Shopping Spree Continues at Covidien

The management at Covidien plc certainly is true to its word. In discussing reasons for company’s $2.6 billion acquisition of ev3 Inc. earlier this month, Chairman and CEO Richard Meelia said, “when the right strategic deal comes along we don’t preclude them.”

There have been few, if any, deals Meelia and his colleagues haven’t precluded lately as they reshape and expand the company’s medical device business. Over the last 14 months, Dublin, Ireland-based Covidien has acquired five companies and divested four others as it continues to craft a long-term growth plan and restructure the business that spun off from Tyco International in mid-2007. Within the last three years, Covidien has acquired nearly a dozen companies.

Covidien’s most recent find was Somanetics Corporation, a Troy, Mich.-based firm that sells the INVOS System, a device that measures blood oxygen levels in the brain of patients undergoing surgery to help detect and correct various life-threatening complications. Covidien is paying $250 million for the publicly-traded firm in a deal that represents a 32 percent premium to the closing price prior to the acquisition and a valuation of nearly six times on a trailing price-to-sales basis.

“The acquisition of Somanetics will allow Covidien to broaden our product offerings and add another monitoring technology to its portfolio,” Pete Wehrly, president of Respiratory & Monitoring Solutions at Covidien, said in a news release. “The Somanetics product line, which we currently distribute in Europe, will expand our presence in the operating room.”

Analysts said the purchase is a “logical fit” for Covidien as it attempts to diversify its selection of oximetry and monitoring products. Stephen Simpson, a financial investor and consultant and former equity analyst, believes Somanetics’ core products and technologies are a logical fit for Covidien’s Nellcor patient monitoring business. “This deal should enable Covidien to package together more appealing total solutions (and harness technology into new applications) to compete with Masimo and Philips in the patient monitoring market,” he wrote in a story posted on investopedia.com. Plus, Simpson added, Covidien distributes Somanetics’ products in Europe and has been a “significant” part of its rising sales.

In fiscal 2009, Somanetics reported $50 million in sales, a 5 percent increase compared with the $47.5 million the company reported in fiscal 2008. The firm’s latest earnings report shows the increases continuing in fiscal 2010—Somanetics reported $13.9 million in net revenue during the second quarter (ended May 31, 2010), a 17 percent increase compared with the $11.8 million it generated during the same period last year. U.S. net revenue jumped 15 percent to $10.7 million, while international revenue rose 28 percent to $3.2 million.

Besides broadening Covidien’s patient monitoring product offering, the INVOS technology from Somanetics pairs nicely with the Bispectral Index, the only system capable of measuring the effects of anesthesia and sedatives on the brain, analysts noted. Covidien added the Bispectral system to its oximetry and monitoring group last year with the $210 million acquisition of Aspect Medical Systems Inc. of Norwood, Mass. Analysts expect the combined revenues from Aspect and Somanetics to add $150 million in annual revenue to Covidien’s Oximetry and Monitoring group, which reported $636 million in revenue in each of the last two fiscal years.

Covidien has three business segments: medical supplies, pharmaceuticals and medical devices. The company—with $10 billion in sales and a U.S. headquarters in Mansfield, Mass.—has focused most of its investments in the medical device segment, which accounts for more than 60 percent of the firm’s sales (largely in areas such as surgical instruments, ventilators, monitoring devices and tissue grafts). In the six months ended March 30, devices accounted for three-fifths of the company’s $5.41 billion in sales.

Covidien’s two acquisitions this month are expected to pare earnings slightly this year and in 2011, though executives expect the amount of cash in the firm’s balance sheet to range between $1 billion and $2 billion.

In addition to the two acquisitions this month, Covidien acquired Aspect Medical Systems in December, surgical cutting and stapling products manufacturer Power Medical Interventions Inc. in July 2009 and VNUS Medical Technologies in May 2009. VNUS Medical makes products for the minimally invasive treatment of venus reflux disease.

Since last fall, Covidien has sold its oxygen therapy line and its general pharmacy business. In addition, the company recently has agreed to sell its sleep therapy business and its specialty chemical business, based in Phillipsburg, N.J.