Yahoo Finance, Feb. 4.

Smith & Nephew believes that cost reduction and additional sales from the ArthroCare acquisition will boost its annual profit by roughly $85 million in the third full year after deal closes.

It could also help diversify its product portfolio beyond the surgical and wound management products that account for the majority of its top line.

Another top stock to watch this morning
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