9. Covidien
$8.4 Billion ($10.4B total)
KEY EXECUTIVES:
Jose E. Almeida, President & CEO
Charles J. Dockendorff, Exec. VP & Chief Financial Officer
James C. Clemmer, Sr. VP & President, Medical Supplies
Timothy R. Wright, Sr. VP & President, Pharmaceuticals
Amy A. McBride-Wendell, Sr. VP, Strategy &Business Development
NO. OF EMPLOYEES: 41,500 (total)
GLOBAL HEADQUARTERS: Dublin, Ireland
Since splitting from its scandal-plagued parent company in 2007, the management team at Covidien plc has maintained a laser-like focus on transforming the firm into a more innovative-driven organization. Such a goal is not surprising, considering former Chairman, President and CEO Richard Meelia has long been a proponent of innovation.
Meelia’s penchant for innovation directly can be traced to his days as president of billion-dollar medical devices manufacturer and services provider Tyco Healthcare. During his tenure at the company, Meelia witnessed first-hand the self-implosion of former Tyco International CEO Dennis Kozlowski, who siphoned hundreds of millions of dollars from the company in unauthorized pay, bonuses and loans, sold company stock at inflated prices, and lied about Tyco’s finances. He currently is serving a federal prison term of up to 25 years in upstate New York.
Kozlowski’s crimes caused Tyco’s stock and credit rating to tank, and made it next to impossible to fulfill the company’s strategy of growth through acquisition. But it taught Meelia some valuable lessons about management, integrity and most importantly, the value of innovation.
“I realized that if we didn’t change the way that we managed and rewarded employees, which was based on earnings and cash flow, and if we didn’t commit resources to innovation, we were going to be a 1 percent to 2 percent grower and would lag the pack,” Meelia told Bloomberg Businessweek in a 2009 interview.
Covidien certainly has never lagged behind any pack. Since its 2007 spinoff from Tyco International, the company steadily has increased spending on research and development to fulfill its innovative-driven mission. R&D spending has skyrocketed 72 percent since fiscal 2007 and 31 percent since fiscal 2008 (its first full year as an independent firm), according to the company’s 2010 annual report. Research spending also has comprised a greater percentage of net sales over the last four years, going from $260 million, or 2.9 percent of net sales in fiscal 2007, to $447 million, or 4.3 percent of net sales in fiscal 2010, year ended Sept. 24. Executives intend to maintain this trend over the next few years until R&D spending comprises 5 percent or 6 percent of net sales.
“Innovation remains a key priority,” Meelia said in his final message to shareholders as CEO (he retired July 1 and was replaced by Jose E. Almeida, former president of the company’s Medical Devices segment).
Indeed it has: for the second consecutive year, the company launched more than 20 new products and was awarded 12,500 patents (an additional 11,000 patents are pending). The new products ranged from the May 2010 launch of the SILS Stitch articulating suturing device for advanced laparoscopic surgery and the June 2010 launch of the Tri-Staple technology platform for endoscopic stapling to the release of the V-Loc 90 device, a member of the V-Loc absorbable wound closure family of devices.
Like its relatives, the V-Loc 90 is a self-anchoring loop and barb combination that enables surgeons to close dermal wounds quickly and securely without tying knots or changing standard closure
techniques. The device, however, contains a material that facilitates the complete absorption of sutures within 90 to 110 days. The V-Loc 90 is ideal for dermal and laparoscopic procedures in which shorter absorption times are needed or preferred, such as plastic reconstructive surgery, gynecologic operations or general surgery, according to Covidien.
Other new product launches during FY2010 include the Mallinckrodt TaperGuard and TaperGuard Evac endotracheal tubes, which incorporate a taper-shaped cuff designed to reduce the chances of foreign material entering the respiratory tract; the EEATM Hemorrhoid & Prolapse Stapler Set, designed to facilitate dilation, purse-string placement, tissue incorporation and stapling/resection; the Puritan Bennett 560 ventilator, a portable homecare device; DuraSeal spine sealant, a synthetic hydrogel that is prepared in minutes and sets in seconds; and Pennsaid, a topical non-steroidal anti-inflammatory drug that contains dimethyl sulfoxide. The drug is designed to reduce pain and improve the function of osteoarthritic knees.
