Covidien CEO José Almeida talks about how the company will look at acquisitions after the scheduled spinoff of its Mallinckrodt pharmaceuticals business on a quarterly earnings call.

April 26, 2013

3 Min Read
How Will Covidien Approach Mergers & Acquisitions Once it Spins Off its Pharma Business?

Dublin-based medical technology firm Covidien is moving to spin off its pharmaceutical business as planned by the middle of the year.

On May 3, it will report separately multiple years of financial performance for Covidien excluding its Mallinckrodt business, as well as provide future financial guidance.

On Friday it reported its fiscal second quarter results, and on its earnings call the question of how Covidien will manage the financial effect of the spinoff and where it will invest its money in the future was on the minds of at least one analyst.

Kristen Stewart, an analyst with Deutsche bank, asked whether it would be appropriate to infer that with the imminent pharma spinoff, Covidien would be more active in doing mergers and acquisitions. But Covidien CEO José Almeida said that the company's acquisition strategy is not affected by unrelated events like a spin off.

We say this all the time. Every acquisition is opportunistic. Covidien, no matter how much money we have in our balance sheet, will not undertake an acquisition, which we don't think will be of value creation to our shareholders. We don't change our models. Our models are fixed. We contemplate the opportunities in the marketplace. So, pharma not being part of Covidien's portfolio does not open the opportunity for us to go try to replace the revenue with another acquisition that will be of similar size. That's not how we think.... We continue to look at tuck-ins. We continue to look at an average of 10 to 20 acquisitions on a monthly basis and 90-plus percent of them don't make it to second base.

Almeida also talked about where the company will make "the lion's share" of its investments in the future. That is squarely in emerging markets. The company has already spent money in building up infrastructure there - especially in terms of a sales force. He noted that China already has 700 sales reps and more will be hired. But the company is also setting up training centers in emerging markets.

We are putting training centers in Brazil, upgrading our training centers in China, putting them in India, Turkey. We are going to put another one either in Mexico or Colombia. So we are very excited about the ability to reach out to these customers and programs [that] are open to MIS - minimally invasive surgery programs.

Overall, Covidien's emerging markets business comprising Eastern Europe, Middle East & Africa, Asia and Latin America, the company "had another excellent quarter, with operational sales growth in the high teens, and double digit increases in all regions and all product lines." he said.

The medical device business of Covidien had revenue of $2.09 billion in its fiscal second quarter ended March 29, up from $2 billion in the same quarter a year ago. Combined business revenue was $3.1 billion, up from $2.95 billion a year ago. Net income declined to $439 million, or 93 cents per diluted share, up from $497 million, or $1.02 cents per diluted share.

-- By Arundhati Parmar, Senior Editor, MD+DI

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