Covidien Cuts its Pharma Side Loose

Covidien PLC is planning to spin off its pharmaceuticals business into a stand-alone public company, focusing on its bigger and more profitable medical devices business.

Company execs said the $2 billion drug business will have more flexibility to pursue growth goals and greater opportunities to bring pipeline products to market.

The spinoff could take up to 18 months.

“We’ve evaluated whether to separate these businesses for several years, due to the major differences between the medical products and pharmaceutical industries. We believe that now is the right time to do so because we have significantly improved the operations, performance and pipeline of our pharmaceuticals business,” said José E. Almeida, president and CEO. “While both businesses hold industry-leading positions, they have distinctly different business models, sales channels, customers, capital requirements and talent bases. In addition, their respective innovation pipelines differ substantially in length, regulatory approval requirements, possible risks and potential returns.”

The split has been rumored for a while. Covidien, which has been reshaping its portfolio since breaking away from Tyco in 2007, has agreesively been growing its device business—both organizally and through acquisition (the $2.6 billion purchase of vascular-device company ev3 Inc. last year, for example). Almeida, who became CEO this summer, previously ran the the company’s medical device business.

According to Almeida during an early morning conference call on Dec. 15, the company has chosen a “seasoned executive” to lead the drug business, more specific information was not provided.

Covidien said its pharmaceuticals business is one of the world’s largest producers of bulk acetaminophen, the largest U.S. supplier of opioid pain medications and is among the top 10 generic pharmaceuticals manufacturers in the United States, based on prescriptions. It also supplies generators used to produce medical isotopes widely used to diagnose diseases. The pharmaceutical business has about $2 billion in annual sales, while the remaining medical products businesses would have annual sales of about $9.6 billion.

Covidien’s device businesses have felt some pressure from a slowdown in hospital traffic because of economic uncertainty. But it doesn’t compete in markets for some pricy implantable devices, such as defibrillators, that have recently contracted and caused big challenges for manufacturers.

Covidien is based in Ireland for tax purposes, although the company’s main office is in Mansfield, Mass.

Covidien’s move follows a similar spinoff in October by Abbott Laboratories to separate its medical products and research-based pharmaceuticals operations.