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First Abbott Laboratories (ABT), now Covidien (COV). The diversified health care products group announced Thursday it is spinning out its pharmaceutical business into a separate public company, citing the need to develop separate strategies for the drugmaking unit and its bigger medical products division.

With little growth forecast and smaller margins from its pharma products, in contrast to greater potential seen in its medical devices business, it is not surprising to see the two divisions go their own way. Investors clearly viewed the pharma division as a drag on growth – Covidien’s shares rose 3% to $43.55 following the announcement. Given the positive reaction to Covidien and Abbott, shares in which are up 5% to a 22-month high of $54.89 since announcing it was splitting in two, hewing off pharma divisions could be a sign of things to come for firms with similar business models, such as Hospira (HSP) and Fresenius (FMS).

Steady but unexciting

Itself a spin-out from Tyco Healthcare, Covidien has an established business primarily in diagnostic imaging agents and generic pain medications. With established sales channels, it is a steady if unexciting business – flat growth is expected through 2016, according to EvaluatePharma data, with sales forecast to hit $2.23bn in 2016 as compared to 1.97bn in 2011.

According to a recent report in Bloomberg, Covidien had sought a buyer for the division and failed. Thus a spinout became Covidien's only viable option, which raises some questions about how attractive the pharma division will be to investors as a standalone. In contrast, Abbott's pharma business holds some of the industry's biggest selling drugs, although it will still provide an intriguing insight into how investors value the two distinct business (Abbott spin off will test market's appetite for R&D, October 20, 2011).

Trendsetting

Hospira is a company with a similar mixed business model to Covidien. The Illinois group is a dominant player in the injectable generics market in the US, a business which generates the bulk of revenues, but it also has a significant division selling infusion devices.

The company might be considering its options after being dragged down significantly this year by manufacturing issues for its injectable generics – shares have lost half their value so far this year and trade at a two-year low of $28.84. With Hospira potentially in a good position to benefit the most from potential biosimilars, splitting up the company into component parts could be a reasonable option, especially in light of the positive reactions to Abbott and Covidien break-ups.

Source: Covidien, Abbott Setting A Spin-Out Trend