COVER STORY

Covidien Ltd. (Hamilton, Bermuda), began its independent life as a company that was already among the largest in the medical device industry. Previously the healthcare business of Tyco International, where it was called Tyco Healthcare, Covidien adopted its new identity when it was spun-out from its parent company in June 2007. The company took with it all of the assets of its predecessor—including significant brand holdings with strong name recognition—and a determination to make something new of itself.

Covidien business segments have a strong presence in the markets for medical supplies, imaging, and pharmaceuticals. But it is the medical devices business segment that brings in more than two-thirds of the company's revenues, and also offers the greatest promise for future growth. Leading Covidien's medical device units through the transformations needed to become a company focused on innovation is Joe Almeida, president of the company's medical devices business segment.

In this excerpted interview with MX editor-in-chief Steve Halasey, Almeida discusses the thinking that led to Covidien's spin-out as an independent company, and how the company is going about the on­going task of self-improvement—while also keeping the needs of customers uppermost in its mind.

MX: By way of reminding our readers how Covidien came into being, I'd like to go back in time a few years. What are the major brands that were acquired to create Covidien's pre­decessor, Tyco Healthcare?

Joe Almeida: Conglomerates look at medical devices as a safe haven, a business that is good for all seasons and mostly for all crises. When I joined Tyco International in 1995, the company was a small, $13 billion conglomerate that had recently decided to get into healthcare. Tyco already had a very tiny business in the medical device arena. But its first real foot in the business came with the acquisition of Kendall Healthcare.

I joined Tyco as an employee of the Kendall Healthcare division, which was at the time a very recent acquisition, just six months of age. But the company was starting to expand through acquisitions, and it rapidly acquired a significant number of medical device companies and brands, including U.S. Surgical, Mallinckrodt, Sherwood and Geck (then a division of American Home Products), Professional Medical Products, Puritan Bennett, and more.

These brands represent a fairly disparate group of technologies and products. Was there a unifying principle that guided Tyco's acquisitions?

The rationale for acquiring a particular company was primarily that the company was distressed or in need of a change. Tyco would go in and acquire the company; make some changes to synergize manufacturing and streamline sales, general, and administrative costs; and make the company much more profitable as a part of Tyco International. So the criteria for acquiring those companies was that they were distressed companies and offered good opportunities for synergies within Tyco.

The name change to Tyco Healthcare came about in the late 1990s, when the company bought U.S. Surgical, which was already a large business of close to $1.4 billion in sales. With that acquisition, Tyco's healthcare units took the name Tyco Healthcare, and Kendall became a division within Tyco Healthcare. The division kept the same management, but the name changed.

Going forward, will Covidien carry on the practice of allowing its acquired brand names to continue to exist?

The short answer is yes. Those are well-known brands, and they will be staying around.

But the whole company is going through an extensive rebranding exercise. As you might imagine, this is a significant undertaking, because our medical device brands and packaging are key parts of our product registration process across the globe.

But between the two companies—Tyco Healthcare and Covidien—there is about 180° of separation. In January 2006, Tyco's new CEO, Ed Breen, called the senior management of Tyco Healthcare into our former boardroom in Mansfield, MA, and told us that Tyco International had decided to split into three pieces, and that the healthcare business would become a public company. From that point on, we have made significant changes in who we are and how we do business.

Take us through the thought process that led to the spin-out of Tyco Healthcare as a separate company.

What was discussed was whether three very different business models could survive under a single roof. Or, from the shareholders' point of view, whether three independent entities would be more valuable than if the units remained together.

The board of Tyco International evaluated the three companies with the advice of McKinsey and Co. and its corporate bankers. And it came to the conclusion that Tyco International could not provide its shareholders the same value that the three companies could provide as independent entities.

What steps toward restructuring were foreseen as part of the spin-out?

This is the part of the process I like to talk about, because this is what made the biggest difference—the 180° of separation—between the two companies.

