American Oriental Bioengineering
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
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
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.
American Oriental Bioengineering and Natus Medical are Motley Fool Hidden Gems selections. Find out why big returns often come in little packages by grabbing a 30-day free trial to the small-cap stock recommendation service.
Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. Pfizer and Johnson & Johnson are Income Investor recommendations. Pfizer is an Inside Value selection. The Fool owns shares of Pfizer and American Oriental Bioengineering. The Fool has a disclosure policy.