Getting Bigger to Survive

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American Oriental Bioengineering (NYSE: AOB) has decided to use some of that cash it's been gathering through dilutive financing. On Tuesday the company announced that it bought not one, but two different companies.

The first is a distribution company, but not the one it had announced in its previous earnings call. While the switch might seem strange, management says the change was a "more efficient use of cash." Among other things, this new distribution company, Nuo Hua, was cheaper at just $39.5 million.

Nuo Hua will give American Oriental Bioengineering better access to hospitals and chain pharmacies to sell its current offerings of traditional Chinese medicine, but the company also distributes drugs from the West as well. Ironically, the company that looks like it's trying to become the Chinese version of Johnson & Johnson (NYSE: JNJ) by growing through acquisitions, will be distributing the American conglomerate's products -- and Pfizer's (NYSE: PFE) as well. The acquisition is expected to contribute to both revenue and net income as early as 2009.

The other purchase, GuangXi HuiKe, is a research and development company that should give American Oriental Bioengineering instant access to personnel who are experienced in getting drugs through the Chinese FDA. We'll have to wait and see how much it adds to the pipeline, but at just $13.6 million, it won't need to add much to be a good deal.

Much like fellow Motley Fool Hidden Gems pick Natus Medical (Nasdaq: BABY), American Oriental Bioengineering is purchasing companies that are already profitable, so that any synergies achieved are reached rapidly, benefiting American Oriental.

Maybe more importantly, the purchases -- along with any future ones -- should help American Oriental Bioengineering stay alive. The government is pushing for consolidation in the health-care field, and smaller companies are more likely to be acquired than to do the acquiring.

Bigger isn't always better, but, in the case of American Oriental Bioengineering, it seems to be the only logical choice.