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Covidien Closes CNS Therapeutics Buy

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Mallinckrodt, the Pharmaceuticals business of Covidien plc , recently completed the acquisition of CNS Therapeutics, Inc., a St. Paul Minnesota-based specialty pharmaceutical company, for roughly $100 million. The acquisition was closed quicker –than-expected as the company had earlier anticipated that the transaction would be closed in the fourth quarter of calendar year 2012.

Privately-owned CNS Therapeutics develops and markets products specifically intended for site-specific delivery to the central nervous system to treat intractable chronic pain and neurological disorders. The company’s key product line viz. Gablogen (baclofen injection) is FDA-approved (“Food and Drug Administration”) and is used to treat severe spasticity. Moreover, CNS Therapeutics is currently developing a number of pain and spasticity products to leverage growth.

Acquisition to Expand Specialty Pharmaceuticals Offerings

Covidien plans to integrate the CNS Therapeutic business with its Specialty Pharmaceuticals division, within the Pharmaceutical business, to capitalize on its therapeutic expertise. The inclusion of CNS Therapeutic’s marketed product along with its solid product pipeline should boost Mallinckrodt’s pain management branded product portfolio. However, Covidien does not expect the deal to be materially accretive to its fiscal 2013 sales and earnings.

In the last reported third quarter of fiscal 2012, revenues from Covidien’s Pharma segment remained flat year over year at $501 million. Robust gains in the Specialty Pharmaceuticals business were offset by lower Contrast Product sales. Specialty Pharmaceuticals sales surged 21% to $145 million spurred by solid revenue from the Exalgo and Pennsaid products.

Mallinckrodt is a leading manufacturer of bulk acetaminophen in the world and the largest supplier of opioid pain management drugs in the U.S. It also features in the top 10 list of prescription-based pharmaceuticals manufacturers in the U.S. Covidien is looking to divest Mallinckrodt and convert it into a stand-alone company by mid-2013.

Covidien was on an acquisition-spree in the recent past and scooped up several new companies for diversification and development of new products/technologies. The company acquired BARRX, superDimension, PolyTouch, Newport Medical and Oridion, among others.

Our View

Covidien remains committed to rolling out new products and technologies, focusing on emerging markets, and boosting market share in core segments through investments in sales and marketing infrastructure. Management expects that a focus on product innovation, aggressive portfolio management and optimal spending on future investments will yield positive results in the long run.

With market capitalization of $28.52 billion, Covidien is a leading developer, manufacturer and distributor of medical devices and services on a global scale. Its business segments overlap with the business of its competitors such as Becton, Dickinson and Company (BDX - Free Report) and CR Bard Inc. among others.

However, sustained pricing/procedure volume pressure, fluctuating foreign exchange rates, a sluggish U.S. and European economy represent major headwinds.  We currently have a Neutral recommendation on Covidien, which carries a short-term Zacks #3 Rank (Hold rating).

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