Bloomberg News

Covidien May Sell Drug Unit to Focus on Device Business

June 08, 2011

(Updates share price in fifth paragraph.)

June 8 (Bloomberg) -- Covidien Plc, a maker of surgical products and drugs, is seeking to sell its pharmaceuticals business in a transaction that may fetch $3 billion to $4 billion, said people with knowledge of the matter.

Covidien had been in talks with another health-care company interested in acquiring the drug unit before those discussions broke down recently, said one of the people, who declined to be identified because the matter is private. Other potential buyers are still looking at the business, the person said.

JPMorgan Chase & Co. is advising Covidien on its options for the unit, the people said. The business had $1.99 billion in sales in the 12-months ended September 2010. Drugs are the company’s second-largest area of business behind its $6.72 billion medical-products line.

The unit “is ripe for divestment” since it’s not as important to Covidien’s growth and cash flow, said David Turkaly, a Susquehanna Financial Group analyst in New York, in a note to investors. “A pharma divestiture would make the company a pure-play med-tech device company -- among the best names to own, in our opinion, as they might garner a premium valuation” for the shares.

Covidien declined 14 cents to $54.17 at 4:01 p.m. in New York Stock Exchange composite trading. The shares have increased 37 percent in the past 12 months.

Lower Margins

Selling the drug unit for $3 billion to $4 billion would be a good deal for Covidien, said Jeff Jonas, an analyst at Gabelli & Co. in Rye, New York.

“The pharma business has struggled to grow sales and carries much lower margins than the main medical device business,” Jonas said today in an e-mail.

While a deal would boost profit margins and growth in the long run, investors may initially be lukewarm about a sale because it may cut into next year’s earnings, said Michael Matson, a New York-based analyst at Mizuho Securities USA Inc., in a telephone interview.

Bruce Farmer, a spokesman for Covidien, declined to comment. The company has offices in Dublin, Ireland, and Mansfield, Massachusetts. A spokeswoman for JPMorgan didn’t reply to a request for comment.

Covidien’s Strategy

Covidien’s proposed sale of the drug unit fits the strategy outlined in March by outgoing Chief Executive Officer Richard Meelia, whose retirement is planned for July. Meelia said the company would increasingly focus on medical devices after he leaves.

The company 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.

The maker of hypodermic needles and hospital feeding-pumps was spun off from Tyco International Ltd. in 2007.

In the U.S. pharmaceutical industry, there have been 226 announced acquisitions in the past 12 months with an average disclosed deal size of $204.7 million and an average premium of 40 percent including net debt, according to Bloomberg data.

--With assistance from Molly Peterson and Drew Armstrong in Washington. Editors: Jennifer Sondag, Andrew Pollack

To contact the reporters on this story: Jeffrey McCracken in New York at; Alex Nussbaum in New York at

To contact the editors responsible for this story: Jennifer Sondag in New York at; Reg Gale in New York at

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