Healthcare is a huge space, and for every Medtronic (NYSE:MDT) or Pfizer (NYSE:PFE), there are dozens of quality names that go unnoticed by the investing public. A little time and effort, though, can uncover some intriguing names that may deserve a place in investors' portfolios. Today we highlight three ideas.

ICU Medical - There is Nothing Dull About Cash
ICU Medical (Nasdaq:ICUI) is a classic example of a company that does nothing exciting, except churn out impressive amounts of cash. ICUI is makes small, inexpensive, disposable medical devices, with a major focus on infection prevention products (IV connectors, in particular), custom medical tubing and critical care.

The growth here is not eye-popping, but the company's return on capital has averaged more than 10% for the last five years, and the company converts more than 10% of its sales to free cash flow. Management is more than happy to return that cash to shareholders in the form of share repurchases.

There are a few drawbacks here for potential investors. The company reduced its reliance on Hospira (NYSE:HSP) by buying its critical care business, but this was definitely a "scratch and dent" purchase that will require a lot of work to turn around. Second, the company does not invest much in R&D, which raises the question of whether it can fuel future growth. Third, the company does compete with some sizable players like Baxter (NYSE:BAX) and CareFusion (NYSE:CFN), but where those two companies see the overlapping products as just a few out of thousands, ICUI is completely focused on them.

IRIS International - A Diagnostics Idea that Could Bloom
IRIS International (Nasdaq:IRIS) is the sort of stock that can drive an owner a little batty. The company has an excellent product (an automated urine microscopy analyzer), a great business model, intriguing technology and a very promising pipeline. It has also been beset by delays and disappointments, and the result is a stock chart that resembles a mountain range.

The good news is that IRIS does not have any problems that a little discipline and a better economy cannot solve. A better economy will give hospitals the money to invest in automation for their clinical labs (a critical need nowadays), while better discipline and execution on product development and regulatory filings will help ease investors' concerns about future performance. (For more, see Investing In Medical Equipment Companies.)

The hook for IRIS is threefold: The U.S. market for its primary product is only 50% penetrated, and the company has the dominant share in the U.S. (and only one competitor). Second, the company hopes to launch a new molecular diagnostics test for prostate cancer that could be worth tens of millions of high-margin revenue. Last and not least, the company has a proprietary imaging technology, called 3GEMS, which could not only support the next generation of automated urine microscopy analyzers, but also an entry into the $2 billion hematology market.

Luminex - A Fighting Chance at the Next Big Thing
Luminex (Nasdaq:LMNX) is likely to be the biggest risk-reward tradeoff of these three ideas. Luminex has developed a technology (called xMAP) that allows scientists and clinicians to quickly test a large number of samples for multiple biological targets. The applications for this technology are numerous, and range across clinical diagnostics and basic biological research. All in all, Luminex's technology touches markets worth about $3 billion today, and that number is likely to keep growing.

Luminex is also pursuing a pretty unusual model. The company is focusing its efforts on developing its technology, manufacturing the systems and disposables and producing a limited number of diagnostic tests. Simultaneously, the company has struck licensing agreements with dozens of major healthcare and life science companies (like Abbott Labs (NYSE:ABT)) to develop and market additional products using this technology. This model is not unlike the Microsoft approach, and it allows for the introduction of a far greater number of assays and tests using Luminex technology than the company could develop on its own.

Of course there are risks here. Luminex competes with major competitors like Illumina (Nasdaq:ILMN), Life Technologies (Nasdaq:LIFE), and Gen-Probe (Nasdaq:GPRO). What's more, these are early days, and the company has seen a lot of lumpiness in its orders, and the partnership model limits the company's visibility. Still, it is not every day that you find a company below $1 billion in market cap that may have a new platform technology for large and growing markets like biological research and clinical diagnostics. (For more on this topic, check out A Checklist For Successful Medical Technology Investment.)

The Bottom Line
Med-tech has often been a sweet spot for many investors. It is the closest thing to a perpetually-growing market that an investor can find, and a little bit of due diligence can take you a long way.



Tickers in this Article: ICUI, IRIS, LMNX, ILMN, HSP, BAX, CFN, MDT, PFE, GPRO, LIFE

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