Covidien to Spin off Pharma Biz - Analyst Blog

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In a major move, international health care giant Covidien ( COV ) has unveiled its plans to spin off its pharmaceuticals business into a stand-alone public company. The spin-off, which has been contemplated for years, is subject to regulatory clearances, final approval of the company's Board and other closing conditions and is expected to take up to 18 months to complete.

Covidien stated that the transaction will be executed in the form of a tax-free distribution to the U.S. shareholders. With this move, the Ireland-based company will be focusing on its medical products (devices and supplies) business, which represented roughly 83% of its sales for fiscal 2011 (ended September 30).

The Pharmaceutical division, one of Covidien's three reporting segments, develops and markets specialty pharmaceuticals, active pharmaceutical ingredients, contrast products and radio-pharmaceuticals. It is among the largest producers of bulk acetaminophen globally and the biggest supplier of opioid pain medications in the U.S.

Besides, it is also one of the top ten generic pharmaceuticals makers in the U.S. and is among the leading providers of generators used to make technetium-99m (a key diagnostic medical isotope) globally. Some of the divisions' key products are Pennsaid, a nonsteroidal anti-inflammatory drug, and Exalgo, a pain killer.

The Pharmaceuticals division generated sales of roughly $2 billion in fiscal 2011 and accounted for roughly 17% of total sales for the year. Roughly two-thirds of the sales were derived from the U.S., were the business holds a significant presence. However, the division had been beset by heightened generic pressure, supply issues and declining sales of branded products over the last few years.

Covidien, which spun off from Tyco International ( TYC ) in June 2007 to become a public company, said that the decision to spin off the Pharmaceuticals unit was partly triggered by major differences between its medical products and pharmaceuticals businesses, stemming from different business models, sales channels, customers, product pipeline and capital requirements.

Covidien, which competes with the likes of Johnson & Johnson ( JNJ ), Becton Dickinson ( BDX ) and C.R. Bard ( BCR ),has been involved in a few divestitures in the recent past. The company, in August 2 010, completed the divestiture of its Specialty Chemicals business and also sold its sleep therapy product line (includes continuous positive airway pressure and bi-level products).

The planned spin-off, if materializes, the resulting medical products business would have annual revenues of roughly $9.6 billion (based on fiscal 2011 sales). This would leave the larger Medical Devices division accounting for roughly 80% of total sales with Medical Supplies unit representing the balance.

The company noted that the spin-off will allow the independent entity to compete more effectively in the growing pain management market. Besides, it would foster opportunities to roll out novel products and provide flexibility to execute growth plans including expansion in the ex-U.S. markets.

We currently have a long-term Neutral recommendation for Covidien, which is in line with a short-term Zacks #3 Rank (Hold).

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BECTON DICKINSO ( BDX ): Free Stock Analysis Report

COVIDIEN PLC ( COV ): Free Stock Analysis Report

JOHNSON & JOHNS ( JNJ ): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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