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WIKI ANALYSIS
Covidien (NYSE: COV) makes healthcare products that are used in hospitals worldwide. 61% of the company's 2007 revenue came from the sale of medical devices that are used during surgery; Covidien's small, precise instruments help decrease recovery time for minimally invasive operations.[1] Covidien's growing presence in non-U.S. markets has helped it increase its net sales by over 4% since 2005. Sales abroad made up approximately 40% of Covidien's net sales in fiscal 2007. [2] Today, Covidien serves customers in over 130 countries. No single account provided more than 10% of the company's total sales from 2005 to 2007. [3]
Until 2007, Covidien was a subsidiary of Tyco International (TYC) Ltd.[4], a conglomerate that makes safety equipment and electrical and metal products. The key to Covidien's success is the advantages its products give to surgeons and their patients, so the company must invest heavily in research and development to continue to innovate ahead of competing medical device manufacturers. A key motivator of Covidien's separation from Tyco was to increase the percentage of spending on R&D relative to revenue growth.[5] Covidien has increased investment in its R&D department by tripling the amount of money put into Research and Development projects since separating from Tyco.[6] However, these efforts come with both cost and risk in that increases in R&D costs have led to a 1.7% decline in Covidien's profitability. [7]
Business Overview
Business Financials
In FY2007, Covidien had net sales of $10.2 billion and a net loss of $342 million as a result of increased investment in its R&D department. Approximately 60% of net sales were generated in the United States and 40% were generated abroad.[8] Covidien has increased investment in Research and Development in the past two years in an attempt to increase its level of innovation, and subsequently, its net sales by offering healthcare providers less invasive surgical capabilities. Minimally invasive surgery, or a surgical procedure that tries to minimize trauma to the body, has become increasingly popular among healthcare providers and patients alike in that it is less traumatic to the body and allows for a quicker recovery time than invasive surgery. The immediate effects of increased R&D investment, however, have been a loss in profitability.
| [10] | 2007 | 2006 | 2005 |
|---|---|---|---|
| Net Sales | $10,170 | $9,647 | $9,535 |
| Research and Development expenses | 274 | 262 | 232 |
| Operating Income | 438 | 2,128 | 2,138 |
| Interest Expense, Net | 152 | 139 | 166 |
| Cost of products sold | 5,333 | 5,161 | 4,835 |
| Gross profit | 4,837 | 4,486 | 4,700 |
| Selling, general and administrative expenses | 2,537 | 2,081 | 2,325 |
| Net (loss) income | (342) | 1,155 | 1,035 |
Business Segments
Covidien operates its business through five segments (% of sales given using 2007 data):
- Medical Devices (61% of total sales): sells products such as instruments for minimally invasive surgery, soft tissue repair products, energy devices, oximetry and monitoring products, etc. [11] In other words, Covidien sells medical devices that allow major operations to be performed using smaller and more precise instruments that also decrease recovery time.
- Pharmaceutical Products (13% of total sales): sells dosage pharmaceuticals, active pharmaceutical ingredients (API), and specialty chemicals. [12] These products include generic pain relievers and fever reducers as well as addiction treatment medicines.
- Imaging Solutions (9% of total sales): offers radiopharmaceuticals and contrast products[13] These products are used in CT scans and X-rays, as well as a series of more complex medical imaging mechanisms. These products aid in the detection and assessment of diseases and abnormalities such as cancer, bacterial infections such as Tuberculosis, and injury to vital organs to mention a few.
- Medical Supplies (10% of total sales): offers nursing care products, medical surgical products, original equipment manufacturer products (OEM), and incontinence products in Europe. [14] Traditional wound care products, needles, syringes, and operating room products comprise the bulk of Covidien's medical supplies.
