standalone company. Five is truly a wonderful age to become a parent. Many had predicted some type of transaction related to the pharma group as the company has been more focused on its larger and higher growth medical devices and supplies businesses.
In addition to being a top 10 generic drug maker and a leading player in the bulk acetaminophen market, the pharma group has numerous other products in its portfolio such as opoids and contrast media. As impressive as that sounds, the group is still relatively small within Covidien, representing only ~17% of total sales ($2b) and an even smaller piece of the operating income.
Current President and CEO Jose Almeida provided plenty of reasons for the split including greater flexibility for both companies, differing operating characteristics and a better opportunity for the pharma unit to grow. Apparently, it was also the perfect time to spin out the division “because we have significantly improved [its] operations, performance and pipeline.” The truth is that Covidien had tried to sell the unit, but was unable to find a buyer. While there is opportunity to grow in the pain-management segment and with new drugs, the ‘growth’ argument is a bit suspect due to the fact that even after all of the ‘improvements’ to the business, according to a recent investor presentation, the group managed a whopping 0% CAGR from ’07-’11 (vs. 10+% for the medical devices unit). The pharma unit also has significantly lower margins than the medical devices unit and is more US focused, with 2/3 of its sales coming domestically. It is also worth mentioning that the pharma group has been without a permanent leader for some time now.
It sounds to me that the company has found a way to dump a business it wasn’t particularly interested in anymore. Analysts don’t seem too fond of it either, referring to it as a ‘drag’ and other downer terms. That isn’t bad from my perspective as strong negative sentiment can often present opportunities, so this situation bears watching. The move is expected to be tax free, but patience is required here as the transaction could take up to 18 months. I wouldn’t be surprised if the company continues to pursue a sale, but either way, we will keep you updated as more information is made available.
Disclosure: Author holds no position in any stock mentioned.
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- Covidien Spin Continues Breakup of Tyco Empire (thestreet.com)
- Covidien to Spin Off Pharma Business (dealbook.nytimes.com)
- Tyco Does It Again (stockspinoffs.com)