Becoming Covidien was not just a matter of separating the things I spoke about and then doing business the same way. If we had done that, we would have failed.

Instead, we had to look carefully at the competitive challenges of today's healthcare marketplace, and we had to look very hard at our company, and then determine which markets we intended to play in. We had to address the questions of how to make Covidien an innovative company, and how to attract and retain the best talent.

So what we did was a complete reengineering of our processes, including portfolio management, product development, and other areas. And we organized the company into segments that were reporting in a way logical to the way we're managing the company.

What restructuring steps were not foreseen or accomplished during the spin-out, but came to the company's attention afterward?

We spent about two or three months benchmarking ourselves, with extensive help from McKinsey and Co. Covidien's chairman, president, and CEO, Richard J. Meelia, led the charge, with group members that included myself; Amy A. Wendell, senior vice president for strategy and business development; Charles J. Dockendorff, executive vice president and CFO; and several other members of the staff who joined us along the way.

As a result of this process, we got quickly educated about what it would take to become successful in the medical device arena. We already knew that our spending on R&D was suboptimal. We knew that we were not launching products into the marketplace fast enough, and that our launches were not as effective as they were supposed to be. And these factors, of course, reflected the company's commercial excellence and how it was launching products.

As a result of these efforts, we accomplished a very big task. We created a very disciplined portfolio measuring process to screen every opportunity that goes into the company's business units. The process provides the foundation for very good and solid business development, acquisitions, and licensing functions. We also revamped our product development process, to be able to quickly weed out things that are not going to work and capture the things that will work.

Did certain unexpected issues arise? What were they, and how did the company deal with them?

To give just one example, we saw that we had a robust product development process that had been developed some time ago with the help of a consulting company.

But when we looked at the process, we began to wonder how the products and projects were being selected to go into the process.

The result was the creation of several vice president positions—one at the corporate level and one in each of our global business units—to look exclusively at our product and business portfolios. These are the people in charge of doing the upstream marketing research and looking at the opportunities necessary to build the business. Building the intrinsic value of each portfolio, and being able to drive that value up collectively, also drives up the overall value of Covidien to its shareholders.

How does the process work when you are considering acquisitions or new market entries?

When we look at a market or disease state, we look at what technologies and know-how we need to be successful in that business.

About three years ago, for example, we looked at our portfolio for general surgery in the body cavity. Covidien's presence there is already immense, with devices for both open surgery and laparoscopic procedures, including access devices, trocars, sutures, staplers, and a great deal more.

But what we really wanted to know about was the adjacency of hernia repair—a $600 million to $700 million market in which we weren't participating. We had a very small product line—insignificant in terms of sales—but we were number one in the fixation of hernia meshes in the body cavity. So we undertook a portfolio analysis on the whole market. We did some upstream marketing research, and we decided that we wanted to be in that space.

In this example, some things we developed in-house, some we bought, and some we licensed. And the conclusion was that we were able to put together a franchise for hernia repair and fixation, and we enhanced our market share position significantly by doing a good job—not only at executing, but also at using our portfolio management process to figure out how to get into the business.

Focus and Interests

How is Covidien structured to take advantage of current and emerging markets?

Covidien is divided into four segments: medical devices, imaging solutions, pharmaceutical products, and medical supplies. I'm responsible for medical devices, which represents about 67% of the company's sales and more than 80% of the company's earnings.

The medical device segment is further divided into four global business units, each with its own president.

Each one of these global business units is a self-sufficient organization with its own R&D, business development, portfolio management, operations, and legal functions.

How does this structure translate into Covidien's activities in specific areas of business?

In medical devices, our core theme is to develop solutions that will address a very important and clinically relevant parameter for our customers. And our customers are clinicians, patients, and providers. So ultimately, clinical relevance is the force that drives our portfolio management process and the selection of areas in which we develop products.

