José E. Almeida, Board Chairman, President & CEO
Charles J. Dockendorff, Exec. VP and Chief Financial Officer
James C. Clemmer, Sr. VP & President, Medical Supplies
Bryan C. Hanson, Sr. VP & Group President, Surgical Solutions
Amy A. McBride-Wendell, Sr. VP, Strategy and
Michael Sgrignari, Sr. VP, Quality & Operations
Brian D. King, President, Emerging Markets
Michael Tarnoff, M.D., F.A.C.S., Corporate Chief Medical Officer
Peter L. Wehrly, Sr. VP & Group President, Respiratory &
Monitoring Solutions and Vascular Therapies
NO. OF EMPLOYEES: 43,400
GLOBAL HEADQUARTERS: Dublin, Ireland
“Trust the instinct to the end, though you can render no reason.”
—Ralph Waldo Emerson
Most business executives are reluctant to admit the significance of heuristics in their professional lives. Economist Harry Markowitz, for example, won the Nobel Memorial Prize in Economic Sciences for developing the “portfolio theory,” a complex mathematical formula for choosing hedge fund managers. Yet when he retired, Markowitz—like most simple folk—followed his instincts and divided his investments equally among a number of funds.
Similarly, Capt. Chesley “Sully” Sullenberger became an instant pop culture icon for calmly and safely landing his hobbled commercial passenger jet in the frigid Hudson River. But it took the threat of perjury for the reluctant hero to reveal the rationale behind his split-second decision to nix a touchdown on terra firma.
“We didn’t have time to consult all the written guidance, we didn’t have time to complete the appropriate checklists,” Sullenberger testified during a National Transportation Safety Board hearing on June 9, 2009. “Jeff Skiles and I had to work almost intuitively in a very close-knit fashion without having a chance to verbalize every decision, every part of the situation…”
Such intuitive fortitude is seldom acknowledged publicly, particularly in the healthcare industry, where boastful revelations of “gut” or rule-of-thumb decisions can elicit litigation. José E. Almeida, however, is an anomaly: He not only embraces heuristics (a fancy name for intuition or “gut feeling”), but advocates for it as well.
“I’ve made mistakes, some were worse than others. But one thing is a common thread,” Almeida told business professionals attending an industry roundtable event in July 2011. “Once you get more experience, you get your gut feelings, your instincts. Usually when you don’t listen to your instincts and you go down a path where you’re telling yourself, ‘This is not right,’ there’s a mistake at the end because you’ve seen enough. Although listening to your people is a great thing, you’ve got to listen to yourself as well. You’ve got to trust your instincts…”
Almeida’s instincts have served him well in his role as board chairman, president and chief executive officer of Covidien plc. Since assuming the top spot two years ago, the Brazilian industrial engineer has devised a growth strategy that combines M&A and operational efficiency with increased R&D spending and a new, more aggressive push into emerging markets.
In FY12, Almeida’s multi-faceted plan worked like a charm, improving the company’s adjusted gross and operating margins, boosting revenues and increasing earnings. The strategy also was partly responsible for a double-digit dividend increase and the return of $1.3 billion to shareholders through dividends and buybacks.
“Covidien had a strong year in 2012,” Almeida said in his annual letter to investors. “Our performance was achieved in the face of ongoing challenges in the global healthcare environment. Despite [this] very challenging market environment, we delivered solid financial results, made progress in reshaping and strengthening our portfolio and funded a broad array of growth-driving investments.”
Many of those investments were funneled into acquisitions or research and development programs. Covidien spent more than $1.2 billion on acquisitions in FY12 to expand its treatment options for hypertension, gastrointestinal diseases, hernias and ischemic stroke.
One of the year’s best bargains, though, was the $106 million deal for Campbell, Calif.-based Maya Medical, developer of a renal denervation system approved last winter by European regulators. The purchase gives Covidien a strong foothold in a promising market that already has attracted such heavy hitters as Medtronic Inc. and St. Jude Medical Inc.
Renal denervation is used to treat uncontrolled high blood pressure by destroying nerves in the renal arteries. The Cleveland Clinic named the technology the top healthcare innovation of 2012.
Another savvy buy was the $393 million purchase of BARRX Medical Inc., a Sunnyvale, Calif.-headquartered maker of minimally invasive devices used in conjunction with endoscopy to remove precancerous gastrointestinal tract tissue. Like the Maya Medical acquisition, the BARRX investment is expected to help the company diversify its product offerings in fast-growing markets.
Other notable FY12 acquisitions included the $327 million purchase of Israeli patient monitoring systems developer Oridion Systems Ltd.; Costa Mesa, Calif.-based ventilator manufacturer Newport Medical Instruments; Irvine, Calif.-stationed MindFrame Inc., which designs and manufactures rapid perfusion and clot removal devices for stroke treatment; and superDimension Ltd., an Israeli firm that created a system (iLogic) for accessing deep lung lesions. Using GPS-like navigation, the minimally invasive system eases the evaluation of lesions, thereby improving the safety of lung tissue biopsies.
Covidien’s FY12 spending spree certainly gave the company an impressive lineup of new product offerings in several undeveloped markets. But innovation came from within as well.
During FY12 (ended Sept. 28, 2012), the company bolstered its Medical Devices portfolio with the launch of Nellcore respiration rate software; the Sonicision cordless ultrasonic dissection device, a battery-powered surgical device for soft-tissue incision; the Solitaire FR revascularization device, a product designed to restore blood flow to the brain in stroke patients; expanded use of the LigaSure small jaw, a laparoscopic vessel-sealing instrument now approved for use in ear, nose and throat procedures; and the iDrive Ultra powered stapling system, a reusable endostapler that improves precision in surgical stapling.
