Covidien's New Acquisition Fails To Boost Investor Confidence

Irish medical technology giant Covidien plc (NYSE:COV) recently acquired Irvine, CA-based Reverse Medical Corporation – a privately-owned medical device company focusing on vascular disease, for an undisclosed sum. However, on the verge of its own acquisition by U.S.-based Medtronic Inc (NYSE:MDT), this buyout news failed to boost investors’ confidence. Following the announcement, shares of Covidien fell approximately 1.7% till the last trading session.

The acquisition of Reverse Medical is expected to complement Covidien’s existing portfolio of vascular technologies, lending it a competitive edge in the worldwide vascular embolization market.

Post the acquisition, Covidien will report the Reverse Medical business as part of its Neurovascular product line in the Medical Devices segment. Annualized dilution is not expected to be material.

Reverse Medical is focused on enhancing the management of vascular disease. It is currently commercializing its vascular embolization plugs – MVP Micro Vascular Plug System and UNO Neurovascular Embolization System. MVP and UNO are self-expanding vessel occlusion devices, which close blood vessels for vascular embolization.

Other Reverse Medical products include ReVerse which is a microcatheter for device delivery and Barrel Vascular Reconstruction Device, a self-expandable bifurcation aneurysm bridging device.

All the above-mentioned devices have received the CE Mark approval and are commercially available in Europe. Additionally, MVP-3 and MVP-5 are 510(k) cleared in the U.S.

While Covidien completed its acquisition of Reverse Medical, it is itself in the process of being bought by Medtronic in a $42.9 billion deal. Subject to certain customary conditions, the acquisition is expected to close in the fourth quarter of 2014 or early 2015.

Medtronic’s rationale behind this buyout is to offset the impact of high U.S. corporate tax rate by shifting its tax base overseas. Post-merger, the combined entity, to be known as Medtronic plc, would be based in Ireland where Covidien is registered for tax purposes (though it has major operations in Massachusetts).  

Medtronic plc will boast a comprehensive product portfolio, a diversified growth profile and broad geographic reach. On successful completion of the transaction, Medtronic plc is expected to report at least $850 million of annual pre-tax cost synergies by the end of fiscal 2018.
 
Presently, Covidien carries a Zacks Rank #3 (Hold). Some better-ranked medical product stocks include ICU Medical Inc (NASDAQ:ICUI) and ABAXIS Inc (NASDAQ:ABAX). ICU Medical sports a Zacks Rank #1 (Strong Buy) while Abaxis carries a Zacks Rank #2 (Buy). 

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