“$9.6 Billion ($41B Total)

Key Executives:
Edward Breen, Chairman and CEO, Tyco International
Thomas Lynch, CEO, Tyco Electronics
Richard Meelia, CEO, Tyco Healthcare
Christopher Coughlin, Exec. VP and CFO, Tyco International

No. of Employees: 238,200

World Headquarters: Pembroke, Bermuda

This time next year, MPO’s Top Companies Report will include a brand new company—well, sort of. This prediction isn’t really going out on a limb. In January 2006, Tyco announced plans to separate the company’s portfolio of diverse businesses into three independent public companies: Tyco Electronics, Tyco Healthcare and the combination of Tyco Fire & Security and Engineered Products & Services.

The split went into effect this June, and Tyco Healthcare is now Covidien, based in Mansfield, MA. Tyco International shareholders will receive one share of Covidien stock and one share of Tyco Electronics for each of their shares, the company said. Tyco has said the separation, costing up to $1.6 billion, will let each company better focus on building value by setting its own strategy for acquisitions, alliances and use of resources, while giving investors clearer choices. The split was expected to take place much earlier this year but was pushed back due to delays with US regulators.

Covidien is an original name inspired by the themes of collaboration and life, the company said. It was selected for its global meaning and appeal from among some 6,000 possible names in a rigorous process that began more than nine months ago.

“Covidien was the result of a careful process that focused on distilling from our customers, employees and industry experts the attributes of a best-in-class healthcare business,” said Eric Kraus, senior vice president, corporate communications. “We’re confident that our new identity as Covidien will help us strengthen our ongoing partnership in the lifesaving work of medical professionals, creating far-reaching benefits for improved patient care.”

However, before we start looking too far forward, we need to take a small step back to look at performance for Tyco Healthcare for fiscal 2006.

Tyco Healthcare consists of three business units, which include Medical Devices & Supplies, Pharmaceuticals and Retail. The company’s product lines include disposable medical supplies, monitoring equipment, wound closure products, advanced surgical devices, medical instruments and bulk analgesic pharmaceuticals.

For Tyco as a whole, revenue rose more than 4%, from a little more than $39 billion in fiscal 2005 to nearly $41 billion in fiscal 2006. Net income also rose from $3 billion to more than $3.7 billion.

Net revenue for the Healthcare group increased 1% in 2006 to $9.6 billion, compared to roughly $9.5 billion in 2005. Tyco said the increase largely was driven by the surgical segment within its Medical Devices & Supplies unit, including strong demand for laparoscopy, ablation and vessel sealing as well as, to a lesser extent, sutures. Increases were partially offset by the adverse impact of voluntary product recalls in Imaging and lower volume sales within the Respiratory product line, in addition to the negative changes in foreign currency exchange rates of $93 million.

Operating income decreased to $2.2 billion from $2.3 billion in 2005. In addition to sluggish performance in Respiratory and Imaging, the company said additional investments in research and development contributed to a weaker profit picture.

Fiscal 2006 also brought with it a series of acquisitions for Tyco Healthcare. The company acquired more than 90% ownership in Floreane Medical Implants SA for approximately $123 million in cash. Floreane develops surgical support implants for parietal, urological and gynecological surgery. The remaining outstanding shares would be acquired if they become available. Tyco also acquired Airox SA, a home respiratory ventilation systems business based in France, for approximately $108 million.

Another takeover target was Waltham, MA-based Confluent Surgical Inc. for $246 million. Confluent Surgical manufactures a neurosurgical sealant that was the first product to receive FDA approval for use in cranial dural repair. This sealant, along with several other products in the company’s pipeline, is intended to improve patient outcomes by reducing leaks or adhesions across various surgical specialties. In the next six years, the biosurgery market, which is estimated at $900 million, is expected to double in size, according to Tyco’s estimates.