Covidien calls its iDrive device the world’s only fully powered reusable battery-operated endoscopic surgical stapler. Featuring one-handed push-button operation and unlimited articulation, the system eliminates the need for manual firing force and improves maneuverability compared with traditional endomechanical staplers, the company notes.
“Laparoscopic surgery can be an exceptionally labor-intensive endeavor that requires a high level of accuracy within a very restricted anatomical space,” Paul Hermes, vice president and chief technology officer for Covidien’s Surgical Solutions segment, explained in a news release. “The iDrive Ultra powered stapling system will enable surgeons to operate through restricted anatomical space with greater precision compared with traditional endomechanical staplers.”
Covidien’s lineup of surgical staplers—particularly the 3-year-old (but still wildly popular) Tri-Staple technology— kept the firm’s endomechanical instrument proceeds from slipping into negative territory in FY12. Sales were flat at $2.3 billion, thanks to the August 2012 voluntary recall and discontinuance of the Duet TRS Universal Straight and Articulating Single-Use Loading Units. The company stopped manufacturing the product following a report that indicated the device caused post-operative abdominal injuries.
The company first recalled the device last January after receiving reports of patient deaths during thoracic surgery. Covidien had received reports of 13 cases of serious injuries and three deaths following the use of Duet TRS in the thoracic cavity.
Introduced in 2009, the Duet TRS was a single-use tissue reinforcement system used with the company’s Endo GIA laparoscopic stapler. It was a key endomechanical product, having generated roughly $50 million for Covidien in the nine months ending June 29, 2012.
The Duet recall capped a bad month for Covidien. Earlier in August, the company voluntarily recalled specific manufactured lots of the DGPHP Radiofrequency Ablation (RFA) High-Power Single Use Grounding Pads and Cool-tip RFA Electrode Kits that included the DGPHP RFA High-Power Single Use Grounding Pads after learning that degeneration of the foil within the DGPHP grounding pad could cause burns.
In addition to the Duet TRS and DGPHP RFA products, Covidien also recalled a particular model of its cuffed Shiley tracheostomy tubes after receiving reports of product complications during mechanical ventilation. The device was sold under the company’s Airway & Ventilation Products segment, which posted a 1 percent sales decline in FY12. The division was one of three in the Medical Devices segment that experienced deficits—Soft Tissue Repair Products lost 2 percent of its FY11 revenue ($882 million) and Other Products lost 3 percent of its previous-year value ($376 million), according to Covidien’s FY12 annual report.
Despite those losses, the company’s Medical Devices segment still managed to turn a profit in FY12, growing revenues by 4 percent and operating income by 3.1 percent. The segment’s $8.1 billion in total net sales predominantly was spread across three sub-categories: endomechanical instruments, energy devices (including vessel sealing, electrosurgical, ablation products and related capital equipment) and vascular products (encompassing compression, dialysis, venous insufficiency, thrombectomy, neurovascular and peripheral vascular devices). Energy devices and vascular product sales both rose 12 percent in FY12, totaling $1.3 billion and $1.6 billion, respectively. Oximetry and monitoring product revenue climbed 2 percent to $867 million.
Such strong gains helped the Medical Devices segment overcome losses in pharmaceutical and medical supplies revenue, and boost the company’s overall net sales to $11.8 billion in FY12, a 2 percent increase compared with the previous fiscal year. Gross profit climbed 3.6 percent to $6.8 billion and diluted earnings per share jumped 3.4 percent to $3.92.
In his annual letter to shareholders, Almeida attributed the company’s overall growth to a better business and product mix, manufacturing cost-reduction efforts, restructuring programs, and healthy R&D investments designed to transform the Dublin, Ireland-based company into a more innovation-driven organization. “When we talk about innovation, it’s not about developing the next gadget,” Almeida said at that same roundtable event where he shared the value of intuition with participants. “Never think we’re after innovation for the sake of innovation. We deliver innovation with clinical and economic value.”
The firm increased its R&D expenditures by 12.4 percent in FY12 (ended Sept. 28, 2012), channeling a total of $623 million to its scientists, engineers and product development teams.
Almeida’s laser-like focus on emerging markets likely contributed to the company’s overall growth as well during FY12. Sales rose 9 percent to $1.9 billion in the Asia/Pacific region, where the company opened two new R&D centers (one in Hyderabad, India and the other in Shanghai, China), and launched the market-tailored ReliaMax reusable stapler in Malaysia (the device also debuted in Chile, Hungary and Jordan).
Executives are hoping for similar market-tailored product launches over the next few years from the company’s new China Technology Center. Spanning more than 100,000 feet, the new facility houses 17 laboratories and features state-of-the-art surgical and simulation suites for design engineers. The CTC has two core focus areas, according to Covidien: the design of customized products for China and other emerging markets, and medtech breakthroughs.
“By collaborating closely with local medical experts who use our products, we can tailor devices to meet the demands of China and other emerging markets,” Dong Wu, vice president of China R&D for Covidien, said at the CTC’s opening in August. “This location will help us tap into internationally renowned experts based here in China, including world-class engineering talent. We believe this collaboration will drive innovation in China and across the emerging markets healthcare landscape.”
Under Almeida’s watch, Covidien is paring down its U.S. manufacturing footprint, planning to slash about 800 jobs in closing plants in New York and South Carolina. Meanwhile, the company has spun off Mallinckrodt, its generic drug business, in a move designed to give each operation’s distinct business model an opportunity to better focus on growth. Abbott Laboratories did the same thing at the end of last year, separating its drug business into an independent entity called AbbVie (see page 72).