In May, Medtronic Inc (NYSE:MDT), one of the largest producers of medical devices, reported quarterly earnings and revenue in line with analysts' expectations and slightly above its results for the year before. These results continued Medtronic's trend of fairly steady but slowing growth. Since then, Medtronic has announced that it will buy Irish medical device maker Covidien (NYSE:COV) for $42.9 billion and that it plans to team up with French pharmaceutical company Sanofi (NYSE:SNY). These two agreements will help Medtronic increase growth going forward.
Medtronic and Covidien came to an agreement in which Medtronic will buy Covidien at a 29% premium. Medtronic also plans to relocate its headquarters from the United States to Ireland. This relocation will allow the combined company to pay taxes at the lower Irish rate. This will be the most substantial direct benefit for Medtronic who recorded tax provisions of $784 million last year. After the buyout, integration between the two companies will allow Medtronic to eliminate overlapping costs -- and the company is guiding for $850 million in annual pre-tax savings by the end of FY 2018. Medtronic CEO and chairman, Omar Ishrak, stressed that this deal would help the combined company reach a broader market with its products. Before the deal, Medtronic did business in about 120 countries but after this deal, with the help of Covidien, Medtronic will be able to increase this number to over 150. This buyout will allow the two companies to combine research efforts and eliminate competition between them in fields common to them such as vascular therapies.
Sanofi research agreement
Medtronic and Sanofi announced that they would begin working together to create products for those suffering from type 2 diabetes. Sanofi is currently an important competitor in the diabetes market through its drug, Lantus, which is the most frequency prescribed insulin. However, Sanofi's patent on Lantus will expire in early 2015 which may have been what sparked this agreement in an attempt to remain prominent in the over $40 billion diabetes market. Medtronic already makes insulin pumps and glucose monitoring tools and has already partnered with Sanofi to develop an implantable insulin delivery system for those with type 1 diabetes. These new collaborative devices would be designed to help patients whose needs are not met by current treatments. Expanding into the type 2 diabetes market will be very beneficial because about 345 million of the 380 million people worldwide with diabetes have type 2 diabetes. Many patients with diabetes use a combination of drugs and devices for their treatment so this partnership has great potential to benefit both of these companies along with individuals with diabetes.
Medtronic stock has soared 60% over the last two years despite slowing growth. Through an agreement with Sanofi and the purchase of Covidien, Medtronic has been able to reduce its tax expenses, absorb one of its largest competitors, and expand its already sizable research efforts. It is also good to see an increased focus on diabetes related products given the unfortunately quick growth of that disease. All of these factors should help boost earnings providing investors with continued growth in the future.
Jonathan Koss has no position in any stocks mentioned. The Motley Fool recommends Covidien. The Motley Fool owns shares of Medtronic. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.