The MX Q&A: Richard Meelia, Covidien

With 40 years of experience in the healthcare products industry Richard Meelia knows more than many about reading the business climate. Asked what advice he’d give to aspiring chief executives on the eve of his July 1 retirement from Covidien, Meelia recommends staying calm through the inevitable business cycles.

“There are going to be headwinds and there are going to be tailwinds, and sometimes people are too quick to make decisions based upon headwinds or tailwinds that they can’t control,” says the 62-year-old executive. “I think patience is required to get through some of these cycles so that you stick with your strategy, remain confident in your people, and then when the outside environment changes, you’re still on course.”

That steady-as-she-goes approach has stood Meelia and Covidien in good stead. The company that Meelia’s successor, Jose (Joe) Almeida, will lead beginning in July boasts $10.4 billion in revenue, with the medical device side of the business in particular doing well in FY11, and a strong overseas presence. Devices have shown double-digit growth with product brands such as ev3, Energy, and Nellcor leading the way. Almeida, 48, is president of Covidien’s medical devices business, which represents about 67%of the company’s total annual revenue and 75% of its operating profit.

Meelia faced a strong headwind in 2002 that would have tested any chief executive’s patience. Based in Mansfield, MA, Covidien was spun out of Tyco International’s healthcare division in 2007 after one of the most notorious cases of corporate malfeasance in U.S. history. In a second state trial brought after the first one resulted in a hung jury, Tyco International CEO Dennis Kozlowski and former CFO Mark Swartz received prison sentences in 2005 for grand larceny, conspiracy, and other charges.

Meelia began his Tyco affiliation when he joined Kendall Healthcare Products as group vice president in 1991. Kendall became the foundation of Tyco Healthcare, and in 1995 Meelia became president of the parent company’s healthcare business. Before his stint with Kendall, he was president of Infusaid, a division of Pfizer that manufactured and sold implantable infusion pumps, and also held various sales and marketing positions with American Hospital Supply’s Pharmaseal and McGaw business units.

Following his departure, Meelia will stay on for one year at Covidien as a nonexecutive chairman of the board in order to ease the transition. In this exclusive pre-retirement interview with MX, Meelia discusses the company’s recent performance, changes in the company’s short-term business model during his tenure, handling the distractions of the Kozlowski affair, the evolution of the device business, and his future plans.

MX: Covidien’s Q2 results for FY11 are positive, and your medical device business showed decent growth. Are you expecting similar results for the last quarter that you’ll be head of the company?

Richard Meelia: Obviously, we can’t give any updated guidance. We did rate guidance at the second quarter.

I believe it was 13% to 16%?

That’s correct. That was driven in a very great way by the results we’re having in Endo Stapling, the ev3 business—the whole vascular business, actually—and the Energy [products] as well as some good results outside the U.S.

I wanted to talk about that, because 40% of your business is outside the U.S. What are some of the challenges you’ve faced with overseas business during your tenure?

It’s actually been one of our “leverageable” strengths, because our footprint has always been pretty extensive and so when we separated from Tyco we knew we had some things that we were going to have to compensate for from the old days. But one thing we knew we had was a good footprint all over the world. We strengthened that, and over the last several years the emerging market growth has been double-digit for probably three of four years in a row. And Europe historically has had U.S.-market kind of growth. Like everywhere else, Europe had some struggles over the last 12 to 18 months with some of their economic issues. But overall Europe’s been good. And Japan and Australia have been [crucial] to our sales and profitability growth.

How is the regulatory aspect of operating in Europe?

I would say they’re probably a little more challenging from a reimbursement standpoint; you have to go country by country, so it’s not just one reimbursement mechanism. Other than that, their regulatory requirements aren’t all that different from FDA. Every regulatory body is putting, I think, more and more scrutiny into their reviews. As a result, [there are] some of the things that you’ve seen in the press, [with] heretofore very well-respected companies just running into difficulties. I’m doing a pretty good job not mentioning any names. (Laughs.) We’re facing that, as is everybody.

Regarding your retirement, it’s an aspect of human nature perhaps to reflect on the past. Have you been looking back on your career at this point?

