Ride the Health Care Sector Merger Wave with Volcano (VOLC) and Alexion Pharmaceuticals (ALXN

April 14, 2009

One of my favorite health care stocks, Express Scripts (ESRX), announced a bold move on Monday. The company said it's going to buy WellPoint's (WLP) in-house pharmacy-benefit management business for $4.68 billion.

Usually an acquiring stock sees its shares fall. Not this time. Express Scripts jumped 15.5% on the day of the announcement. This is a very good deal, and it will give Express Scripts a huge lift against its rivals.

Expect to see a lot more deals like this.

Whenever you have lots of uninvested cash, low stock prices, and a crowded industry, merger mania is bound to happen. That's exactly the position the health care sector is in now. The industry is currently going through rapid consolidation, and as with my other top 5 stocks to buy right now, you can make big profits if you invest intelligently.

Volcano Corporation is a Good Merger Target

According to my analysis, two possible health care buyout targets are Volcano Corporation (VOLC) and Alexion Pharmaceuticals (ALXN).

Volcano is a fascinating small-cap health care stock (just $650 million in market value). The company designs medical devices to diagnose and treat heart disease in patients. I can speak to the quality of Volcano's products, because I've had the arteries in my heart and neck checked by its ultrasound equipment.

Although these tests aren't normally covered by most health insurance policies, they cost less than $1,000 a pop, and they're especially important for those of us who are at risk for cardiovascular disease. And honestly, I tend to prefer Volcano's device to the typical angiogram, which tends to be much more expensive – and invasive.

Insurance issues aside, Volcano has beaten Wall Street's expectations for 10 straight quarters. That's a very impressive streak. Mark you calendars, because the next earnings report is due in early May and I'm looking for another impressive showing. Even if a larger company doesn't make a bid for Volcano, the shares are still very attractive. I rate the stock a very strong buy.

Alexion Is a Cutting-Edge Biopharmaceutical

My other possible acquisition candidate is Alexion Pharmaceuticals (ALXN). This biopharmaceutical company specializes in the development of drugs that combat life-threatening medical conditions such as blood diseases, autoimmune disorders and cancer.

Alexion struck gold in 2007 after European and American regulators approved the distribution of the drug Soliris that's used to treat a rare condition called paroxysmal nocturnal hemoglobinuria (PNH). This condition destroys red blood cells and usually causes death within 15 years. But thanks to Alexion's cutting-edge Soliris drug, patients can now find relief for this disease.

Thanks to the success of Soliris and other amazing treatments like it, the company's sales rose 260% last year. The next earnings report will come on April 23, and the company is set to post very impressive gains.

Wall Street expects Alexion to net 14 cents a share. For the last earnings report, Alexion doubled Wall Street's consensus -- and the earnings report before that, beat expectations by more than fivefold. I expect this trend to continue, especially since Soliris is the only drug of its kind on the market.

Both Volcano and Alexion Pharmaceuticals are outstanding buys.

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