Covidien ($COV) conceded in an Oct. 24 filing with the U.S. Securities and Exchange Commission that it will likely divest some vascular assets so that the looming $43 billion mega merger with Medtronic ($MDT) can commence under antitrust law.
Covidien's vascular product line includes the main areas of overlap between the two companies' largely complimentary portfolios. Most notably, Covidien acquired the startup CV Ingenuity in 2013, snagging the rights to the company's in-development drug-coated balloon designed to treat peripheral arterial disease, with a goal of FDA approval in fiscal year 2017. But Medtronic obtained a CE mark for the similar IN.PACT Admiral drug-coated balloon product in 2009, and is aiming for FDA approval of the device in 2015; that would likely be the second such U.S. approval of its kind, following this month's approval of Bard's ($BCR) Lutonix drug-coated balloon.
Could Covidien's clinical-stage Stellarex drug-coated balloon be the divestment target? Covidien did not comment on the matter by the time of publication.
But the SEC filing provides reasons to suspect that the developmental-stage balloon could be up for sale, stating that "on October 20, 2014, Covidien plc's management concluded that a non-cash charge was required for the impairment of non-amortizable in-process research and development projects associated with its Vascular Therapies product line. This determination reflects the probability that the in-process technology will be sold in connection with the acquisition of Covidien by Medtronic, Inc."
The charge of $90 million to $125 million will be booked in Q4, the filing states, citing the need for the merger to obtain clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. Upon announcing the acquisition of CV Ingenuity, Covidien said it planned to spend more than $50 million to fund the clinical development of CV Ingenuity technologies in fiscal years 2013 and 2014.
Whichever technology the filing refers to, news of an impending divestment marks another step closer toward the closure of the year's most talked about med tech transaction.
A larger hurdle could be the Treasury Department's new rules designed to deter inversion deals such as this one. Due to the rules, Medtronic will not use cash from foreign subsidiaries to fund the acquisition of Covidien, as originally planned. Instead, it will use $16 billion in debt at an interest rate of 4% to 4.5%, the company's Oct. 24 SEC filing says.
Ratings agency Standard & Poor's isn't thrilled by the plan."We now expect to lower the corporate credit rating and the issue-level ratings by 2 notches, to 'A' and to lower the short-term rating to 'A-1', if the transaction is consummated as expected," the ratings agency said on Oct. 3, according to MassDevice.
Editor's note: An earlier version cited an incorrect figure for the amount of debt Medtronic will use to buy Covidien.
- here's the Covidien SEC filing | here's the Medtronic SEC filing
- here's MassDevice's take on the Medtronic filing
- the Stellarex clinical trial results | Another study
- Covidien's vascular therapies website