Well, I think it’s pretty normal to do that as one brings one’s career to the end. I’ve had some very interesting opportunities, from being part of the team that took Kendall through a prepackaged bankruptcy and then to operating as a public company. That was very exciting. Then when we got acquired by Tyco, I took a couple of years to kind of understand what the role was going to be, but we grew our business pretty significantly. Then, the most exciting and gratifying aspect clearly has been Covidien, where we just have really transformed Tyco Healthcare from a cost-cutter, short term–focus, cash-and-earnings [company] to a much more long term–focused, technology and clinically driven Covidien. It’s been gratifying to see analysts writing about the company in the way that we talk about it. So they agree with what we’re saying; they’ve agreed pretty much with our strategy. You’re seeing some confidence reestablished in the stock price as well.

On reflection is there anything at all you think you might have done better or differently?

I [would] just say that when we were part of Tyco it was the model to not invest in growth and to really maximize profitability….

The quarter-to-quarter thinking?

...from quarter to quarter. You know, it worked. It was the Tyco model, and we did what they wanted us to do, and we built up the profitability of Tyco Healthcare. I mean, it was clearly the most profitable [unit] in Tyco, and it was very profitable as a medical company. But we had just a 1% or 2% sales growth. And if I had it to do over again, I think I would have put up more resistance to the short-term objectives and begun to gradually invest in internal growth instead of relying strictly on acquisition growth, which was really what drove the buildup from $600 million in ’94 to $9 billion in 2002.

You would have been going against a culture that encourages that short-term thinking, though.

It wasn’t just that. It was the bonus program, the culture, the management philosophy; everything was focused that way. And for many years until the unfortunate end, with the scandal, there are a lot of happy shareholders, a lot of positive analyst reports. So it was working well for a while, but it came to halt with all those problems.

I don’t want to rehash everything, but how hard was it bouncing back from those legal troubles? Were there any moments during that whole period with Dennis Kozlowski that you were worried about the future of Tyco Healthcare?

For people like me, at my level [then]—as a division president and not in Tyco corporate—the first time we really heard about any of this was when he was indicted in early June of 2002. I would say for the next several months until [chairman and CEO of Tyco International] Ed Breen  came in and began to establish his direction, it was very distracting, and [there were] a lot of forensic audits going on, making sure that the stuff that was happening in corporate wasn’t happening in the division. So I wouldn’t say [I was] worried so much about Tyco Healthcare’s future, because the company was pretty solid from a franchise standpoint, but the distractions could have really crippled us.

The good news is: We had always been run very independently of Tyco. And, in fact, 2002 was one of our best years. We had a very good year. We earned a very good bonus—the only company within Tyco [to do so]—because of our results. So, I think because Tyco really ran the businesses almost like holding companies—it had nothing to do with the management, our systems were separate, our payroll was separate—we were able to continue kind of independently. Probably the biggest difference was that there wasn’t a Tyco brand of a healthcare product or an electronics product, so we had Nellcor, U.S Surgical, Mallinckrodt, the people that clinicians were familiar with, [and] the names clinicians were familiar with. While purchasing groups and the analysts knew that there were issues at Tyco Healthcare because of our association with Tyco, honestly a surgeon or a clinician in a hospital probably didn’t even know we were part of Tyco.

During your tenure were there any business, regulatory, or technological trends in the device industry that stood out?

I started in the 1970s and back then I think what clearly happened was that you could put any little widget on your product, say it did something, put a glossy brochure with it, and people would pay more for it if they bought your story. That day is so far gone. It really is…clinically proven data that drives decision making [today].

I [also] think the death of technology has been overstated, because some of our fastest-growing businesses are areas where our pricing is relative to options people might have. People are paying more because of the value that comes from some of these Energy products or some of these vascular products. So technology is not doomed at all. I think that, as we develop technology, we just need to do really careful economic data mining to support anything that we’re going to be doing with new product launches and new technology development so that there’s no question it makes a difference in the hands of our customers.

What particular product lines are doing well?

