FDA Approves Changes Related to Covidien Recall, Shares Dip - Analyst Blog

Covidien plc ( COV ) revealed that the U.S. Food and Drug Administration (FDA) sent its approval for the required changes in the manufacturing process for the polytetrafluoroethylene (PTFE) coating on the delivery wire of the company's Pipeline embolization device. The changes are related to the company's recall made on Apr 1, 2014. Since the announcement, shares of the company fell 0.6% till the last trading session.

In April, Covidien had recalled some of its Pipeline and Alligator brain embolism devices after internal product testing revealed a serious problem with their delivery wire. The company had mentioned that polytetrafluoroethylene (PTFE) coating applied to the delivery wire of certain lots of its Pipeline Embolization and Alligator Retrieval devices could delaminate and detach from them.

The changes in manufacturing processes also apply to the Alligator device as it also uses PTFE coating. Covidien submitted a Special 510(k) change in the manufacturing process for the device to the FDA.

Covidien has not received any reports of patient injuries related to the problem. Since the recall announcement, the company has been working with its suppliers to rectify changes to the coating process.

PTFE coating is used to lessen friction between devices and ease navigation through the vasculature. Delamination of the PTFE coating could potentially lead to embolic occlusion in the cerebral vasculature leading to the risk of stroke or even death.

The affected Pipeline Embolization Device was sold in the U.S., Australia, France, Germany and U.K., and the affected Alligator Retrieval Device was sold in the U.S., Australia, Canada, Europe and Latin America.

Covidien's Pipeline Embolization Device is used for the endovascular treatment of adults with large or giant wide-necked intracranial aneurysms in the internal carotid artery from the petrous to the superior hypophyseal segments. On the other hand, the Alligator Retrieval Device is meant for use in the peripheral and neuro-vasculature for foreign body retrieval.

As many as 32 Pipeline Embolization Devices and 621 Alligator Retrieval Devices were affected by the recall. These devices were manufactured and distributed from May 2013 to Mar 2014. The recall is expected to have a marginal negative impact on Covidien's sales and earnings in the fourth quarter of fiscal 2014.

Covidien posted a 14.3% rise in fiscal 2014-third quarter adjusted earnings per share to $1.04 from 91 cents a year ago, beating the Zacks Consensus Estimate by 4 cents. Net earnings rose 11.0% to $474 million from $427 million.

Total revenues in the quarter grew 4.3% to $2,688 million, marginally missing the Zacks Consensus Estimate of $2,690 million. On a geographic basis, revenues in the U.S. market increased 3.2% to $1,325 million. On the other hand, revenues from non-U.S. developed markets rose 4.2% to $948 million and from emerging markets went up 8.1% to $415 million.

In early June, medical technology giant, Medtronic Inc. ( MDT ) announced its plans to acquire Covidien for $42.9 billion. Medtronic's rationale behind the merger is to offset the impact of high U.S. corporate tax rate by shifting its tax base overseas, to Ireland. Subject to certain customary conditions, the acquisition is expected to close in the fourth quarter of 2014 or early 2015.

Post-merger, the combined entity will be known as Medtronic plc and will boast a comprehensive product portfolio, a diversified growth profile and broad geographic reach. On successful completion of the transaction, Medtronic plc is expected to report at least $850 million of annual pre-tax cost synergies by the end of fiscal 2018.

Covidien currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the medical products industry include ICU Medical, Inc. ( ICUI ) and Symmetry Medical, Inc. ( SMA ). ICU Medical sports a Zacks Rank #1 (Strong Buy), while Symmetry Medical carries a Zacks Rank #2 (Buy).

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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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