(Reuters) – When Kimberly-Clark Corp decided a year ago to carve off its healthcare division, it probably did not envisage launching the company amid the deadliest ever outbreak of the Ebola virus.
Since Ebola was first diagnosed in the United States, demand has surged for the eye shields, face masks and disposable gowns made by Halyard Health Inc, which is set to make its market debut on Monday.
“The investment community seems very engaged and are asking us a lot of questions,” Warren Machan, Halyard’s senior vice-president of business strategy, told Reuters.
Kimberly-Clark announced the spin-off last November, saying it would focus on its core business of diapers and Kleenex tissues. Existing Kimberly-Clark shareholders will be able to exchange eight shares of the company for one share of Halyard.
The healthcare business was Kimberly-Clark’s smallest, with sales of $1.7 billion in 2013.
That was before the latest outbreak of Ebola, which has killed nearly 5,000 people, mostly in three West African countries. The death of one person and four other recorded cases in the United States has put the country on high alert.
Among the guidelines for health workers laid out by the Centers for Disease Control and Prevention (CDC) is a warning that no skin can be exposed by workers taking care of a person infected with Ebola.
The Ebola outbreak – and fear of its spread in developed countries – is certain to spur growth in demand for Halyard’s products in the near future.
NOT A “ONE-TRICK PONY”
Analysts and industry experts are bullish about the company’s prospects even after the Ebola epidemic subsides.
“I’m certain that this is not a one-trick pony,” said Peter Kenny, chief market strategist at Clearpool Group.
“There’s significantly more sophistication to the (company’s) strategy than simply the current health crisis,” he said.
Halyard’s surgical and infection-prevention division, which sells shoe covers and other protective clothing, is responsible for nearly 70 percent of the company’s total sales.
Judson Boothe, senior global manufacturing director for the division, says demand for its fluid-resistant products has risen by 20-30 percent. There is room to grow further, he said.
“We’re not maxed out on capacity at this point,” he said.
Protective clothing makers have seen a surge in demand in the past few weeks. Lakeland Industries Inc has raised monthly production of its hazmat suits by nearly 50 percent since August; by January, production will be double that of pre-Ebola levels.
There will be no instant reward for Halyard’s shareholders, with Halyard having declared it has no immediate plans to pay a dividend.
But Josef Schuster, founder of Chicago-based IPO investment firm IPOX Schuster LLC, said demand for spin-off stocks is usually quite strong and expects Halyard to perform well over time.
“It is a stock that has scope for overperformance … In the medium to long run, the prospects for this space in general is pretty good and for the company specifically as well,” he said.
THE PRICE IS RIGHT
Halyard’s stock was trading at $38.07 on Friday on a “when issued” basis, a term that refers to trading of shares before they are officially issued.
At that price, the company is valued at about $1.77 billion, based on the 46.5 million common shares outstanding.
Halyard’s price-to-earnings ratio is 14.09, a modest discount to peer C.R. Bard Inc’s trading multiple of 15.61 times forward earnings.
“Halyard’s price-to-earnings ratio is in line with the overall market, and that does not reflect speculative fever about Ebola,” said Jay Ritter, IPO expert and professor of finance at University of Florida.
“Ebola has got a lot of attention … but the reality is that there are a lot of other infectious diseases such as resistant tuberculosis and malaria that create demand for protective gear now and in the future,” Ritter said.
The California State Teachers’ Retirement System, or CalSTRS, the second-largest U.S. pension fund, has said it will invest in Halyard. As of Sept. 30, CalSTRS held about 11,000 Kimberly-Clark shares through the Russell 3000 index.
Robert Abernathy, who was responsible for overseeing activities related to the spin-off, will be chief executive of the company.
Halyard will retain brand names such as ON-Q pain relief and Purple Nitrile gloves.
“One thing is sure. Healthcare is very strong, biotech is very strong … and I think Halyard has a good role in there,” Schuster said.
(Additional reporting by Ramkumar Iyer, Amrutha Gayathri and Nayan Das in Bangalore; Yasmeen Abutaleb in New York; Editing by Robin Paxton, Feroze Jamal and Saumyadeb Chakrabarty)