Covidien: Why It Looks Like Bayer Will Take Its Health Care Business

Image Credit: Pfizer

Image Credit: Pfizer


S. for: Neonazeb

Q1 2018 Revenue ($Y’16): $3.1 billion

FCF: $2.4 billion

Key Stats

The revenue and earnings beat estimates of market watchers and the stock price dropped. Analysts estimate earnings of $0.80/share.

The FCF number was $2.4 billion, which is higher than the consensus estimate.

Key Facts

The company has $8.3 billion in cash and equivalents.

The net income was $750 million for the quarter (below consensus estimates).

The book value stood at $16.67 (the stock closed at $69.88 yesterday).

Source: CIBC, Yahoo Finance

Given the outlook for weaker-than-expected earnings growth at a time when the market is focusing on growth stocks, it could get worse.

Furthermore, you can buy into the performance of Covidien and its differentiated product line, particularly the baby band, in a short period of time:

Description: Covidien provides healthcare products for markets around the world, including the treatment of neonatal complications, delivery of drugs and medical products, applications for structural heart disease, rehabilitation of stroke patients, and the prevention of infections.

Source: CE, Wikipedia


Pfizer has been slowly but surely accelerating a split of its generic drug business into a separate company. The name and details have yet to be disclosed.

In the last earnings call, CEO Ian Read mentioned a “well-capitalized and capable free-cash-flow [company] with the ability to recycle capital into innovation and funding acquisitions as needed,” which could indicate that Nexitropid will see a launch in India in the near future.

The Indian market has been exposed to generic drugs like Cerus with the Cerus 1 kit being the preferred solution to prevent intravenous-incision-associated-infection. This could well be the way forward for Covidien and its cheap generic pill.

Pfizer is on track to approve the contraceptive pill called “Covidien” as well as a blood thinner.

But don’t forget Bayer

Of course, Pfizer has competition in the generic drug space as well. In Germany, Bayer is looking to cut down its middle-man by providing its generic drugs directly to clinics and pharmacies.

Bayer and a group of private equity firms are looking to buy out minority shareholders in Abbott Laboratories for $28 billion to push through with the acquisition.

In a previous report, we said:

“If both Pfizer and Bayer can succeed with their respective plans, then it would bode well for the generic drug industry as a whole. So if you are a prescription drug industry investor, keep a watchful eye out for this acquisition.”

This was right when Pfizer’s stocks were relatively cheap. However, we have already covered the Obamacare healthcare reform in a previous report. The market looks to be in an over-reaction to this potential acquisition and the delay. Here’s why.

One of the four major healthcare conglomerates, Pfizer has a market cap of $173 billion, a gross margin of 60% and a profit margin of 31%. It generated $6.18 billion in cash and equivalents in 2017 while it had $16.29 billion in long-term debt. The stock is currently trading at $70.76, while its 52-week range is from $62.65 to $74.84.

On a dividend front, Pfizer boasts a dividend yield of 3.2%. The forward annual dividend yield is $2.52 or 2.5%.


We agree with analysts (Credit Suisse, Societe Generale, Morgan Stanley) who recommend Pfizer to hold or to buy. Furthermore, it will be interesting to see if Pfizer would be a beneficiary of Bayer’s acquisition of Abbott Laboratories.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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