$10.6 Billion
It’s sort of difficult to think of $10.66 billion as a placeholder. In this year’s installment of the MPO Top Company report, however, that’s just what it is as a result of one of the medical device industry’s largest and most closely scrutinized buyouts.

After much fanfare and media coverage, debate of corporate inversions and government action, Medtronic Inc. officially became Medtronic plc in January this year after completing the acquisition of Dublin, Ireland-based Covidien plc. The deal originally was announced in June of 2014. Because the Top Company rankings are based on 2014 revenue, we are—of course—including Covidien to make note of its accomplishments in the fiscal year (which ended for the company on Sept. 26).

“The culmination of this acquisition marks a significant milestone in our industry, creating a company uniquely positioned to alleviate pain, restore health and extend life for more patients around the world. We can now bring together the extensive and innovative capabilities of both Medtronic and Covidien with an underlying objective to solve healthcare’s biggest challenge—expanding access and improving clinical outcomes, while lowering costs,” said Omar Ishrak, chairman and CEO of Medtronic.

(For more on the structure and detail of the acquisition, turn to the Medtronic listing on page 48.)

Former Covidien CEO, Joe Almeida, stepped down following the close of the deal. Other top executives also left Covidien after the purchase was finalized. Based on a clause in a Jan. 24 proxy statement covering termination upon “change in control,” Almeida received a severance payout of $37.3 million. Charles H. Dockendorff, Covidien’s executive vice president and chief financial officer, received $15.1 million in severance. Other senior executives listed in the document are Peter L. Wehrly, group president for developed markets, who received $9.3 million; and, John H. Masterson, senior vice president and general counsel, who got $7.7 million.

Bryan Hanson, who was a group president for Covidien, became executive vice president and president of a new business group within Medtronic, the newly formed Covidien Group.

In addition to the new Covidien Group, the Peripheral Vascular business from Covidien, including the Endovascular, Arterial and Chronic Venous Insufficiency businesses, were integrated into the Covidien Group’s Aortic and Peripheral Vascular business after the close of the transaction. Upon the closing, Covidien’s Neurovascular business was integrated into Medtronic’s Restorative Therapies Group as an independent business unit.

Bob White, who was president of Covidien’s emerging markets, became senior vice president and president of Medtronic Asia Pacific, based in Singapore. This new region is composed of Japan, India, Australia/New Zealand, Korea and Southeast Asia.

Its final fiscal year as a standalone company was a solid one. In FY14 Covidien posted net sales of $10.66 billion, up 4 percent above the $10.24 billion in the previous year. Operational sales growth was 5 percent, as foreign exchange rate movement lowered the sales growth rate by one percentage point. The company reported operating income of $1.99 billion in fiscal 2014, compared with $2.13 billion in FY13. Fiscal 2014 adjusted operating income was $2.43 billion, versus $2.26 billion in the prior year. Fiscal 2014 adjusted operating income, excluding the specified items, represented 22.8 percent of sales, versus 22.1 percent for fiscal 2013. By business group, Surgical Solutions sales increased 7 percent to $5.11 billion from $4.78 billion in 2013.

Vascular Therapies sales increased 2 percent to $1.68 billion from $1.65 billion. Respiratory and Patient Care sales increased 2 percent to $3.87 billion from $3.81 billion in the previous fiscal year. During the year, the company released a number of new devices and made key acquisitions that now will fall under the Medtronic umbrella.

Covidien received U.S. Food and Drug Administration (FDA) approval for the HawkOne directional atherectomy system for the treatment of peripheral arterial disease. It launched the ReliaTack articulating reloadable fixation device, which the company billed as the “first and only of its kind” for laparoscopic (minimally invasive) hernia repair. The company’s Sonicision Cordless Ultrasonic Dissection Device portfolio was extended following FDA approval of three additional device lengths, enabling surgeons to expand their use of the system to more procedures. Covidien also boosted its vascular treatment capabilities with two strategic acquisitions: Sapheon Inc., a developer of venous disease treatments; and Reverse Medical Corporation, a medical device company focused on expanding the management of vascular disease. The company also opened a Covidien Center of Innovation in Brazil, the firm’s first medical training and research center in Latin America.

$10.24 Billion
NO. OF EMPLOYEES: 38,000

It has been seven years since Tyco spun off its healthcare business. The newly independent and publicly traded company—an amalgam of many smaller firms acquired over the years—was renamed Covidien, and management swiftly went about the work of rebranding and building market recognition for the new moniker. Industry insiders and baseball fans may remember that the company quickly bought a prime advertising spot on the 37-foot, 2-inch high, bright green left field wall (affectionately called the Green Monster) of Fenway Park in Boston, Mass., home of the Boston Red Sox.

How quickly situations in the medical device world can change—sort of. File this under “what’s old is new again.” Not a standalone entity for very long, Covidien plc (based in Ireland for tax reasons but primarily run out of an extensive complex on the South Shore of Massachusetts in the town of Mansfield) soon will become part of a larger organization once more. Medronic Inc., No. 4 on MPO’s list of leading medical device firms this year, has plans to acquire Covidien in a blockbuster deal announced in June this year worth nearly $43 billion. There’s not much overlap between the two medtech giants, which should make the marriage a smooth one, analysts have said. Medtronic’s interest in Covidien is the company’s overseas address. It’s called a corporate inversion—companies that purchase international targets and reincorporate abroad where there are lower tax rates. The deal still has to jump through regulatory hurdles before it is blessed by all concerned (for more information on the deal, see Top of the News on page 12).