Energy, ev3. I mean, ev3 has been an absolute home run for us—high double-digit growth, high profitability. We’re just beginning to leverage the global footprint. They were pretty much a U.S. company selling outside the U.S. through distribution, so we’re just slowly getting into that. And Energy has been just one home run after another with new product launches. The most exciting thing that they launched…is the Sonicision device, which will be our first entry into the $800 million ultrasound energy market. That’s what’s been driving us, and I think even over the short term [they] will continue to be the primary drivers.

Even the supplies business, which doesn’t have spectacular metrics, is a huge cash generator for us. And even though it has an operating margin of 14–15% it still generates a lot of cash that we then invest in other parts of the business with greater returns.

On the eve of your retirement how would you describe investor confidence in Covidien?

Investor confidence is pretty good. We had an opportunity when we spun [off] to make a decision how we wanted to interact with the investment community. We took some hard calls. We said we’re not going to guide to ETS, we’re going to guide to sales growth and operating margin, and we weren’t going to get pinned down on that. We were going to give guidance annually; we weren’t going to give it quarterly. We stuck with that, and people had some issues with it, but whenever there are issues we’re very transparent; we let people know what our strategies are. We told people coming out of the gate that we’re going to take our profitability down in order to make the investments in selling marketing and R&D to build up the topline growth, but eventually the operating margins would return. So we came out in 2007 with a 1% to 2% sales growth, a 22% to 23% operating margin. Then we took that operating margin down to the high teens, and now it’s back up over 22%—we’re guiding 21.5% to 22.5%, so it’s just about back where it was, but our sales growth now, as you know, is in the mid-single digits.

We did what we said we were going to do, and I think that’s why they’re confident in us. If we had not done what we said, then it’d be a lot different.

Did you have any role in choosing your successor, Joe Almeida?

It was a board decision, that’s for sure, and I’m a member of the board. I was a very, very strong supporter of Joe. He was managing the device business, and that’s what drove our value. I just believe that you go outside [the company] when you have issues or you don’t have an internal candidate. You know, I thought the board did a great job. They looked carefully at Joe; they took a look at the outside, and in the end they just decided the best candidate is right here with us.

What are the duties of the “nonexecutive chairman” for that one-year period?

The duties of the nonexecutive chairman are pretty much to manage the board meetings, and I’ve agreed to stay for a year. I think after that Joe deserves the opportunity not to have his predecessor looking over his shoulder. The plan is to stay in a transition period as the non-exec chairman to manage the board meetings, to be present, to support Joe and be a sounding board as he manages his way into a new responsibility—managing a public company, managing with a board. These are all things that I’ve been comfortable with, and now, I think, can help him transition into.

Is there any advice you’d give to Joe, or generally speaking give to any new chief executive, based on your years of experience?

One thing I’ve realized, if anything, is that like anything in business there are just a lot of cycles. You want to make sure [that] you manage all the things you control as effectively as you can to optimize the value of your company. But you have to recognize that there are going to be headwinds and there are going to be tailwinds, and sometimes people are too quick to make decisions based upon headwinds or tailwinds that they can’t control. I think patience is required to get through some of these cycles so that you stick with your strategy, remain confident in your people, and then when the outside environment changes, you’re still on course.

Speaking of headwinds and tailwinds, I did want to ask you whether passage of the Affordable Care Act—or healthcare reform generally—has had any effect on Covidien. Is there anything you foresee happening with reform going forward that could have a big impact on business?

If you have 30 million more people coming in, we’ll likely benefit from that. I think the only negative thing we know for sure is the device tax, and the first year would be 2013. Other than that, there’s been a focus on trying to manage healthcare costs for a long time. Those of us in the industry have been dealing with Medicare cuts and Medicaid reimbursement issues forever, and we need to make sure we give the best value to our customers. It’s just now becoming more of a societal issue as people outside the industry are paying attention just because of their own personal costs. While those people who haven’t been in it see seismic types of changes, I don’t. I think you’ve got to bring value to your customer, and healthcare is healthcare. It’s not widgets; it’s healthcare, and it will always be a different industry.

If I may end with a personal question, what are your plans down the line? You’re still pretty young. Are you going to travel or…?

Yeah, I’m on Covidien’s board, and I’ll likely get on maybe another public company’s board. I’m on three or four not-for-profit boards, and I have a lot of grandchildren. I plan to see how relaxed I can get and then work my way out of that if it’s required.