The introduction of all these new products helped boost Covidien’s net sales in fiscal 2010 by 5 percent to $10.4 billion. Net income skyrocketed 80 percent and gross profit rose 3 percent to $5.8 billion as executives fine-tuned the company’s business portfolio, divesting the sleep and oxygen therapy product lines, its U.S. nuclear pharmacies network and the specialty chemicals business. Covidien also instituted a number of cost reductions in manufacturing and supply chain management that contributed to the sales increase, and implemented several restructuring programs.
The main beneficiary of these growth breeders was Covidien’s Medical Devices segment, which generated more than three-quarters of the company’s 2010 fiscal year operating profit and 64 percent its overall sales. The segment reported $6.7 billion in net sales during the last fiscal year, an 11 percent increase compared with FY2009, ended Sept. 25. Operating income rose 13 percent to $2 billion.
More than half of the $654 million sales hike in the Medical Devices segment came from favorable foreign exchange rates ($175 million) and the acquisitions of both ev3 Inc. and VNUS Medical Technologies Inc., a San Jose, Calif.-based firm that manufactures devices for the minimally invasive treatment of venous reflux disease. Covidien paid $440 million for the company and $2.6 billion for ev3 (the largest deal since its Tyco spinoff)—quite a hefty price tag, considering the moves jump-started overall segment sales by only $195 million in fiscal 2010. But the purchases enabled Covidien to expand its presence in the vascular device sector and capitalize on the plethora of products the two firms added to its product lineup. The strategy, while still years away from producing any significant results, appears to already have contributed to sales: Executives attribute the 41 percent jump in vascular product sales to both acquisitions.
Though they experienced the largest increase in net sales in fiscal 2010, vascular products comprised only 12 percent of the Medical Devices segment sales total. The largest contributor was endomechanical instruments, which generated $2.1 billion in sales, followed by energy devices, which amassed $992 million for the division. Oximetry and monitoring products was the weakest sales generator dollar-wise, but posted the second-highest increase behind the vascular product line. The source of that increase, according to the annual report, was Covidien’s $210 million purchase of Aspect Medical Systems Inc. in September 2009, a deal that allowed Covidien to leverage Aspect’s brain monitoring technology to gain market share in that segment. Data show that acquisition is paying off as well—oximetry and monitoring product sales jumped 19 percent in FY2010 to $770 million.
Such hefty increases, however, did not carry over to Covidien’s Medical Supplies segment, which experienced a 2 percent net sales decrease to $1.7 billion. Executives attributed the decline to lower product sales in all categories, but most notably in the SharpSafety merchandise line, where sales fell 4 percent to $320 million in fiscal 2010. The dropoff, company bigwigs claim, resulted from pricing pressures in both sharps disposal products as well as needles and syringes, and the discontinuation in Europe of the two product lines in FY2009.
Nursing care products such as incontinence, wound care, enteral feeding, urology and suction goods also suffered a decline in FY2010, though not as steep. That product category slipped 1 percent to $783 million as sales of traditional wound care products waned. Other device sales slowed as well during the last fiscal year, leading to 1 percent sales decreases in medical surgical products (operating room supplies and related accessories, including electrodes, thermometry and chart paper product lines) and original equipment manufacturer (OEM) products (medical supplies such as needles and syringes that are manufactured for other companies). Medical surgical product sales totaled $412 million, while OEM device sales netted the segment $208 million, according to the annual report.
The Medical Supplies segment comprised 17 percent of the company’s total net sales in fiscal 2010. The remaining 19 percent came from the Pharmaceutical segment, which reported $1.9 billion in total sales.