Covidien PLC (COV): Interesting Medical Spin-Off for Mid-2013

Complications and legal issues

At this point, the primary hurdles that stand in the way of this deal’s completion are logistical rather than legal. Since no major lawsuits or investigations have arisen to complicate this deal, it appears likely that it will close as planned. Covidien’s management team has hinted that it will release specific information about the deal’s terms and timing by the end of the first quarter of 2013.

Long-term prospects and outlook

According to the latest figures, Mallinckrodt accounts for just under 20% of Covidien’s total sales. As such, the company can expect to earn annual revenue in the neighborhood of $2 to $2.5 billion during the first few years of its existence. In terms of size, this means that it will be one of the smaller newly-formed companies to arise out of the current wave of pharmaceutical spin-offs. For comparison, Abbott Labs’s (ABT) AbbVie Inc.  (NYSE:ABBV) spin-off has annual revenueof about $18 billion.

However, Abbott Labs is a far less diversified company than Covidien. In addition, Mallinckrodt will have a far more specialized and high-end portfolio of drugs. By contrast, AbbVie’s business model relies heavily on the development and sale of blockbuster drugs that have the potential to bring in billions of dollars in revenue on an individual basis. In other words, it may be unfair to compare the two companies.

Regardless, it must be noted that Mallinckrodt is entering a crowded, highly competitive space. While the newly-formed company will be able to rely on a robust portfolio of proven drugs, it will need to invest heavily in research and development in order to remain competitive. The company’s current hiring blitz indicates that its management team is aware of this need.

In sum, the Mallinckrodt spin-off looks to provide current Covidien PLC (NYSE:COV) shareholders with a solid opportunity to turn a profit. In the short term, the company is likely to perform well and could provide returns of 20% or more after its release. These returns could be further enhanced by a special dividend. Accordingly, investors would do well to listen to the statements provided by Covidien’s management team in the coming weeks.

The article Interesting Medical Spin-Off for Mid-2013 originally appeared on Fool.com and is written by Mike Thiessen.

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