Before this year’s medtech deal heard ‘round the world, fiscal 2013 (ended Sept. 30, 2013) was, for the most part, business as usual for Covidien—conservative growth, solid financial performance (even in the face of a challenging marketplace). and prolific new product releases.

Covidien separates its business segments into two categories.

Medical Devices—the largest of the two segments—includes endomechanical instruments (laparoscopic instruments, surgical staplers, interventional lung devices); energy devices (vessel sealing, electrosurgical devices, ablation products); soft-tissue repair products (sutures, mesh, biosurgery products and hernia mechanical devices); vascular products (compression, dialysis, venous insufficiency, thrombectomy, neurovascular and peripheral vascular products); oximetry and monitoring products (sensors, monitors, temperature management products); airway and ventilation products (breathing systems and inhalation therapy devices); and other medical products.

Medical Supplies includes nursing care products (incontinence, wound care, enteral feeding, urology and suction products); medical surgical products (operating room supply products and accessories); SharpSafety products (needles, syringes and sharps disposal products); and original equipment manufacturer (OEM) products (medical supplies manufactured for other medical products companies).

Roll ‘Em Out
Covidien’s numerous and varied technology categories and sectors churn out a steady stream of new technology. For FY13, Covidien spent more than $500 million on research and development activities—while not the only method for new product launches (think acquisition), it’s certainly a good start.

During the fiscal year, Covidien received U.S. Food and Drug Administration (FDA) 510(k) clearance for its Nellcor pulse oximetry portfolio. The line of devices is designed to measure arterial oxygen saturation. According to Covidien, it is the first company to receive clearance for a motion-tolerant bedside pulse oximeter portfolio that also is compliant with ISO 80601-2-61 (the ISO standard for pulse oximetry). Pulse oximeters provide early warning of dangerous respiratory complications, enabling clinicians to detect and address life-threatening events sooner. The portfolio of devices consists of the Nellcor bedside SpO2 (arterial hemoglobin) patient monitoring system, the Nellcor bedside respiratory patient monitoring system and the Nellcor N-600x pulse oximetry monitoring system. Nellcor devices rely on cardiac-based signals to provide a more accurate reading that closely is tied to the patient’s physiology. This, Covidien officials claim, drives consistent performance during various challenging conditions, such as patient motion, noise and low perfusion, which can impede the assessment of patient respiratory status. Motion-tolerant pulse oximetry is important for ensuring patient safety because patient movement can thwart accurate readings and delay diagnosis of serious respiratory compromise. The devices in the newly cleared Nellcor portfolio are indicated for prescription-use only for the continuous non-invasive monitoring of functional oxygen saturation of SpO2 and pulse rate. They are intended for neonatal, pediatric, and adult patients, and for well or poorly perfused patients in hospitals, hospital-type facilities, intra-hospital transport and home environments.

Covidien expanded its portfolio of radiofrequency ablation (RFA) catheters with the launch of the Barrx Channel RFA endoscopic catheter for treating Barrett’s esophagus and certain gastrointestinal bleeding disorders. Left untreated, Barrett’s esophagus, a precancerous condition of the esophageal lining, can lead to life-threatening cancer of the esophagus. The Barrx line of RFA catheters is based on the company’s proprietary technology that controls the amount of RF energy delivered to remove diseased tissue, thereby allowing the growth of healthy tissue. Endoscopic surgeons and gastroenterologists can shorten procedure time with the new Channel RFA device, as this patient-centric design allows for fewer endoscope introductions and removals (compared to other Barrx catheters). The technology in the Channel catheter enables a 7.5-millimeter wide electrode to easily pass through a 2.8-millimeter diameter endoscope channel. Other features and benefits of the new device include a transparent ablation electrode for enhanced visualization and a unique rotatable shaft design that provides additional control and maneuverability. The Barrx Channel RFA endoscopic catheter is available in the United States and Europe.

Covidien entered the fast-growing wound protector market with the launch of two new surgical access devices. Used in open and minimally invasive surgery, the access device protects the wound site from contamination and also provides excellent exposure and visualization. The SurgiSleeve wound protector is easy to place, and since the material is three times stronger on average than what is used in the leading competitive product, the likelihood of tearing during a procedure is reduced, according to the company. The company also released the Versaport bladeless optical 12 millimeter trocar, offering surgeons visualization during trocar placement to help clinicians minimize the risk of trocar injuries. It shares the same proprietary cannula design as the rest of Covidien’s optical and bladeless trocar family.

Three new hernia care products that address clinical needs in laparoscopic inguinal, ventral and umbilical hernia repair were introduced in FY13. These addressed needs include reduced recurrence, pain and risk of infection as well as shorter procedure time and lower cost.

