Covidien plc will spin off its Hazelwood-based drug business, turning it into an independent company that may restore the historic corporate name of Mallinckrodt.
Covidien, based in Dublin, makes medical devices and medical supplies in addition to drugs. The proposed spinoff also will have its legal headquarters in Ireland, largely for tax reasons, company executives said in a conference call.
But the spinoff’s U.S. operation will be based in Hazelwood, and its new CEO will work from here. Spokesman Steve Littlejohn said the company has not made a final decision on its name, “but chances are good that it will be Mallinckrodt.”
Covidien’s pharmaceutical business has $2 billion in sales, with two-thirds of that coming in the U.S. market. It turned an operating profit of $318 million this fiscal year.
The drug business is a large provider of acetaminophen, the ingredient in Tylenol, and the largest U.S. supplier of opioids; both are pain medicines. Other lines include contrast products used with medical imagery and nuclear medicine products.
The pharmaceutical operation currently employs about 2,500 people in metro St. Louis. A company spokesman said the move should have no immediate impact on jobs here. Some jobs might be added as the firm sets up its own administrative operation.
Analysts had speculated that Covidien might get rid of the drug operation. Although profitable, it is less lucrative than the rest of Covidien and demands a higher investment in research and development. The drug operation earns a 16 cent operating profit for every dollar of sales, compared with 28 cents for the rest of the company.
The drug operation has a “lumpy” revenue history, notes analyst Aaron Vaughn of Edward Jones in Des Peres. The division is largely a generic drugmaker, and that sector suffered through a price war in past years, he noted.
“We thought they would be getting the business right-sized so that they could spin it off and let it grow on its own,” he said.
Covidien Chief Executive Jose Almeida said the pharmaceutical drug division’s performance had improved in recent years.
“We’re confident the business can now stand on its own,” he said in a conference call Thursday morning.
He said the company had been thinking about shedding the business for several years, citing “major differences” between drugs and Covidien’s other medical products. The operations have different business models, sales channels, customers and capital requirements, and demand different talents, he said.
Separating the operations would allow both to focus on their own strategies, Almeida said. Shareholders also might get more value over the long term, he said.
The drug business “definitely needs some investment,” said analyst Jeff Jonas of Gabelli & Co. in an interview with Bloomberg News. “They need to find new products, invest in the pipeline. That’s a multiyear process.”
Research and development consumes 7 percent of revenue in the drug division, compared with 4 percent in the rest of Covidien.
The spinoff would be in the form of a stock distribution, tax-free to U.S. shareholders, the company said. That tax-free aspect made the option of a spinoff superior to the alternative of selling the unit, company officials said.
The spinoff could take 18 months to complete and would need approval of regulators.
Bloomberg News, citing unidentified sources, reported last summer that Covidien had tried to sell the unit, but talks broke down.
Almeida said he has picked a CEO for the new company, although he didn’t name the person. The person is a ’strong leader” with “broad pharmaceutical experience,” Almeida said, and will join the spinoff from another company.
The drug operation is now headed by Matt Harbaugh, the drug division’s chief financial officer serving as interim president. Based in Hazelwood, he has led the unit since the previous president left last year.
Besides its Hazelwood headquarters, the drug unit has a research operation in Webster Groves, a nuclear medicine facility in Maryland Heights and a plant just north of downtown St. Louis.
That plant sits on what was the Mallinckrodt family farm. G. Mallinckrodt & Co. was founded there in 1867 and grew up as a chemical and drug firm. It refined uranium for the Manhattan Project, which created the atomic bomb during World War II.
Avon Products acquired Mallinckrodt in 1982. Avon sold the company to International Minerals and Chemical Corp. in 1986, which later changed its own name to Mallinckrodt.
In 2000, Tyco bought the company. After Tyco went bankrupt amid scandals, its health care operations were spun off as Covidien in 2007.
Without the drug business, Covidien would have $9.6 billion in sales. Covidien’s remaining business makes trays, hypodermic needles, retractors, pumps for patient feeding and pain management, and other medical devices.
Covidien stock rose $1.39 to $43.55 on Thursday.
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