Covidien to ditch pharma unit

Covidien

Covidien plc (NYSE:COV) said it plans to spin out its no-growth pharmaceuticals business into a stand-alone business over the next 18 months.

The announcement sent the Mansfield, Mass.-based health products giant’s shares up more than 4% to $43.90 as of about 10 this morning. CEO José Almeida said Covidien has been considering a separation for years and decided to pull the trigger now that the pharma unit has been fine-tuned.

"We’ve evaluated whether to separate these businesses for several years, due to the major differences between the medical products and pharmaceutical industries. We believe that now is the right time to do so because we have significantly improved the operations, performance and pipeline of our pharmaceuticals business," Almeida said in prepared remarks. "While both businesses hold industry-leading positions, they have distinctly different business models, sales channels, customers, capital requirements and talent bases. In addition, their respective innovation pipelines differ substantially in length, regulatory approval requirements, possible risks and potential returns."

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The company said "New Covidien" would post a compound annual sales growth rate of about 8.5% after the no-growth pharma unit is spun out, posting annual sales of roughly $9.6 billion. Covidien’s bread-and-butter medical device business posted a CAGR of 10.7% from 2007 to 2011, compared with 0.0% for the pharma unit and 0.9% for its small medical supplies operation.

The move should also improve Covidien’s adjusted gross margin from 57.1% with pharma to 60.0% without.

"This transaction, if completed, would give both businesses greater flexibility to focus on and pursue their respective growth strategies, while potentially providing shareholders with greater value over the longer term," Almeida said.

The company hopes to effect the spinout so that shareholders in the new pharma firm would get a tax-free distribution.

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