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Covidien Prices Senior Notes

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Healthcare major, Covidien plc announced that its fully-owned subsidiary Covidien International Finance S.A. (CIFSA) will be offering 2.950% underwritten senior notes due 2023 for an aggregate purchase price of $750 million.

The net proceeds will be used primarily to repay its earlier debt of 1.875% senior notes due Jun 2013 as well as for general corporate purposes. The offering will close on May 16, 2013.

Covidien’s debt-to-capital ratio at the end of the second quarter of fiscal 2013 was 29.4%. Moreover, net interest expenses in the quarter were $50 million.

Covidien recently provided a dismal fiscal 2013 guidance, which complements its Zacks Rank #5 (Strong Sell). Management stated that the guidance was lowered due to the impact of unfavorable currency fluctuation.

Moreover, the company’s net income from continuing operations dropped 10.2% in the last reported quarter of fiscal 2013 due to higher expenses, which dampened solid sales growth. We are concerned over the company’s increasing expenses associated with acquisitions, costs related to the expected divestment of Malinckrodt and other restructuring charges. The medical device tax is an additional burden borne by the company.

Covidien is slated to spin-off its Pharmaceutical unit at the end of Jun 2013. The Pharma business is performing well and contributing significantly to the top line. Following its divestment, Covidien will be left with only the medical devices and supplies businesses. Given the current difficult healthcare environment, uncertainty looms over the growth prospects of these two businesses.

While we strongly recommend investors to avoid this stock due to the risks associated with the Pharma spin-off, other medical stocks such as Conceptus , Atricure (ATRC - Free Report) and Myriad Genetics (MYGN - Free Report) warrant a look. While Conceptus carries a Zacks Rank #1 (Strong Buy), the other two stocks carry a Zacks Rank #2 (Buy).

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