HEALTHCARE PRODUCTS and medical device maker Covidien said yesterday it plans to spin off its pharmaceutical business into a stand-alone public company, sending its shares up by as much as 5 percent.
The spin-off, anticipated by Wall Street for several years, would likely take up to 18 months and be carried out as a tax-free distribution to shareholders.
The two units “have distinctly different business models, sales channels, customers, capital requirements and talent bases,” chief executive José Almeida said in a statement.
Covidien’s pharmaceutical business, which carries lower margins than its other businesses, accounts for about $2 billion (€2.6 billion) of total company sales.
After the spin-off, Covidien’s medical products business would generate about $9.6 billion in sales, the company said.
Covidien, which is domiciled in Ireland, employs about 1,500 people at plants in Galway, Tullamore and Dublin.
The company’s Irish businesses are focused on medical devices and customer service, both of which will remain with the group after the split.
BMO Capital Markets analyst Joanne Wuench said in a research note that the spin-off “removes a low-margin business and it will leave Covidien as more of a pure play for medtech investors with higher top line and better operating margins,” adding that the pharma division has been “responsible for most of the negative surprises out of the company”.
The Covidien decision follows a similar move by Abbott Laboratories, which in October announced that it would split off its pharmaceuticals business into a separate publicly traded company.
The company was rumored to have been trying to sell the unit for quite some time. Management declined to say whether it had spoken to another party about a deal.
Almeida expects improved profits for the pharmaceutical company once it stands on its own, noting that it has an advancing pipeline in place, but declined to give a specific growth forecast.
Michael Weinstein, an analyst with JPMorgan, said once the transaction is completed, Covidien should have one of the best revenue and profit growth profiles among top medical device makers.
Covidien shares were up $1.44 or 3.4 per cent at $43.60 in afternoon trade on the New York Stock Exchange. Earlier it traded as high as $44.37. – (Reuters)
