Covidien to spin off pharma biz

Covidien ($COV) announced plans this morning to spin off its pharmaceuticals business into a stand-alone public company, a move President and CEO José Almeida said has been evaluated for years. The completion of the spinoff is projected to take 18 months, pending customary regulatory approvals. The announcement comes months after news outlets reported that Covidien had hired JPMorgan Chase to handle a potential sale of its drugs business in a potential $4 billion deal.  

During a conference call, Almeida said the spinning off is "the best course of action" at this time, and Covidien's choice of who will lead the spinoff will be announced shortly (but it is a done deal, CFO Charles Dockendorff assured listeners). Almeida added in a statement that the spinoff makes sense, given that its business model, sales channel and customers differ from the medical products unit. Furthermore, "their respective innovation pipelines differ substantially in length, regulatory approval requirements, possible risks and potential returns."

When asked about why the company chose a spinoff versus a sale, Almeida said the spinoff option provided Covidien with a tax-efficiency component that couldn't be ignored and will prove to be a boon to shareholders. He also declined to comment on whether Covidien had had any discussions with other companies about a sale of the pharma business.  

At least one analyst is positive about the spinoff. "The pharma division has been a drag on the company's top-line growth rate," said BMO Capital Markets' Joanne Wuensch, as quoted by Bloomberg. The spinoff "should provide a relief to the overhang and questions that have dogged this division."

Once the spinoff is complete, the resulting Covidien medical products business would have annual sales of about $9.6 billion, based on 2011 reported sales. Covidien's pharmaceuticals business currently generates about $2 billion in annual sales, with about two-thirds derived from the U.S. market, the company says in a statement.

The Covidien news comes a couple of months after Abbott Labs ($ABT) announced that it's splitting itself into two similarly sized, separate companies. So it'll be interesting to see if other companies with biopharma and device units start following this trend.

- check out Covidien's statement
- get more from Bloomberg