Mallinckrodt survives turmoil to emerge as brand name | St. Louis Public Radio

Mallinckrodt survives turmoil to emerge as brand name

May 19, 2008

This article first appeared in the St. Louis Beacon: The Mallinckrodt name goes back to the mid-19th century as a source of St. Louis pride in commerce, chemistry and medicine. The name goes back a quarter-century as an example of chronic corporate turmoil.

Since 1982, Mallinckrodt has been bought, sold, split up and spun off. It has been reorganized, restructured, relocated and renamed. Large pieces have been acquired and divested with the regularity of customers going through turnstiles at a sports stadium.

"Mallinckrodt became something of a capital markets football," says Stuart I. Greenbaum, a former dean and an emeritus professor of managerial leadership at Washington University's Olin School of Business. "More than most companies, it was subject to reconfigurations."

The latest version of Mallinckrodt isn't a company or division: It's a brand name for many medical products under the umbrella of Covidien Ltd., of Hamilton, Bermuda. Covidien is a collection of medical companies that were acquired by the voracious conglomerate Tyco International between 1994 and 2006. Covidien, which has 42,000 employees worldwide, was spun off as an independent public company nearly 12 months ago.

Financial analysts see encouraging signs for a healthcare-products revival. "Covidien's strength lies in its newly found freedom from the smothering bureaucracy of Tyco," says Alex Morozov of the financial research firm Morningstar.

However, the nearly 3,000 Covidien workers in the St. Louis area and investors who remember all those promises by Mallinckrodt's previous corporate parents will probably want to see more of Covidien's strategy and performance before applauding.

LITTLE SUPPORT

At least Covidien has a strategy. "Tyco was an unfocused conglomerate," says Michael J. Alderson, professor of finance at St. Louis University's John Cook School of Business.

"Getting bigger for the sake of bigness doesn't make companies more valuable," he adds. "All things being equal, spin-offs tend to do well when there's more focus."

Tyco treated its healthcare acquisitions simply as sources of cash, thus thwarting their opportunities for growth. "Tyco was an acquisition machine," says Bruce Farmer, vice president for public relations at Covidien. "The primary objective was to cut expenses and make Tyco more profitable."

Farmer promises "a totally different" approach than Tyco's. "We want to expand development and licensing and expand marketing," he explains. "We are investing for growth."

Under Tyco, spending on medical research and development was put "on the back burner," says Morningstar's Morozov. Thanks to a "chronic underinvestment" R&D spending by Tyco, Covidien must now play catch-up in developing new products. He says it will take until at least 2009 for Covidien to start growing.

Tyco's "significant underinvestment" in R&D "has hampered product innovation, which we believe will negatively impact near-term growth," adds a recent report by Deutsche Bank Securities.

The newly independent Covidien "will face significantly higher operating expenses over the next several quarters," says the investment banking firm, which has a "hold" rating on Covidien. Among analysts polled by the financial data firm Thomson Reuters, five had buy ratings and three are neutral.

"In recent quarters Covidien's sales growth and gross [profit] margins have improved," says a recent report by Bear Stearns & Co., which has an outperform rating. "As Covidien's transformation continues, the shares could still move higher."

Since officially starting trading on July 2, Covidien's stock is up about 15 percent, while the Standard & Poor's 500-stock index is down about 6 percent.

A NEW ROLE

The latest version of Mallinckrodt will play a solid but not dominant part in Covidien's comeback.

For the six months ended March 28, sales of pharmaceuticals accounted for $460 million, or 10 percent of corporate sales. (Covidien's 2008 fiscal year ends in late September.)

"Pharmaceuticals is not a great growth opportunity, but it's a good defensive business," says Morozov. Six-month sales were flat vs. the first six months of sales in the previous fiscal year. These products include Mallinckrodt brands of narcotics and acetaminophen, the ingredient used in Tylenol.

The "imaging solutions segment" contributed $595 million, a gain of 16 percent over the first six months of fiscal 2007. "This is a growing business," says Morozov, noting that Covidien recently upgraded its sales growth forecast for the fiscal year. Imaging products account for 13 percent of corporate revenue. They include Mallinckrodt's drugs and nuclear-medicine products designed to help doctors better diagnose and treat diseases.

Covidien's biggest stake in the future is medical devices, which contributed $3.25 billion, or 69 percent of revenue, for the first six months of fiscal 2008. That was a 12 percent improvement over the first half of fiscal 2007. Respiratory care products, acquired by Mallinckrodt in 1998, are included in this segment, representing about $710 million in sales.

A LESSON IN CAPITALISM

Mallinckrodt's complex journey illustrates what happens when corporations change their minds and their strategies.

"There was no compelling economic logic to the potpourri of operating companies" controlled by Tyco, says Stuart Greenbaum of Washington University. "Companies that are less complex will get a better value in the capital markets. They're easier to understand."

Mallinckrodt was easy to understand when it was founded in 1867 as a chemical manufacturer. It was still easy to understand when it became a publicly traded company in 1954 specializing in chemicals, drugs and radiology products.

Then, things became complicated when it was acquired by Avon Products, the cosmetics maker in 1982. Fortune Magazine once described Avon's parenthood as "inattentive," and Mallinckrodt was sold four years later.

The next parent was International Minerals & Chemical (IMC), a fertilizer company. Within a few years, IMC bought three animal healthcare companies and spun off its fertilizer business as an independent company. IMC changed its name to Imcera Group.

In 1994, the company renamed itself Mallinckrodt Group and moved the corporate headquarters from Northbrook, Ill. to the St. Louis area. At the time, Mallinckrodt's businesses accounted for 70 percent of corporate revenue and 80 percent of corporate profits.

The new Mallinckrodt kept wheeling and dealing. It sold its 50 percent stake in a joint venture that made flavors and fragrances; it also sold its animal-health unit and its chemical additives and catalysts businesses.

In 1997, it paid $1.9 billion for a respiratory-care products company, a move that Greenbaum says weakened Mallinckrodt and led to Tyco's takeover in 2000. "They overpaid for the respiratory business," he says. "They made a heavy investment that didn't go very well."

Since being spun off from Tyco, Covidien has made some small acquisitions and has shed some assets to sharpen its focus on medical products. Analysts say this isn't a case of Tyco disease.

Covidien "has been diligent not to overpay and to add products that are complementary," says a recent Deutsche Bank Securities report.

Covidien has sold a business specializing in adult incontinence products, feminine hygiene and baby diapers. It also has signed a deal to sell its European incontinence-products business.

And no discussion of buying and selling would be complete without mentioning Mallinckrodt.

In February, Covidien said it would divest an assortment of chemicals used in scientific research and manufacturing. These products were included in Tyco's acquisition of Mallinckrodt.

The chemicals, sold under the Mallinckrodt and J.T. Baker brands, produced $422 million in sales during the 2007 fiscal year. Covidien hasn't found a buyer yet. Sales are growing nicely, Covidien says, but the products don't fit its medical-products strategy.

That means another piece of Mallinckrodt will be on the move again.

Robert W. Steyer is a freelance journalist in New York and former Post-Dispatch reporter.