Covidien Spinning Off Drugs Unit to Focus on Pain Management

Covidien Plans Spin-Off of Pharmaceuticals Unit
The headquarters of Covidien Plc, in Mansfield, Massachusetts. Source: Covidien Plc. via Bloomberg

Covidien Plc., a maker of surgical products and drugs, plans to spin off its pharmaceuticals division into a separate company that would be better able to compete in the growing pain-management area.

The drugs unit generates about $2 billion in annual sales, with about two-thirds coming from the U.S. market, the company said in a statement today. Among its products are Exalgo, a 24-hour extended release opioid, and Pennsaid, a topical anti-inflammatory medication.

Covidien, with offices in Dublin, Ireland, and Mansfield, Massachusetts, had been seeking to sell the unit when talks broke down earlier this year, people familiar with the matter said in June. The company’s medical products business has annual sales of about $9.6 billion, today’s statement said.

“The pharma division has been a drag on the company’s top-line growth rate,” said Joanne Wuensch, an analyst with BMO Capital Markets in New York, in a note. The spinoff “should provide a relief to the overhang and questions that have dogged this division.”

Covidien rose 3.3 percent to $43.55 at 4 p.m. New York time. The shares had fallen 7.7 percent this year before today, closing yesterday near their low for 2011.

Recent Trend

The company’s plan follows a recent trend of health-care companies who have shed units in favor of their core businesses, including Abbott Laboratories, in Abbott Park, Illinois, and New York-based Pfizer Inc., said Jeff Jonas, an analyst with Gabelli & Co. in Rye, New York, in a telephone interview.

“We’re in a tough market where share prices haven’t been increasing,” Jonas said. “Maybe the pieces will be more attractive on their own.”

Investors have rewarded all three companies in the wake of their announcements. Abbott has risen 4.7 percent to $54.89 since Oct. 18, the day before its plan to divest its drug business was announced, and shares of New York-based Pfizer have increased 16 percent to $21.15 since CEO Ian Read announced on Feb. 1 that he was planning to divest units.

Covidien’s decision to shed its drugs division is expected to take up to 18 months to complete, the company said. While a leader for the drug company has been hired, according to the company, Covidien declined to identify the person.

The change won’t affect Covidien’s ability to make acquisitions, Chief Financial Officer Charles Dockendorff said on a conference call with investors.

Trays, Hypodermic Needles

The medical products division makes trays, hypodermic needles, retractors, pumps for patient feeding and pain management, and other items used in hospitals.

“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 in the statement.

The pharmaceutical company will likely be based in Ireland, partly for tax purposes, Dockendorff said. The main operations of the drug business are now in St. Louis, Missouri.

The drugs business “definitely needs some investment, and that’s why there are so many questions about the new president and whether there might be some strategy changes beyond that, Jonas said. “They need to find some new products, invest in the pipeline. That’s a multiyear process,” he said.

Past Divestitures

Covidien has divested three business units since December 2009, when it sold the U.S. radiopharmaceutical business to Parthenon Capital LLC, a private equity firm based in Boston. In two 2010 deals, the company sold U.S. units to New Mountain Capital LLC, based in New York.

Jonas said those sorts of sales are part of a trend across industries in a difficult economy. “We’re in a tough market where share prices haven’t been increasing,” he said. “Maybe the pieces will be more attractive on their own.”