By: Zacks Equity Research

Leading health care products maker Covidien (COV) has cut a deal to buy the outstanding shares of Barrx Medical for $325 million, hoping the move will boost its presence in the gastrointestinal diseases therapy space.

Barrx Medical makes ablation catheters and other devices for treating gastrointestinal diseases and Barrett’s esophagus syndrome, a pre-cancerous condition of the lining of the esophagus. Barrett’s esophagus syndrome affects about 1% of the American adults, generally with gastroesophageal reflux disease. If not treated, the condition can lead to esophageal adenocarcinoma, which has an average five-year survival rate of below 15%.

Barrx’s devices, offered under the Halo brand, use bipolar radio-frequency waves to provide a uniform and controlled ablation that removes the diseased tissue and stimulates re-growth of normal cells.

The acquisition is expected to close by Jan. 31. Covidien said that the deal complements its energy-based product portfolio and its strategy to invest in products that can offer global competitive advantages.

The transaction is not expected to have a material impact on Covidien’s sales, operating margin and earnings in fiscal 2012. Following the deal closure, Barrx Medical will become a part of the company’s energy product line in its larger medical-devices division.  

Covidien is a leading global health care products company with a rich history of developing high-quality products in a cost-effective manner. It competes with Johnson & Johnson (JNJ), Becton Dickinson (BDX) and C.R. Bard (BCR), among others.

The company exited fiscal 2011 strongly, powered by solid performance by its core medical devices division. Both revenue and adjusted earnings for fourth-quarter 2011 beat the Zacks Consensus Estimates, benefiting from an extra selling week.

Covidien remains committed to rolling out new products and technologies, focusing on emerging markets, and boosting market share in core segments through investments in sales and marketing infrastructure. Moreover, the company is expanding its portfolio through acquisitions and strategic collaborations.

However, pricing/procedure volume pressure and rising raw material costs remain headwinds. We are currently neutral on Covidien, supported by a short-term Zacks No. 3 Rank (Hold).

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