ProGrip laparoscopic self-fixating mesh combines mesh and fixation into one device to increase the security of laparoscopic inguinal hernia repair, while eliminating the pain and reducing the costs associated with tack fixation. The ProGrip laparoscopic mesh provides tack-free fixation over the entire anatomy, including below the inguinal ligament where traditional tacks cannot be placed. The Parietex composite ventral patch is designed for optimal abdominal wall conformability in umbilical and small ventral hernia repair. With a unique design allowing for easy deployment and peripheral fixation, the Parietex composite ventral patch features a macroporous textile supporting consistent tissue integration and a clinically proven collagen film technology to minimize visceral attachment. AbsorbaTack 30X absorbable fixation device builds on the AbsorbaTack fixation line launched in 2008. The new AbsorbaTack 30X fixation device features an enhanced drive mechanism and new shaft for optimal tack deployment in challenging situations. All three products received FDA 510(k) clearance. In the United States, approximately 600,000 inguinal and 700,000 ventral hernia procedures are performed every year, according to industry sources. A hernia develops when the outer layers of the abdominal wall weaken, bulge or tear, with most hernias resulting from strain on the abdominal muscles. Hernias can grow larger over time and cause serious complications if not surgically repaired.

Growth Continues
For fiscal 2013, net sales of $10.24 billion were 4 percent above the $9.85 billion for FY12, with foreign exchange rate movement lowering the sales growth rate by two percentage points. The company reported operating income of $2.13 billion in fiscal 2013, versus $2.09 billion for the prior year. Net income was $1.7 billion, down from $1.9 billion in 2012. Fiscal 2013 diluted GAAP earnings per share from continuing operations were $3.40, versus $3.37 in 2012.

For fiscal 2013, sales for the company’s Medical Devices unit climbed 5 percent to $8.49 billion from $8.11 billion a year ago.
Foreign exchange rate movement reduced the sales growth rate by two percentage points. Sales outside the United States outpaced domestic sales. Non-U.S. sales for the Medical Devices group were $4.8 billion, up 9 percent, compared to U.S.-based sales of $3.66 billion, which slipped 1 percent. Most of the key product groups in the Medical Devices sector reported gains. Sales of endomechanical instruments grew 6 percent to $2.48 billion. Soft-tissue repair product sales grew by only 1 percent to $890 million. Energy device sales increased 7 percent to $1.39 billion. Oximetry and monitoring product sales rose 12 percent to $969 million. Airway and ventilation device sales were up 3 percent for the year to $763 million. Sales of vascular products increased 3 percent to $1.65 billion.

For fiscal 2013, Medical Supplies category sales were  $1.75 billion—essentially unchanged from 2012’s $1.74 billion. Higher sales of nursing care products, led by enteral feeding, were offset by decreased sales of OEM, medical surgical and SharpSafety products. For Medical Supplies, the United States was responsible for the lion’s share of sales—$1.54 billion—flat compared to 2012. Sales outside the United States grew slightly (1 percent) to $199 million.

For the company as a whole, U.S. and international sales were nearly even. U.S. sales were $5.21 billion (flat compared to 2012), while international revenue was $5.02 billion (up 9 percent).

A Legal Win
In May 2013, after nearly nine years of litigation, Covidien won a patent infringement lawsuit against Ethicon Endo-Surgery Inc., a Johnson & Johnson company. In 2004, Covidien sued over Ethicon’s Harmonic line of ultrasonic surgical products.

The patents-in-suit are titled “Ultrasonic dissection and coagulation system” and “Ultrasonic curved blade.” While Covidien argued that Ethicon’s devices infringed upon its patents, Ethicon attempted to use an “obviousness” defense. Determining legal obviousness requires considering whether two or more pieces of prior art could be combined, or a single piece of prior art could be modified, to produce the claimed invention. Ethicon argued that its devices combined existing non-ultrasonic, laparoscopic technologies in such a way that would have been obvious and therefore Covidien’s patents were, effectively, unfair.

“Though the simplicity of this argument seems tempting, this is insufficient to make a clear and convincing case that the patents-in-suit ‘only unite old elements with no change in their respective functions,’” U.S. District Judge Janet Bond Arterton wrote in the ruling. Arterton also said Ethicon failed to reasonably show that an engineer of ordinary skill would have seen a benefit to using curved blades, dual cam mechanisms, a rotating blade and clamp, a device that fits down a 5-millimeter trocar and the use of a tube-in-tube design, as the patents describe. Proving this was an essential component to the obviousness defense.

The judge held that Covidien, known as Tyco Healthcare Group LP when the suit was initiated, proved infringement of all asserted claims of the patents-in-suit. The federal court awarded Covidien a $176.5 million verdict upon ruling that several claims of Covidien’s patents were valid, enforceable, and infringed by Ethicon. The amount of the verdict was based on an 8 percent royalty rate on infringing sales through March 2012, plus prejudgment interest. Eight percent of infringing sales from April 1, 2004, to March 31, 2012, yields royalty damages of $140 million, according to the court’s opinion. The prejudgment interest amounts to $36.5 million. The amount remains under appeal.

Acquisition, Expansion & Sales
In January 2013, Covidien announced plans to buy CV Ingenuity, a drug-coated balloon manufacturer based in Fremont, Calif. Financial terms of the transaction were not disclosed. The CV Ingenuity business became part of Covidien’s Vascular product line in its Medical Devices segment. CV Ingenuity’s core technology—though still in the investigational phase—is a drug-coated balloon (DCB) the company calls a “novel, proprietary, tunable, rapid-release system.” Covidien planned to increase research and development spending for the next several years to fund the clinical development of CV Ingenuity technologies. Covidien does not expect FDA approval for a DCB product based on CV Ingenuity technology until fiscal 2017.

