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Covidien Follows Abbott With a Pharma Spin-Off

In a late October article, we suggested that the Abbott Laboratories (NYSE:ABT) spin-off of its proprietary pharmaceutical business into a separate company may be the beginning of a trend.

It appears that just may be the case.

Dublin, Ireland-based Covidien (NYSE:COV) said today it’s going to follow in Abbott’s footsteps and separate its pharma business into a publicly traded firm. President and CEO José Almeida said the company has been considering this move for years, according to FiercePharma.

Earlier, it had been reported that Covidien had hired JPMorgan to find a buyer that might be willing to pay $4 billion for the business. Almeida didn’t indicate whether the company found any takers, but  he said the spin-off option was chosen because it provided tax advantages to shareholders.

Maybe Covidien didn’t have a choice. “They probably tried to find a buyer but couldn’t get the price they wanted,” Jeff Jonas, an analyst with Gabelli & Co. in Rye, New York, said in a phone call with Bloomberg. Gabelli owns shares of the company for its clients.

Regardless, investors are applauding Covidien’s move, boosting the shares more than 3.5% Thursday to $43.65. Even at that price, it appears management needs to do more to restore confidence — the stock is still well off its 52-week high of $57.65.

Maybe it’s just a coincidence, but the shares of Sanofi (NYSE:SNY), GlaxoSmithKline (NYSE:GSK) and Novartis (NYSE:NVS) are all up today. Industry observers believe the three European pharma companies could be breakup candidates.

In Covidien’s case, one analyst thinks it’s making a wise move. BMO Capital Markets’ Joanne Wuensch called the pharma division “a drag on the company’s top-line growth rate,” according to Bloomberg. The spin-off “should provide a relief to the overhang and questions that have dogged this division.”

Covidien sasy it expects to complete the move in 18 months. After it’s done, Covidien will be left with a medical products business that includes trays, hypodermic needles, retractors, pumps for patient feeding and pain management, and other items used in hospitals. Based on 2011 reported sales, the medical products business generates about $10 billion in annual revenue. The pharmaceutical unit generates about $2 billion in yearly sales, with about two-thirds of it in the U.S.

Covidien won’t own a piece of the new drug company, and spinning off the business won’t affect the company’s results, CFO Charles Dockendorff told Bloomberg.

A head for the new drug company has yet to be named, but whoever gets the job appears to have a big job ahead. The pharma unit will have Exalgo, a 24- hour extended-release opioid, and Pennsaid, a topical anti-inflammatory medication. But it will need a substantial investment to obtain some new products and boost the productivity of its drug pipeline, Gabelli’s Jonas told Bloomberg. And “that’s a multi-year process.”

Barry Cohen is long GlaxoSmithKline and Novartis.

Article printed from InvestorPlace Media,

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