Healthcare products and medical device maker Covidien Plc COV.N said on Thursday 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 Jose Almeida said in a statement.
Covidien's pharmaceutical business, which carries lower margins than its other businesses, accounts for about $2 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.
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 Inc (ABT.N), which in October announced that it would split off its pharmaceuticals business into a separate publicly traded company.
Covidien's pharmaceutical business is one of the world's largest producers of bulk acetaminophen and the largest U.S. supplier of opioid pain medications. It is among the top 10 U.S. generic drug manufacturers, the company said.
It is also one of the world's leading suppliers of generators used to produce technetium-99m, a critical diagnostic medical isotope. It is the only manufacturer that offers a fully integrated system of diagnostic contrast media in prefilled syringes and injectors.
During a conference call with analysts, executives declined to say how much the transaction would cost.
Asked why management decided not to sell the pharmaceutical unit, Almeida said: "A spin is something we control ... and the tax efficiency component cannot be ignored."
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.
Covidien will not maintain any ownership in the spun-off company, which will likely seek out its own acquisitions to round out its product offerings, Almeida said.
The capital structure of the two new companies is expected to mirror Covidien's capital structure today, suggesting Covidien will reduce its debt load in the 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 percent at $43.60 in afternoon trade on the New York Stock Exchange. Earlier it traded as high as $44.37.
(Reporting by Debra Sherman in Chicago, Bill Berkrot in New York and Kavyanjali Kaushik in Bangalore; Editing by Michele Gershberg, Gerald E. McCormick)