Covidien Spins Off Drug Company: 5 Drug Makers Hedge Funds Want Most


Covidien (NYS: COV) plans to spin off its pharmaceuticals division from its surgical products in order to create a separate company better able to compete in the growing pain-management area, reports Bloomberg.

The drug unit alone generates about $2 billion in annual sales compared to the company's medical products business, which has annual sales of about $9.6 billion. It will take an estimated 18 months for the spin-off to be complete.

"The pharma division has been a drag on the company's top-line growth rate," said Joanne Wuensch of BMO Capital Markets in a note. The spinoff "should provide a relief to the overhang and questions that have dogged this division."

The market reacted favorably to the news, jumping 3.3% on Thursday -- a nice rebound from the 7.7% drop this year prior to the announcement.

One of many
Covidien's spinoff follows a recent trend among health-care companies who have shed their weaker links in order to grow their core operations.

This isn't the first spin-off for Covidien either -- the company recently divested three business units. In December of 2009 it sold its U.S. radiopharmaceutical business to Parthenon Capital LLC. It also made two deals in 2010 to sell units to New Mountain Capital LLC, based in New York.

Covidien's pharmaceutical product lines include Exalgo, a 24-hour extended release opioid, and Pennsaid, a topical anti- inflammatory medication. Perhaps these drugs will be more profitable in a company focused on their marketing and development.

Investing ideas
In a market that is facing growth difficulties, it is easy to understand why big companies would shed their underperforming divisions for the benefit of shareholders.

So we were wondering what pharmaceutical companies are seeing positive attention from hedge funds as they are now, including deals already in the pipeline.

To find out, we created a list of major drug companies and screened them for the names seeing the highest levels of institutional buying. The "smart money" thinks these drug companies have more upside than downside.

Do you agree? (Click here to access free, interactive tools to analyze these ideas.)

1. Rigel Pharmaceuticals (NAS: RIGL) : Engages in the discovery and development of small-molecule drugs for the treatment of inflammatory/autoimmune diseases, as well as for certain cancers and metabolic diseases. Market cap of $532.16M. Net institutional shares purchased over the current quarter at 3.2M, which is 5.61% of the company's 57.08M share float.

2. Aegerion Pharmaceuticals (NAS: AEGR) : Engages in the development and commercialization of novel therapeutics to treat severe lipid disorders. Market cap of $335.61M. Net institutional shares purchased over the current quarter at 366.0K, which is 2.62% of the company's 13.95M share float.

3. Impax Laboratories (NAS: IPXL) : Engages in the development, manufacture, and marketing of bioequivalent pharmaceutical products. Market cap of $1.19B. Net institutional shares purchased over the current quarter at 1.4M, which is 2.34% of the company's 59.90M share float. .

4. WuXi PharmaTech (Cayman) (NYS: WX) : Engages in providing laboratory and manufacturing services to support research and development for pharmaceutical, biotechnology, and medical device companies. Market cap of $781.08M. Net institutional shares purchased over the current quarter at 1.2M, which is 2.34% of the company's 51.21M share float.

5. Abbott Laboratories (NYS: ABT) : Engages in the discovery, development, manufacture, and sale of health care products worldwide. Market cap of $85.51B. Net institutional shares purchased over the current quarter at 13.9M, which is 0.92% of the company's 1.51B share float.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.

Kapitall's Rebecca Lipman does not own any of the shares mentioned above. Institutional data sourced from Fidelity.

At the time thisarticle was published The Motley Fool owns shares of Abbott Laboratories. Motley Fool newsletter services have recommended buying shares of Abbott Laboratories and Covidien. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.