- Retail Products (7% of total sales): distributes infant care products, incontinence products, and feminine hygiene products.[15] These products are primarily used by consumers at home, rather than in hospitals or clinics.
| [16] | 2007 | 2006 | 2005 |
|---|---|---|---|
| Medical Devices | $6,200 | $5,700 | $5,600 |
| Pharmaceutical Products | 1,300 | 1,200 | 1,200 |
| Imaging Solutions | 942 | 870 | 938 |
| Medical Supplies | 993 | 992 | 1,026 |
| Retail Products | 744 | 855 | 830 |
Covidien has had steady sales growth in its medical devices and pharmaceutical products segments over the past three years, with a $600 million and $100 million increase in net sales respectively from FY 2005. With the acquisition of Confluent Surgical, Inc. in FY 2006, the company's medical devices unit posted a $450 million increase in revenue.[17] Covidien's Mallinckrodt pharmaceutical brand is the world's largest manufacturer of medicinal narcotics and acetaminophen[18] and in FY2007, the company's pharmaceutical products segment posted a $111 million increase in revenue.[19]
| [21] | 2007 | 2006 | 2005 |
|---|---|---|---|
| United States | $6,128 | $6,008 | $6,040 |
| Other Americas | 491 | 443 | 385 |
| Europe | 2,492 | 2,198 | 2,171 |
| Japan | 584 | 579 | 594 |
| Asia-Pacific | 475 | 419 | 345 |
Trends and Forces
The Volatility of the US Market has Resulted in Losses for Covidien
Approximately 60% of Covidien's total sales revenue comes from operations within of the United States.[22] This statistics reflects a relatively high reliance on the U.S. market in comparison to other comparable pharmaceutical companies, whose average percentage of total sales revenue from operations within the United States is 50%.[23] This high reliance on the U.S. market amplifies losses in Covidien's domestic earnings. 83% of Covidien's production takes place in the United States and increases in oil, gas and pulp prices have resulted in higher production costs and has made it more expensive to distribute products. The price of production increased by $50 million in FY 2007.[24] Moreover, in the past three years, Covidien's domestic earnings have steadily decreased as a percentage of net sales by approximately 2-3% annually.[25]
Risks Associated With Doing Business Abroad
40% of Covidien's total sales are outside of the United States.Covidien's foreign operations are namely grounded in the other Americas, Europe, Japan, and Asia-Pacific. [26] Operations abroad are subject to all the risks that come with conducting business abroad under foreign laws, regulations and customs. These risks include changes in non-U.S. medical reimbursement policies, possible failure to comply with anti-bribery laws such as the U.S. Foreign Corrupt Practices Act, trade protection measures, and more general political and economic factors such as military instability or recession.[27]
Foreign Currency Exchange Rates Lead to Increase in Net Sales
The weakening of the U.S. dollar has had impact on foreign currency exchange rates wordlwide. In foreign markets where Covidien is operating, a weakening of the U.S. dollar leads to an increase in net sales by strengthening the currency that Covidien is using abroad. In FY2007, Covidien attributed an increase of net sales by approximately $201 million, or 4-7%, as a result of foreign exchange rates.[28]
Tyco Legacy Contingencies Tie Covidien Up in Tax and Legal Liabilities
On June 29, 2007, Covidien separated from Tyco International in order to gain independent operating capabilities, namely with the stated intention of increasing investment in Research and Development. In the separation, Covidient agreed to assume 42% responsibility of Tyco International's contingent and corporate liabilities.[29] Covidien shares an equivalent amount of tax liability for periods prior to and including the date of separation. The monetary total for Covidien's class action lawsuit settlement is over $140 million and has led to a $1.2 billion adjustment in its operating income for 2007.
Competition
Covidien's primary overall competitors
Primary competitors by business unit[30]
- Medical devices shares the market for common surgical instruments and monitoring devices with Johnson & Johnson, C.R. Bard, Becton Dickinson, Respironics and ConMed. Covidien offers the fullest breadth of products in regards to Medical devices. However,
- Pharmaceutical Products shares the market for active ingredients with Johnson & Johnson, Siegfried and Johnson Matthey. This unit also shares the market for dosage products with Teva, Mylan, and Watson.
- Imaging Solutions shares the market for contrast and nuclear medicine products with GE Healthcare. Covidien also competes with Bracco for contrast agents as well as Bristol-Myers Squibb for nuclear medicine cardiology agents.
- Medical Supplies shares the market for branded products with 3M, ConMed, First Quality, as well as low-cost suppliers, such as Cardinal and Medline.
