Covidien's Small Acquisition Of CNS Highlights Its Growth Strategy

| About: Medtronic plc (MDT)

Covidien (COV) announced on Monday, September 24, that it will acquire CNS Therapeutics in a deal valuing the company at approximately $100 million. Investors sent shares of Covidien almost 1% higher in that day's trading session.

The Deal

Covidien announced that it will acquire CNS Therapeutics, a privately held specialty pharmaceutical company focused on developing and commercializing products for site-specific administration to the central nervous system. Its products threat neurological disorders and intractable chronic pain.

The $100 million acquisition of CNS's business will be integrated in Covidien's Mallinckrodt division. CNS currently markets one product and has a diverse pipeline of pain and spasticity products in development.

President Mark Trudeau commented on the deal:

"This acquisition supports our strategy of leveraging our therapeutic expertise and our capabilities in manufacturing, regulatory and commercialization to serve patients. CNS Therapeutics' marketed product line complements our brand portfolio. Their central nervous system and pain management products in development complement our pipeline and address an important need for patients."

CNS Therapeutics generated less than $10 million in quarterly revenue with some 30 employees, according to Mallinckrodt spokesman Stephen Littlejohn.

As Covidien did not provide detailed financial information for CNS, attaching a valuation multiple of the deal is not possible. Covidien does not expect that the acquisition has a material impact on 2013's sales or earnings per share.

Covidien expects to close the deal in the fourth quarter of 2012. The deal is subject to regulatory approval and the usual closing conditions.


Covidien ended its third quarter of 2012 with $1.9 billion in cash and equivalents. The company operates with $5.1 billion in short and long-term debt, for a net debt position of $3.2 billion. Covidien's net debt position will not rise significantly after the deal with CNS.

For the first nine months of 2012, Covidien generated revenue of $8.85 billion. The company net earned $1.44 billion, or $2.97 per diluted share. For the full year of 2012, the company is on track to generate revenue around $12 billion. Covidien is expected to earn almost $2.0 billion, or $4 per share.

Valued at $28.5 billion, the market values Covidien at 2.4 times annual revenue and 14 times earnings.

Currently, Covidien pays a quarterly dividend of $0.26, for an annual dividend yield of 1.8%.

Investment Thesis

Year to date, shares of Covidien have risen some 32%. Shares steadily rose from levels around $45 in January to their highest level for the year, around $60 last week. Earlier in September, Covidien raised its quarterly dividend by some 16%, boosting interest in the stock.

Between 2008 and 2012, the company already boosted its annual revenue from $9.9 billion in 2008 to an expected $12 billion in 2012. Net income rose from $1.4 billion to an expected $2.0 billion over the same time frame.

Covidien, which once was the healthcare unit of Tyco (NYSE:TYC), keeps growing partially by organic growth, but also by means of acquiring other companies. Earlier this year, Covidien bought SuperDimension for $350 million and Oridion Systems for $346 million. The latest deal of CNS just once more highlights the strategy of making bolt-on acquisitions in the company's attempt to grow the business.

While the deal of CNS hardly makes a dent in Covidien's operations, it highlights the company's deal making aspirations. Shares of Covidien trade at their highest level since being an independent company.

Valued at a mere 14 times annual earnings, this manufacturer of healthcare products has plenty more upside. I see shares reaching $70 in the coming year.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.