Our work in the field of bariatrics is a good example. Treatment of obesity through bariatric procedures—gastric bypass, duodenal switch, or a couple of other variations—can result in a weight reduction of up to 80%. Moreover, if the patient has type 2 diabetes, these procedures can bring about a resolution of that condition, which is a significant improvement for the patient's life and a great cost savings for the healthcare system.

So we've been working very hard to develop that market. We have products suited to bariatric procedures, and we have a Web site (www.bariatrics4diabetes.com) to help tailor solutions for patients.

Another interesting example is our work to develop technologies for tumor ablation. In the liver, tumor ablation can be done with either radio-frequency or microwave technology. Our energy-based device division has recently launched the Evident microwave-ablation system, and we've been very happy with its performance.

In another area, Covidien is also developing products to support single-incision laparoscopic surgery (SILS). This approach enables the surgeon to do several procedures—such as an appendectomy or a colecistectomy—by means of a single incision through the umbilicus, or belly button. We launched SILS as a Covidien trademark at the recent annual meeting of the American College of Surgeons, and we got tremendous acceptance of the approach from surgeons.

When you look across all these opportunities, what is your sense of where Covidien's growth will come from? How much will be organic, how much of it will be acquired, and how much of it will be achieved through partnerships and alliances?

For Tyco Healthcare, of course, the key driver of growth was acquisitions. But that's not the case for Covidien. We don't use acquisitions as a way of augmenting the company's top line just for a short term.

Instead, we view acquisitions through the lens of our portfolio management process. We identify targets that have a significant technology advantage—meaning intellectual property of interest or use in developing a market space—or an advantage in a certain disease space that we could not achieve on our own. We buy these companies with the objective of continuing to develop and invest in their R&D, and following on with their marketing activities to grow the business.

What is Covidien's current rate of R&D spending for medical devices, and what does that rate need to be for Covidien's business units to get where they want to go?

In 2007, we were at 2.9%. For fiscal 2008, we have increased that rate to 3.4%.

Although I'm happy with that number, I'm far from being satisfied. If there is one thing that we need to do, it is to continue investing more funds in R&D. Our plans for FY09, call for another significant increase in the amount of spending on research and development.

Plans for the Future

How do you see Covidien's plans for growth playing out in the coming year and on into the future?

Covidien has a rich pipeline that is enhanced on an ongoing basis. Every quarter, we conduct portfolio review meetings that involve our CEO, me, and the heads of the business units. You'd be surprised at how dynamic that portfolio meeting is, and how many new things pop up.

It is the job of the business unit presidents to enhance the intrinsic value of their units as part of Covidien. By doing so, they will grow the overall value of the company and that, in turn, drives higher returns for the shareholders. So we review these portfolio review meetings—and the portfolio management process as a whole—very thoroughly.

Do you expect to achieve market ex­pansion regionally, as well?

Absolutely. Before this job, I was the president of international for our business, with responsibility for all the overseas businesses outside the United States and Canada. We invest a significant amount in growing our international businesses. In the past three years, for instance, we have doubled the size of our sales force in Latin America. And as a result, we are experiencing phenomenal double-digit growth in that market.

Regional development is an area where I wish we were a little further along. We're not where I want to be. But our business is experiencing significant regional expansion, primarily in emerging markets. Our next step is to start diversifying R&D locations.

Today, Covidien employees seem to radiate a sense of excitement and optimism. Do you consider that typical?

Absolutely. The enthusiasm of our employees is great. Our latest employee satisfaction survey has improved significantly from a few years ago, and that has made us very happy.

In the future, we're going to have all kinds of tasks ahead of us. The changes that are sweeping the global marketplace are challenging businesses in all industries, all around the globe.

But I think our industry still has some opportunities to provide solutions that are effective and clinically relevant to our patients. And our optimism comes from having a great group of people at the company, and from having a good portfolio that is getting better.

There are challenges everywhere. But operationally speaking, we believe our company is well poised to move forward.

Copyright ©2008 MX