Covidien Reportedly Considering Selling its Drug Business

Covidien Plc is accepting bids on its pharmaceuticals business, which could earn the company between $3 billion and $4 billion, sources claim. Discussions with one company recently broke down, but other potential buyers still are considering purchasing the business.

JP Morgan Chase & Co. is advising Covidien on its options, according to a report Thursday in Bloomberg. Garnering $1.99 billion in sales in the twelve month-period that ended in September 2010, the company’s drug unit is the second-largest money-maker for Covidien, behind its $6.72 billion medical products line.

The proposed sale follows a strategy outlined by outgoing chief executive officer Rchard Meelia. At the time of Meelia’s retirement announcement, he indicated that Covidien’s focus would shift to medical devices after his departure.

“A pharma divesture would make the company a pure-play [medical technology] device company—among the best names to own, in our opinion, as they might garner a premium valuation [for the shares],” David Turkaly, a Susquehanna Financial Group Analyst in New York, N.Y., wrote in a note to investors.

Jeff Jones, an analyst at Gabelli & Co. in Rye, N.Y., agrees that selling its drug unit is a good option for Covidien.

“The pharma business has struggled to grow sales and carries much lower margins than the main medical device business,” Jones said.

However, investors may take a while to warm up to the idea—while a deal of this size would boost profit margins and growth in the long run, the initial sale may cut into next year’s earnings, according to Michael Matson, a New York, N.Y.-based analyst at Mizuho Securities U.S.A. Inc.

The Mansfield, Mass.-headquartered company has divested three business units since December 2009—its U.S.-based radiopharmaceutical business to Parthenon Capital LLC in Boston, Mass.; and its U.S. specialty chemicals unit to New York, N.Y.-based New Mountain Capital LLC last year.