- Retail Products shares the market for private-label products with Kimberly-Clark (KMB), Procter & Gamble, Johnson & Johnson, Arquest and Associated Hygienic Products.
Covidien's strengths rest in the fact that it offers a full breadth of products to its consumers, most namely in regards to Medical Devices and Imaging Solutions. In fact, no single company competes with Covidien over the full breadth of products offered by its Medical Devices segment. In regards to its Pharmaceutical Products branch, Covidien possesses a secure source of raw materials and manufacturing capabilities that enables them to compete effectively against its competitors. In FY2007, Covidien came second only to Johnson and Johnson among its competitors in regards to total revenue. However, in that same year, Covidien showed the least amount of percentage revenue growth among its main competitors.[31]
| [32] | 2007 Total Revenue (In millions) | % Revenue Growth in 2007 | 2007 R&D Spending as a percentage of Total Revenue |
|---|---|---|---|
| Covidien[33] | $10,170.00 | 5.4% | 24.9% |
| Johnson & Johnson [34] | $61,100.00 | 14.57% | 7.93% |
| Becton Dickinson [35] | $6,360.00 | 10.8% | Not Available |
| C.R. Bard [36] | 1,986.00 | 12.14% | 7.3% |
References
- ↑ COV 2007 10-K; Item 1: Business, Page 2
- ↑ COV 2007 10-K; Item 1a: Risk Factors, Page 16
- ↑ COV 2007 10-K; Item 1: Business, Page 5
- ↑ COV 2007 10-K; Item 1: Business, Page 9
- ↑ Tyco Healthcare completes spinoff as Covidien, St. Louis Business Journal (July 2, 2007). Retrieved on 25 September 2008]
- ↑ Covidien Emerges from Tyco's Shadow with R&D emphasis AuntMinnie.com (20 August 2007) Retrieved on 25 September 2008
- ↑ COV 2007 10-K; Item 1: Business, Page 1
- ↑ COV 2007 10-K; Item 1: Business, Page 1
- ↑ COV 2007 10-K; Item 6: Business, Page 46
- ↑ COV 2007 10-K; Item 6: Business, Page 41 & 46
- ↑ COV 2007 10-K; Item 1: Business, Page 2
- ↑ COV 2007 10-K; Item 1: Business, Page 3
- ↑ COV 2007 10-K; Item 1: Business, Page 4
- ↑ COV 2007 10-K; Item 1: Business, Page 4
- ↑ COV 2007 10-K; Item 1: Business, Page 5
- ↑ COV 2007 10-K; Item 1: Business, Page 2-6
- ↑ COV 2007 10-K; Item 1: Business, Page 2
- ↑ COV 2007 10-K; Item 1: Business, Page 3
- ↑ Covidien, Global Market Direct, Page 22. Published Feb 2008, Reference Code: GMDME5255S
- ↑ COV 2007 10-K; Item 1: Business, Page 5
- ↑ COV 2007 10-K; Item 1: Business, Page 5
- ↑ COV 2007 10-K; Item 1: Business, Page 1
- ↑ Wobbly at First, Covidien Can Now Rise on Its Own, Barrons.com. (April 28, 2008) Retrieved on 25 September 2008
- ↑ COV 2007 10-K; Item 1A: Risk Factors, Page 15 and 52
- ↑ COV 2007 10-K; Item 1A: Risk Factors, Page 13
- ↑ More specific information concerning Covidien's international sales are not available.
- ↑ COV 2007 10-K; Item 1a: Business, Page 16
- ↑ Covidien Announces Highlights from Investor Meeting, MSNMoney.com, (September 10 2008), Retrieved on 25 September 2008]
- ↑ COV 2007 10-K; Item 1a: Business, Page 16
- ↑ COV 2007 10-K; Item 1: Business, Page 9
- ↑ COV 2007 10-K; Item 1: Business, Page 9
- ↑ COV 2007 10-K; Item 1: Business, Page 2-6
- ↑ COV 2007 10-K; Item 1: Business, Page 2-6
- ↑ Johnson & Johnson Q2 2008 Earnings
- ↑ Becton Dickinson 2007 10-K; Item 1: Business, Page 1
- ↑ C.R. Bard 2007 10-K; Item 2: Business, Page 2
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