“Confluent Surgical is an excellent strategic fit for Tyco Healthcare. This acquisition will expand US Surgical’s Syneture suture product portfolio, as well as the Autosuture division’s surgical stapler franchise,” said Rich Meelia, CEO of Tyco Healthcare. “

$9.5 Billion ($74B Total)
No. of Employees: 247,900

This will be the last year that Tyco is one company, as CEO Ed Breen prepares to split the company into three publicly traded divisions—including Tyco Healthcare.

The move is just another step in the reconfiguration of Tyco after Breen took over the reigns of the company in 2002, after former CEO Dennis Kozlowski left under a cloud of well-publicized controversy. Kozlowski and former CFO Mark H. Swartz are currently serving time in prison after being convicted for stealing from Tyco.

The separation of Tyco into three units is expected to be finalized in the first quarter of 2007; along with the healthcare unit, the other two divisions are Tyco Electronics and Tyco Fire & Security and Engineered Products & Services. With the reorganization changes, current Tyco Healthcare President Rich Meelia will become the separate company’s CEO.

“After a thorough review of strategic options with our board of directors, we have determined that separating into three independent companies is the best approach to enable these businesses to achieve their full potential,” said Breen. “Healthcare, Electronics and TFS/TEPS [Tyco Fire & Security and Tyco Engineered Products & Services] will be able to move faster and more aggressively—and ultimately create more value for our shareholders—by pursuing their own growth strategies as independent companies.”

Tyco Healthcare products include advanced surgical instruments and supplies, respiratory care products, contrast media and diagnostic imaging products, needles and syringes, vascular therapies, sutures and wound care products.

In 2005, Tyco Healthcare rose 4% in revenues with the help of increased volumes in its international division, especially in Europe. The division experienced sales in its surgical segment due to increased contracting with group purchasing organizations (GPO) and the acceptance of its Laparoscopic Gastric By-Pass procedures and the increased adoption of LigaSure vessel occlusion system device.

Overall, Tyco corporate revenue increased only 3% to $39.7 billion. The small increase might be the result of what some analysts say was the company’s past skimping on R&D—however, in the last two years the company has increased its R&D efforts. Last year, R&D expenditures for the Healthcare division rose 11% to $232 million, the second highest segment spending on R&D (the first being Tyco’s electronics segment).

After being quiet in terms of company takeovers after the ouster of Kozlowski, Tyco has started to become more aggressive and made two purchases in the healthcare segment that especially bolstered its surgical product portfolio.

In July 2005, the company bought Mountain View, CA-based Vivant Medical, a manufacturer of microwave ablation technology, for $66 million with up to an additional $35 million to be paid in the future based on the achievement of certain milestones. The company expects the world ablation market to grow to between $700 million and $1.5 billion by 2015.

Later, in November, Tyco acquired a controlling interest in Floreane Medical Implants of Trévoux, France. The manufacturer of surgical mesh products was gotten for $142 million.

In the courts, Tyco Healthcare received a favorable verdict in an appeal in March this year, when a US district judge vacated a $420 million jury settlement to Irvine, CA-based Masimo. A jury in 2005 had ordered Tyco to pay Masimo the amount of damages dealing with an antitrust lawsuit dealing with Masimo’s pulse oximetry. Masimo contends Tyco subsidiaries prevented hospitals from buying Masimo’s products.  The judge ordered a new trial on the issue.

While Tyco won the ordering of a retrial in that case, it was hit by two other longstanding lawsuits. Nellcor, a division of Tyco Healthcare, settled with Masimo and had to pay out $330 million to the Irvine, CA med-tech company for an antitrust lawsuit over its pulse oximetry monitors. In addition, Tyco had to pay out $64.5 million to Rancho Santa Margarita, CA-based Applied Medical Resources in another patent dispute over a device used in laparoscopic surgery.

In the second quarter of 2006 (ended in April), its overall healthcare segment recorded a flat increase due to several voluntary recalls in the respiratory and imaging segments. After an inspection of a Tyco Healthcare plant in the beginning of 2005, the FDA announced in October that there were problems with the company’s tracheotomy tubes and a heart and blood monitoring device that are manufactured at the company’s Pleasanton, CA plant.