Covidien Looking for an Rx

 | Jun 11, 2013 | 2:30 PM EDT
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This morning, medical device maker Covidien (COV) announced that its next-generation endovascular device, the Solitaire FR, used in treating ischemic stroke patients, achieved substantially better results and clinical outcomes than Concentric Medical's Merci Retriever catheter. This exciting development could shake up the blood-clot segment.

Doctors use the privately held Concentric's Merci Retriever to snatch blood clots out of large blood vessels in stroke victims. The Food and Drug Administration first approved this clot-catching device in 2004, and the Concentric product line leads the market. In the last nine years, more than 14,000 patients have been treated with Concentric products.

Covidien announced that its 144-patient, randomized SWIFT study saw substantially better results and patient outcomes. In addition, three other scientific studies, the ESCAPE, EXTEND-IA and REVASCAT trials, have also added to the growing body of evidence that Covidien mechanical thrombectomy device is safe and effective treating stroke patients.

According to Concentric, ischemic strokes make up the majority (87%) of all strokes. An ischemic stroke occurs when a blood vessel to the brain gets clogged, cutting off the supply of oxygen.  Stroke is the third-leading cause of death in the U.S. and it's the leading cause of long-term disability in adults. On average, every 40 seconds someone in the U.S. has a stroke, and someone dies from a stroke every few minutes.

Last year, Covidien announced it would spin off its pharmaceuticals business. More than half of that business focused on things like dyes and contrasts for the radiologic market. After the spin-off, the medical device business will make up 83% of Covidien's revenue and the endomechanical-device market accounts for almost 24% of the company's $11.9 billion in revenue.

Investors love spin-offs. Covidien's former pharma business, now called Mallinckrodt PLC, will begin trading this summer. The company will have $2 billion in revenue and will focus on the generic pain market, the radiologic contrast business and attention deficit hyperactivity disorder (ADHD). Mallinckrodt is the only manufacturer of acetaminophen outside of Asia and is the first company to introduce a generic form of Concerta, a treatment for ADHD.

The management of both companies will be out in force at investor conferences to talk up the story.  They need to. When Covidien reported its fiscal second quarter, the medical-device business had slowed to just 6%. Revenue grew 5.3% to $3.1 billion. Sales missed expectations and the stock was slammed. The company was also affected by weakness in the Japanese yen. Year-to-date, the stock is up 11%.

The company gave fiscal year 2013 guidance May 3 and projected that sales would grow 4% to 5%, which works out to about $12.33 billion to $12.44 billion in revenue vs. a previous expectation of $12.5 billion. Medical devices are expected to grow in the mid-single digits and medical supplies are expected to eke out just 1% growth. Mallinckrodt is expected to grow faster on a small revenue base. Total sales are expected to grow between 7% and 11%. The company's specialty pharmaceutical business, which is mostly generic Concerta, is expected to grow more than 20% as patients look for less expensive ADHD treatments.

COV trades at 16x fiscal 2014 expected earnings of $4.07. It seems to me, investors have already priced in any earnings per share growth and taken into account the spin-off. Although the company's new stroke treatment is exciting, it's unlikely to add to growth next year. Medical-device investors need to see more growth to unclog their wallets.

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