The fiscal year also included expansion in growth markets.

Covidien opened a R&D facility in South Korea. Called, appropriately, the Covidien Center of Innovation Korea (CCI Korea), the facility is the first such location for the company in Korea. With a total investment of $21 million planned over a three-year period, CCI Korea is a high-tech medical training center focused on raising awareness of various disease states and providing opportunities for advancing healthcare professionals’ capabilities by creating access to a full-range of Covidien’s medical devices
CCI Korea spans an area of more than 65,000 square feet and includes a surgical lab with 11 operating stations; an intensive care unit (ICU) lab with two ICU stations and a human patient simulator; as well as an auditorium with seating capacity for 112 people, which has 3-D/high-definition display technology and a state-of-the-art, optimized sound system to provide an immersive and experiential training environment.

Covidien signed two memorandums of understanding with the Korean Surgical Society and the Korean Society for Thoracic & Cardiovascular Surgery. All healthcare professionals affiliated with the two societies will experience CCI Korea as part of their mandatory certification programs. Covidien planned to continue to collaborate with Korean medical societies for training programs and new product development at CCI Korea, with a focus on promoting national health and advancing medical technology in the country.

In July 2013, Covidien completed the separation of its pharmaceuticals business, which is now held by Mallinckrodt plc, a new independent company. The company announced in December 2011 that it planned to spin-off the Pharmaceuticals business. The businesses had distinctly different business models, sales channels, customers and capital requirements. In addition, their respective innovation pipelines differed substantially in length, regulatory approval requirements, possible risks and potential returns. The spin-off enabled both businesses to pursue their own strategic and operational plans, including setting optimal levels of investment in research and development and creating business-appropriate capital structures.

8. Covidien
$9.6 Billion ($11.6B Total)

KEY EXECUTIVES:
José E. Almeida, President & CEO
Charles J. Dockendorff, Exec. VP and Chief Financial Officer
James C. Clemmer, President, Medical Supplies
Michael Tarnoff, M.D., F.A.C.S., Corporate Chief Medical Officer
Michael Sgrignari, Sr. VP, Quality & Operations

NO. OF EMPLOYEES: 41,000 (total)

GLOBAL HEADQUARTERS: Dublin, Ireland

“Be brave. Take risks. Nothing can substitute experience.”

José E. Almeida may recognize the quote from his fellow countryman, Brazilian author Paulo Coelho. In July 2011, Almeida took the reins of Covidien as president and CEO following the retirement of his predecessor Richard J. Meelia. Almeida became chief executive after heading the company’s Medical Devices division. Maybe its Almeida’s device background. Or perhaps it is that medical devices make up 68 percent of the company’s total sales that the Dublin, Ireland-based company is so aggressive about its medtech sales. The company has leveraged its experience in a number of key sectors and has taken risks with an aggressive acquisition agenda. It certainly was evident in the company’s bottom line.

The medical device industry—once accustomed to regular double-digit growth—has come to recognize that high single-digit gains aren’t too shabby. But that wasn’t good enough for
Covidien in 2011.

For fiscal 2011 (ended Sept. 30), Medical Devices sales rose 17 percent to $7.8 billion from $6.7 billion in the prior year. Favorable foreign exchange contributed approximately four percentage points to the increase. Medical devices were 68 percent of the company’s total net sales. Strong sales of oximetry and monitoring devices, vascular products and venous insufficiency products led to increased led other sectors.

For fiscal 2011, sales of Medical Supplies, at nearly $1.8 billion, were up 3 percent from last year’s $1.72 billion. The increase was a result of higher sales of nursing care and medical surgical products.
For the company as a whole, net sales of $11.6 billion were 11 percent above the $10.43 billion in the previous year, with favorable foreign exchange increasing the sales growth rate by approximately three percentage points. The addition of an extra selling week in fiscal 2011 also added approximately two percentage points to the sales growth rate. Net income was $1.9 billion, up from $1.6 billion. Earnings per share were $3.79, compared with $3.26 for fiscal 2010.

In the ultimate device-centric move, Covidien announced in December that it would peel off its pharmaceutical business into an independent public company in order to better focus on the specific models, sales channels, customers, capital requirements and talent bases demanded by its significant device operations.

“We’ve evaluated whether to separate these businesses for several years, due to the major differences between the medical products and pharmaceutical industries,” Almeida said at the time of the announcement. “We believe that now is the right time to do so because we have significantly improved the operations, performance and pipeline of our pharmaceuticals business.” Almeida pointed out that the device and pharmaceutical pipelines “differ substantially in length, regulatory approval requirements, possible risks and potential returns,” making it easier just to separate the two businesses.

The main segments Covidien manufactures devices for are endomechanical, energy, soft tissue repair, vascular, oximetry and monitoring, and airway and ventilation. Staple products, which fall under the endomechanical business, have been a boon to Covidien, representing 13 percent of total net sales in FY11. They contributed 12 percent of net sales in FY10.

New products certainly have been a major focus in 2011. One of the first products to kick off the year was the Endo GIA curved tip staples and black reloads with Tri-Staple technology for thoracic surgery, announced in January with full roll-out mid-year. The company claimed that the curved tip reload was to be the first and only surgical stapling device that features a curved tip for improved maneuverability around hard-to-reach tissues and vessels. It also offers blunt dissection during minimally invasive procedures such as video-assisted thoracoscopic surgery to remove a portion of the lung. The black reload enables surgeons to consistently staple in extra thick tissue applications that previously were beyond the indications of any minimally invasive stapler, according to Covidien.

Other devices released during the fiscal year include: The Fentanyl Transdermal System patch for pain management; the TurboHawk Plaque Excision System for small vessels, for the treatment of peripheral arterial disease; the LigaSure Curved, Small Jaw, Open Sealer/Divider surgical instrument for general surgery applications; the Pipeline Embolization Device, intended for the endovascular treatment of large or giant wide-necked intracranial aneurysms in the cavernous and paraclinoid regions of the internal carotid artery; the DuraSeal Exact spine sealant; and another addition to the V-Loc wound closure device family, the V-Loc PBT (polybutester) for knotless incision closure. All of these products were released in the United States, where approximately 55 percent of Covidien’s net sales are generated—also where the company’s primary operational headquarters are located (Mansfield, Mass.).

The company experienced healthy business in Europe too. FY11 saw the launch of the Self-Expanding Peripheral Stent System in Europe, as well as the Parietex Optimized Composite mesh for laparoscopic ventral hernia repair, and the Infinity MCable with Nellcor and OxiMax technology as an integrated component of the Dräger Infinity Acute Care System, which monitors patient hemoglobin levels.

September brought the announcement of Covidien’s first-ever research and development facility in China. Located in Shanghai, the facility focuses on tailored products customized to the specific needs of China and other emerging markets, as well as making use of the specific talents offered by Asian employees to develop and create new medical device technologies. The location was planned to be fully operational by July this year.

Like many other companies, Covidien had operations impacted as a result of the Tohuku earthquake and tsunami of March 11, 2011. The earthquake rocked Japan, causing almost 16,000 confirmed deaths. Covidien has a manufacturing facility in Shizuoka as well as offices in Tokyo (both about 500 miles from the epicenter of the quake), but on March 17 the company confirmed that none of its 1,500 employees had been injured. Transport routes were affected by the earthquake and ensuing tsunami, and some of Covidien’s local suppliers suffered damage, but the company fed from raw material stores to keep supply up during the period of uncertainty.

Because of its ties with Japan, Covidien worked closely with disaster relief organizations and donated more than $1 million in products, corporate grants and employee matching gift funds to support the country. Japan represented approximately 8 percent of Covidien’s fiscal year 2010 net sales, but Japan sales were not adversely affected by the disaster—they ended up being 9 percent of the company’s net sales for FY11.

So far in 2012, Covidien is getting a reputation for fast and furious acquisitions. Working toward its goal of expanding and making the most of its booming device business, Covidien has been purchasing device companies around the world. Early in January, the $325 million acquisition of BÂRRX Medical Inc. was completed—the purchase was first announced in November 2011. BÂRRX produces technology for the treatment of Barrett’s esophagus, a condition where the lining of the esophagus is damaged by stomach acid. Covidien also has finalized the purchase of Newport Medical Instruments Inc. for $108 million, and Oridion Systems Ltd. for $310 million. The companies have been folded into Covidien’s ventilation and oximetry businesses, respectively.

$8.4 Billion ($10.4B total)
>NO. OF EMPLOYEES: 41,500 (total)

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.

9. Covidien

$7.8 Billion ($10.7B total)

KEY EXECUTIVES:
Richard J. Meelia, Chairman, President and CEO
Charles J. Dockendorff, Exec. VP and CFO
Jose E. Almeida, President, Medical Devices
James Clemmer, President, Medical Supplies
James M. Muse, Sr. VP, Global Supply Chain

NO. OF EMPLOYEES: 42,000 (total)

GLOBAL HEADQUARTERS: Dublin, Ireland

With three years as an independent company under its belt, Covidien continued its growth even in the face of global recession throughout its 2009 fiscal year (ended Sept. 30).

It was a news-making year for the Dublin, Ireland-based firm (the company changed its site of incorporation from the Bahamas to Ireland in 2009. U.S. headquarters are in Mansfield, Mass.). The company launched more than 20 new products, made sizeable and strategic acquisitions, and delivered solid bottom line growth compared to many of its corporate peers.

The company also consolidated four business units into three: Medical Devices, Medical Supplies and Pharmaceuticals. The Pharmaceutical Products and Imaging Products divisions were combined into a single segment—Pharmaceuticals. Also, in the Medical Supplies segment, the company expanded its product portfolio, adding the Clinical Care and SharpSafety lines formerly in Medical Devices.
Revenues for Medical Devices and Medical Supplies were used to categorize Covidien in this year’s MPO ranking.

For fiscal 2009, company-wide net sales were $10.7 billion, 3 percent above the $10.4 billion in the prior year, with unfavorable foreign exchange lowering the sales growth rate by approximately 5 percentage points. Sales rose 8 percent in the United States, but declined 3 percent internationally, reflecting non-U.S. operational growth of 7 percent and a negative currency impact of 10 percent. Operating income was down slightly to $1.9 billion in fiscal 2009, versus $2.0 billion a year earlier.

The Medical Devices division sales increased 2 percent to $6.1 billion, versus $5.9 billion a year ago. Within the division, endomechanical product sales climbed at a double-digit pace, fueled by sharply higher sales of stapling products. Vessel-sealing products also showed gains. Soft-tissue repair unit sales grew thanks to gains for mesh and biosurgery products, but growth in the product line was restrained by somewhat lower sales of sutures. Vascular sales were strong, due to fiscal year acquisitions, coupled with good growth for compression products.

Medical Supplies, at $1.75 billion, were 2 percent below last year’s $1.79 billion, with unfavorable foreign exchange reducing the sales growth rate by approximately 2 percentage points. There was also a decline in Nursing Care, SharpSafety and
OEM products.

For fiscal 2009, Pharmaceuticals sales climbed 8 percent, from $2.66 billion last year to $2.86 billion.
Among the notable new products on the device side were the SILS Port, a multiple-instrument access port for laparoscopic procedures; Duet TRS, an innovative endoscopic stapler; the portable 540 ventilator; and anti-microbial foam dressing to help prevent healthcare-associated infections.

At the beginning of fiscal 2010, the company’s DuraSeal product received an additional indication approval from the U.S. Food and Drug Administration (FDA). The new application provides watertight closure during spinal surgery, offering improvements over common sealing methods. According to the company, it is the first product approved specifically as an adjunct to suturing for intra-operative dural sealing in spine procedures. The dura is the outermost of the three layers surrounding the brain and spinal cord. The FDA OK’d the same formulation of the DuraSeal in 2005 and is currently on the market for cranial procedures. Both the cranial and spinal products are available in Europe and other markets.

To say that Covidien was acquisitive in 2009 may be a bit of an understatement. The company bought VNUS Medical Technologies Inc., a San Jose, Calif.-based firm that manufactures devices for the minimally invasive treatment of venous reflux disease, for approximately $440 million. Venous reflux disease is an underlying cause of varicose veins that can result in symptoms including leg pain, swelling, fatigue and skin ulcers. VNUS had 2008 revenues of $101 million. Both companies’ boards unanimously approved the move. VNUS’ primary product is the VNUS Closure system, which uses a disposable radiofrequency catheter that controllably heats and closes diseased veins.

“The acquisition of VNUS will allow Covidien to expand its presence in the vascular market and is in line with our strategy of becoming a leading partner with vascular surgeons and interventional radiologists,” said Joe Almeida, president of Covidien’s Medical Devices division.

The VNUS purchase was closely followed by Covidien’s buyout of Bacchus Vascular Inc., a Santa Clara, Calif., pioneer of interventional therapies for deep vein thrombosis. The amount of the deal was not disclosed. The purchases (along with the company’s 2010 purchase of ev3 for $2.6 billion—the largest deal since Covidien spun off from Tyco) laid the groundwork for the company as a serious player in the vascular device market.

Harry Glorikian, a managing partner at Scientia Advisors, a Cambridge, Mass.-based consulting firm that focuses on life sciences, told the Boston Globe following the ev3 purchase: “Covidien is definitely going to be a force to be reckoned with’’ in vascular devices. “This is a fast-growing market, and a big market. This is the kind of thing you want in your portfolio.’’ Ev3 develops peripheral vascular and neurovascular disease technologies. The companies will form Covidien’s Vascular Therapies Global Business Unit.

In July, the company inked a deal to buy Power Medical Interventions, Inc., a provider of computer-assisted, power-actuated surgical cutting and stapling products. Based in Langhorne, Pa., Power Medical Interventions (PMI) had 2008 revenues of $9 million. The purchase price was $64 million. PMI’s first powered stapling platform, the SurgAssist, was introduced in 2001 and has been used in more than 45,000 procedures globally, the company said. Over the last two years, the company has introduced wireless Intelligent Surgical Instruments that have the potential to revolutionize and expand minimally invasive surgery applications, as well as enable novel surgical procedures, officials noted. PMI became part of Covidien’s Endomechanical product line in the Medical Devices division.

At the end of the fiscal year, Covidien wrapped up yet another deal—Aspect Medical Systems Inc. for approximately $210 million. The purchase broadens Covidien’s reach into the oximetry and monitoring business. Aspect develops brain-monitoring technology.

But it wasn’t all spend, spend, spend. The company divested a few of its holdings, including its sleep diagnostics and oxygen therapy product lines in 2009. A deal was reached in 2010 to sell the firm’s sleep therapy unit as well.

$8.9 Billion ($9.9B total)
NO. OF EMPLOYEES: 41,700

Fiscal 2008 marked an anniversary for Covidien—its first full year as an independent medical technology firm. Its days as Tyco Healthcare now a distant memory, the company has moved forward to establish a new brand, a better reputation and solid portfolio of products and services.
The new approach seems to be working based on sales growth for the year.

Covidien derives its revenue from four groups.

Its Medical Devices group includes the development, manufacture and sale of endomechanical instruments, soft-tissue repair products, energy devices, oximetry and monitoring products, airway and ventilation products, vascular devices, sharps safety products, clinical care products and other medical device products.

The Imaging Solutions unit includes the development, manufacture and marketing of radiopharmaceuticals and contrast products.

Pharmaceutical Products includes the development, manufacture and distribution of dosage pharmaceuticals and active pharmaceutical ingredients.

The Medical Supplies division includes the development, manufacture and sale of nursing care products, medical surgical products and original equipment manufacturer products (OEM).
Higher volume and new products drove sales growth for fiscal 2008 (ended Sept. 26), according to the company. Net sales for all business divisions was $9.9 billion, 11 percent more than the $8.9 billion in 2007, with favorable foreign exchange contributing four percentage points to the sales increase.
(Editor’s note: Net sales reported in 2008 for fiscal 2007 were adjusted. The figure does not include $1.275 billion in net sales from discontinued operations. In its 2007 annual report, Covidien reported $10.170 billion in net sales. The company divested its Retail Products segment and European Incontinence business.)

Approximately 55 percent of sales in 2008 were generated in the United States. Net income was $1.36 billion for 2008, compared with a net loss of $342 million in fiscal 2007, the company reported.
“We finished fiscal 2008 with our strongest quarterly operational results since becoming a public company in mid-2007,” said Chairman, President and CEO Richard J. Meelia. “Growth was broad-based, with three of our four segments reporting double-digit increases. Our performance was especially strong in markets outside the U.S., as we continued to benefit from the incremental investments made over the last few years to augment our sales force and expand geographically. Our Imaging segment, however, posted disappointing fourth-quarter results, but we have plans in place designed to improve its performance going forward.”

For fiscal 2008, Medical Devices sales grew 12 percent to $6.8 billion from $6 billion a year ago. Sales for the company’s Endomechanical products were well above those of a year ago, led by sharply higher sales of laparoscopic instruments, the company reported. Sales of soft-tissue repair products climbed significantly, driven by stronger sales of hernia mesh products.

For the fiscal year, Imaging Solutions sales climbed 13 percent to $1.2 billion compared to $1.1 billion last year. Favorable foreign exchange contributed five percentage points to the sales increase. Pharmaceutical Products sales were up 12 percent to $1 billion from $908 million last year.

For the fiscal year, Medical Supplies sales, at $920 million, were 4 percent above last year’s $887 million. Total revenue tied to medical devices was roughly $8.9 billion.

This figure includes revenues from Medical Devices, Medical Supplies and Imaging Solutions. While Imaging Solutions incorporates a significant pharmaceutical element, it also includes a substantial device component as well.

While Covidien’s research and development expenditures were $341 million for 2008, up substantially from $260 million in 2007, many new product offerings came through acquisitions.
During fiscal 2008, the company’s Medical Devices segment acquired Tissue Science Laboratories plc for $74 million.

TSL is a medical device company dedicated to the research, development and commercialization of tissue implant products for surgical and wound care therapies. The acquisition of TSL provided Covidien with a leading tissue repair technology and accelerates its entry into the biologic hernia-repair market. TSL’s Permacol product complements Covidien’s current soft tissue product offerings and allowed the company to expand its line of differentiated hernia repair products. In November 2007, the company’s Medical Devices segment acquired Littleton, Mass.-based Scandius Biomedical Inc., a developer of medical devices for sports-related surgeries, for $27 million. The acquisition of Scandius enabled the company to offer customers innovative soft tissue repair devices for common sports injuries. Covidien also acquired technology assets from Portland, Ore.-headquartered CardioDigital Inc., a developer of advanced signal processing techniques for patient monitoring. They will be incorporated into Covidien’s Respiratory and Monitoring Solutions business unit.

The number of buyouts didn’t quite meet management’s expectations for the year, however.
“Overall, however, we were disappointed in the pace of activity and the number of acquisitions we made in 2008,” according to the most recent annual report. “While acquisitions are typically opportunistic, we intend to vigorously pursue those opportunities that will leverage our global footprint, enlarge our geographic presence and facilitate our participation in adjacent product categories to accelerate growth.”

For 2009, the company was quick to rectify its acquisition goals in a big way.

In June, Covidien completed a deal to purchase VNUS Medical Technologies Inc., a San Jose, Calif.-based firm that manufactures devices for the minimally invasive treatment of venous reflux disease, for approximately $440 million. VNUS had 2008 revenues of $101 million. Both companies’ boards unanimously approved the move.

Covidien paid $29 in cash for each share of VNUS stock—a 36 percent premium compared to the closing price of the stock on the day the deal was announced. “The acquisition of VNUS will allow Covidien to expand its presence in the vascular market and is in line with our strategy of becoming a leading partner with vascular surgeons and interventional radiologists,” said Joe Almeida, president of Covidien’s Medical Devices division. “The VNUS product line will be an important addition to our innovative portfolio of vascular intervention products.”

VNUS business became part of Covidien’s Vascular product line in the medical devices segment. Fiscal 2009 also brought a new home, of sorts, for the company. In December 2008, Covidien’s board approved moving the firm’s tax residency from Bermuda to Ireland. The move, finalized in June, was part of a reorganization creating a new Irish company dubbed Covidien plc. Covidien has a well-established presence in Ireland, where it has had operations for nearly 30 years. The company has five factories serving its Medical Devices and Imaging Solutions segments, as well as sales and customer service facilities. In total, Covidien has almost 2,000 employees in the country. The company’s U.S. base remains in Mansfield, Mass.

