Today Covidien plc (COV) announced it will be spinning off its pharmaceuticals business into its own public company. We view this event as COV passing on significant regulatory risk to the newly created company.
We have rated COV Medium Risk - Negative Bias since we initiated coverage of the company on 28-Apr-11. We reiterated this rating in our most recent report dated 11-Nov-2011. One of the major driving factors behind this rating has been an ongoing DOJ investigation.
In Jan-09, COV disclosed it received a subpoena from the U.S. Attorney's Office for the Northern District of California in Jan-09 requesting documents related to the sales and marketing of its Tofranil-PM, Restoril, and Nagnacet products (all pharmaceutical drugs). In its FY11 10-K filed in Nov-11, the company reported it was complying as required by the terms of the subpoena. That was its most recent disclosure regarding the investigation.
The above DOJ investigation, which we view as ongoing, is no doubt linked to COV's pharmaceuticals segment. COV, which actually spun-off from Tyco International itself in Jun-07, reported the spin-off "would give both businesses greater flexibility to focus on and pursue their respective growth strategies, while potentially providing shareholders with greater value over the longer term." However, the spin-off of this segment will likely transfer the risk associated with this investigation to the newly formed company.
Here is a link announcing the spin-off.
Attached is our most recent report on COV published 11-Nov-11: