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Covidien plc Generic Concerta Approval Should Provide a Meaningful Boost to Pharmaceutical Outlook in Fiscal 2013

• This morning, Covidien announced that its pharmaceuticals business (Mallinckrodt) has received approval from the FDA to manufacture and market a generic version of Concerta (methylphenidate HCI) extended-release (ER) tablets. The tablets are to be used for the treatment of attention deficit hyperactivity disorder (ADHD) and will be available in three dosage strengths (27, 36, and 54 mg).

• The company plans to launch the methylphenidate HCI ER tablets in the 27 mg dosage strength immediately, and expects to have the 36 mg and 54 mg dosage strengths available in the first quarter of calendar 2013. In addition, the company plans to submit a supplement to its approved new drug application for the 18 mg dosage strength (also expected in the first quarter of calendar 2013). The company will hold six-month generic exclusivity for all three of the dosage strengths (exclusivity begins upon the commercial launch of each individual product).

• As a result of the FDA approval and continued solid operational performance, the company increased its fiscal 2013 net sales guidance for the pharmaceuticals segment to 3% to 6% growth (previously 1% to 4% growth). We view today’s announcement as another favorable data point demonstrating that the company’s upcoming pharma
spin-off (expected mid-2013) remains on track, and we view this event as a meaningful catalyst for the stock next year as the remaining entity should grow slightly faster, offer
higher operating margins, and enjoy excellent free cash flows compared with Covidien’s
current form (which should push the multiple higher, in our view).

• To reflect newly issued guidance, we are increasing our 2013 pharmaceutical sales estimate by $39 million (now $2.101 billion, up 5%). Despite the heightened sales outlook, we will maintain our EPS target of $4.30 for next year as we anticipate the company will invest aggressively to develop its recently acquired drug coated balloon. We expect more details to be provided on January 25, 2013, when the company announces its fiscal first-quarter results.

Although shares of Covidien are up 27% this year, they continue to trade at a discount (roughly 12%) to its closest competitor, C.R. Bard (BCR $96.84; Market Perform) (14.1 times our 2013 estimate), and only a modest premium to other large cap names, which still, in our view, makes the stock attractive at these levels. Consequently, with a compelling top- and bottom-line outlook (and expected outperformance once the company spins off its pharmaceutical business in the middle of next year), Covidien remains a must-own name in medical technology, in our view, and we recommend investors accumulate its shares. We rate the stock Outperform

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