$8.1 Billion ($10.1B total)

NO. OF EMPLOYEES: 43,800

A year after spinning off from Tyco International, Covidien has charted an ambitious course to re-brand and position itself as a truly independent company. Once Tyco Healthcare, the medical device and pharmaceutical manufacturer became an independent publicly traded company (on the New York Stock Exchange, under the symbol “COV”) on June 2, 2007.

Making a name for itself has meant more than just a name change.

In an effort to put ties with scandal-plagued Tyco behind them, company officials have begun investing in increased R&D, new products, increased sales and marketing efforts as well as strategic acquisitions and partnerships. If you’re a baseball fan, you couldn’t help but notice part of this strategy in play on the outfield walls of Boston, MA’s Fenway Park (aka the Green Monster, home of the world champion Boston Red Sox), where Covidien’s logo is prominently displayed. The company has its roots in Massachusetts. Though headquartered in Bermuda for tax purposes, most of its corporate functions are located in Mansfield, MA.

For 2007 and the beginning of 2008, Covidien was broken into five business segments: Medical Devices, Pharmaceutical Products, Imaging Solutions, Medical Supplies (which includes the company’s contract manufacturing business) and Retail Products. In April of this year, however, the company sold its Retail Products group, which made infant care products, incontinence and feminine hygiene products as well as other retail items, to an affiliate of First Quality Enterprises, Inc. for $330 million in cash. The sale was part of Covidien’s strategy to focus its portfolio and reallocate resources to its core healthcare businesses.

“We created a comprehensive strategy centered on growth, innovation and globalization to transform our organization from a cost-cutting integrator of acquisitions into an innovative, risk-taking growth company,” wrote CEO Richard Meelia in Covidien’s annual report to shareholders. “We then reallocated financial resources to support this new strategy, which called for increasing our investment in research and development, strengthening growth functions such as strategic marketing and business development, expanding our sales and marketing workforce, realigning each of our businesses on a global basis and launching targeted initiatives to stimulate growth in the near-term as we build longer-term capabilities.”

Meelia said that while spending on R&D had doubled between 2002 and 2006, the company would aggressively expand its efforts moving forward to keep pace with its competition.

For fiscal 2007 (ended Sept. 30), Covidien posted sales of $10.1 billion, an increase of 5% compared with 2006. Subtracting pharmaceutical and retail products sales, total revenue for device-related Covidien businesses was approximately $8.1 billion (Editor’s note: This figure includes revenues from Medical Devices, Medical Supplies and Imaging Solutions. While Imaging Solutions incorporates a significant pharmaceutical element, it also includes a substantial device component as well.) Net sales in the United States across all business units were $6.1 billion (an increase of $100 million compared with 2006), while non-US business generated net sales of $4 billion (an increase of roughly $400 million).

Operating income decreased to $438 million, compared with $2.1 billion in fiscal 2006. Earnings were negatively impacted by a charge of $1.2 billion as part of a class action settlement related to Tyco International. Other factors affecting income for the year include increased marketing and branding expenses, sales force development and restructuring charges, according to the company. Covidien posted a net loss of $342 million for the year, compared with net income of $1.2 billion in 2006.

Medical Devices division sales were the largest revenue driver for Covidien at $6.2 billion. Operating income for the business unit decreased $93 million, or 5.1%, to $1.7 billion in fiscal 2007 compared with $1.8 billion in fiscal 2006. Imaging Solutions net sales increased $72 million, or 8.3%, to $942 million in fiscal 2007, while net sales for Medical Supplies increased $1 million, or 0.1%, to $993 million.

In the area of mergers and acquisitions, Covidien (then Tyco Healthcare) expanded its international presence with the acquisition of Polysuture, a Brazilian suture manufacturer in March 2007. In April that year, the company acquired the intellectual property for AbsorbaTack technology—absorbable fixation technology used in hernia repair—from Sorbx for $30 million (the company released AbsorbaTack products in the United States and Europe in January and May 2008, respectively). Following the close of the 2007 fiscal year, Covidien bought Scandius Biomedical, a developer of devices for sports-related surgeries. The purchase, according to the company, increases its reach into the growing $1 billion sports surgery market. In November, Covidien announced an agreement with Allergan, Inc. to co-promote the Lap-Band adjustable gastric banding system for the obesity surgery market.

Covidien has room to grow internationally, according to analysts. With 38% of sales overseas, it lags behind rivals such as Baxter and Becton Dickinson that have closer to 50% in international sales. However, a solid cash position and a good debt position means Covidien can afford to buy companies in faster-growing markets.

For 2008, experts expect earnings to drop slightly as Covidien continues to record some restructuring charges and ramps up its sales force. The charges eventually should yield annual savings as Covidien consolidates operations, outsources more work and divests underperforming businesses.

For the second quarter of 2008 (ended March 28), overall net sales rose 10% to $2.4 billion from $2.2 billion a year ago, fueled by strong growth in the Medical Devices and Imaging Solutions business segments, the company reported. Sales growth was driven by higher volume and new products. Operating income was $405 million, versus $484 million for 2007. Excluding restructuring and asset impairment charges and charges for Covidien’s portion of a Tyco International shareholder settlement, adjusted operating income was $500 million in the second quarter, compared with $488 million in the prior year. Net income was $263 million, compared with $394 million for the same period in 2007.