ArthroCare: A Stronger Company Now

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Health care is one of those industries where potential for high returns is increasing. Despite the advanced facilities and prevention steps taken by people, the ratio of people reported to be diagnosed with major diseases in the U.S. continues to increase. Since health care is a necessity, its demand may not be impacted by business cycles.

Medical appliances and equipment industry

The U.S. medical equipment industry’s demand is backed by the population demographics and innovating superior medical technology. The competitive advantage of individual companies depends on their skill coming up with new improved products. Large companies can gain advantages of economies of scale due to large scale manufacturing and research. Small companies can generate profits by focusing on a particular niche market, or by means of technical innovation.

The U.S. medical appliances industry is highly concentrated, with the 50 largest companies forming up to 60 percent of total sales. Recently, ArthroCare (NASDAQ: ARTC) completed its acquisition of ENTrigue Surgical (“ENTrigue”), in order to strengthen its foothold in the ear, nose and throat (ENT) surgical equipment market. ENTrigue specializes in designing and producing innovative implants, disposables and instruments for endoscopic sinus surgery.

At the moment, there are two companies that produce balloon equipment for endoscopic surgery; namely, Acclarent and Entellus Medical. Acclarent is a subsidiary of Johnson & Johnson (NYSE: JNJ) while the latter is a privately held companies. Both companies’ products are FDA approved for use in the United States.

Smith & Nephew (NYSE: SNN) is also in the business line of manufacturing medical devices. Stryker (NYSE: SYK) is also a medical technology company providing health care products.

Acquisition of ENTrigue: will it prove to be a complement to ArthroCare’s product portfolio?

Let’s analyze the acquisition made by ArthroCare and see if it will prove to be of benefit to the company in the future.

ArthroCare specializes in creating surgical devices, instruments, and implants that attempt to add to the surgical techniques, with the aim to improve patient outcomes. The company’s apparatus is designed to improve current surgical procedures and facilitate new minimally invasive procedures. The two fundamental products include sports medicine and ear, nose, and throat. A lot of ArthroCare’s appliances make use of its internationally patented Coblation technology.

Similarly, ENTrigue develops innovative implants, disposables and instruments, with its particular focus on endoscopic sinus surgery including balloon dilation. The company will now function under the name ArthroCare’s ENT, as a supplement to the ArthroCare Coblation and Rapid Rhino products, currently being used by ENT surgeons across the globe.

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Presently, more than 30 million citizens in the United States are calculated to suffer from sinusitis. On average, 500,000 sinusitis patients undergo surgical treatment in the United States per year.

Attitudes towards treating ear, nose, and throat (ENT) conditions are turning toward medical appliances. Although oral treatment is still the priority treatment for ENT conditions, the patients are moving towards choosing surgical procedures to deal with problems which include chronic sinusitis. As a consequence, the amount of surgical ENT procedures has been gradually increasing since 2010 and this rising trend is expected to continue.

The major advancement in sinus surgery is the development of Balloon Sinuplasty. This has resulted in less postoperative pain and reduced the potential for infection. This has also drastically reduced post-operation recovery time. This technology has been launched by ENTrigue, Acclarent and Entellus.

Last year, ENTrigue entered into a collaboration with Fiagon GmbH, a company based in Germany, that develops and manufactures highly portable navigation systems for ENT, oral and maxillofacial surgery. Under the collaboration, ENTrigue and Fiagon will search for the integrated navigation and therapy solutions for ENT procedures beginning from ENTrigue’s Ventera Sinus Dilation System in Europe.

This acquisition is expected to show its positive effects in the full fiscal year 2014, with the sales estimates to be higher at 3.7% compared to 2.4% in 2013. The analysts’ have estimated the EPS of ArthroCare to rise to 1.57 in the 2013, compared to 1.25 in 2012, an increase of of 25.6%.

Smith develops manufactures and sells advanced surgical devices in advanced wound management sectors worldwide. Last month, the company announced that its Advanced Wound Management division and United Drug Medical were entering a strategic partnership to support and endorse the IV3000 range of cannula dressings in the UK.

Stryker, a leading medical technology company, provides reconstructive, medical and surgical, and neurotechnology and spine products. In the current fiscal year, the company received a warning letter from FDA relating to the quality system observations made during the inspection. It blamed Stryker for failing to notify FDA of a product recall, and for marketing devices, including the Neptune Waste Management System, without a required 510(k) clearance.

Final thoughts

ArthroCare is expected to benefit from its acquisition of ENTrigue and is likely to show significant growth in its earnings as the research activity and collaboration agreements materialize. The company is a strong buy, to be held for a few years, as currently the ENT industry is in its high growth phase and can give high returns.

Smith also has bright future prospects as the company is undergoing strategic collaborations to enhance its market share in the UK. The company is recommended for investors who prefer a regular stream of income as the company is increasing its dividend yield year-on-year.

Stryker is not recommended as it has been receiving FDA warnings in 2013. This may give rise to penalties. Also, the company offers a lower dividend yield compared to Smith.

Awais Iqbal has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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