Investments, growth define Boulder's Covidien

By Alicia Wallace, Daily Camera

Published August 18, 2008 at 11:30 a.m.
Updated August 18, 2008 at 11:30 a.m.

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Early last year, when conglomerate Tyco International Inc. chose a name for its health care business spinoff, Tyco settled on “Covidien.”

With co representing the Latin word for “together” and vid, a root for the Latin root for “life,” the name was to embody a new start for a familiar player within the health care industry.

And when the spinoff was completed in July 2007, so began a new life for the businesses under the Covidien umbrella, including two Boulder-based divisions: Energy-based Devices (formerly Valleylab) and Respiratory & Monitoring Solutions (formerly Nellcor Puritan Bennett, which relocated to Boulder in January 2007 from Pleasanton, Calif.).

Thirteen months later, officials for the local units — which, combined, make Covidien the fifth-largest employer in Boulder and Broomfield counties — tell stories of increased investment and work force growth that have lead to the development of products designed to further the company’s foothold in the market and further individuals’ lives.

Out of the Valley

In early 2006, Tyco International Inc., which recently had emerged from an accounting fiasco involving former executives, announced plans to split into three separate, publicly traded companies — Tyco Healthcare, Tyco Electronics and the combination of its Fire and Security and Engineered Products and Services arms.

At that time, Tyco Healthcare, parent of Boulder-based electro-surgical products maker Valleylab, notched $9.5 billion in annual revenue. The Colorado born-and-bred Valleylab employed 1,100 people locally and was the area’s eighth-largest employer.

Months before the July 2007 split, Boulder became home to another Tyco Healthcare division: Nellcor Puritan Bennett. The $1.4 billion medical device company decided to settle in Gunbarrel next to its colleague as a way to attract employees, save on costs and to have some synergy with Valleylab.

Nellcor’s move was expected to bring with it 300 new jobs. The two divisions combined would equal $2 billion in sales, about one-fifth of the soon-to-be separate Tyco Healthcare, officials said.

After the split occurred and Covidien, which has its U.S. headquarters in Mansfield, Mass., started trading on the New York Stock Exchange, Bryan Hanson, president of the Energy-based Devices unit, was enthusiastic about investments that fueled the former Valleylab’s research and development, global marketing and business development pieces.

“Clearly we’re seeing the benefits of acting more like a medical device company,” he said at the time.

Sitting in his office at 5920 Longbow Drive — an address Valleylab had called home for more than 30 years — last Monday, Hanson’s attitude is little changed.

If anything, he was even more positive.

“We have been more disciplined in terms of what we do focus on,” he said.

Since the split from the Tyco conglomerate, business has been very strong because of the fueling of the “R&D engine,” Hanson said. The amount of investment in Energy-based Devices is double what Valleylab had 2 ½ years ago, he said.

Locally, that has meant the addition of 251 jobs during the past year, and plans to add more in the next fiscal year, which begins in October. A new 60,000-square-foot building is under construction as well, a move made to ease some crowding among the 1,500-employee Energy-based Devices operation.

When the building is completed later this year, Covidien’s footprint in Gunbarrel will be 460,000 square feet.

The growth plans are not limited to Energy-based Devices.

Respiratory & Monitoring Solutions is now 300 people strong and should hire 50 more people by the end of the year, said Scott Drake, a former president of Valleylab who is heading up the operations of the former Nellcor Puritan Bennett unit.

The unit experienced a “profound” increase in research and development, Drake said, noting it grew 30 percent from 2007 to 2008. At least similar growth is expected from 2008 to 2009.

“We really expect our growth rate to accelerate,” he said.

Breathing easier

Energy-based Devices has three focuses:

* Vessel sealing — includes a technology that fuses blood vessels and tissue and makes up half of the unit’s total sales.

* Interventional oncology — includes technologies that are designed to eliminate or lessen cancerous tumors. The oncology products account for 5 percent of Energy-based Devices’ sales.

* Electrosurgery — includes surgical tools and equipment that use electrical currents for actions such as cutting tissue or stopping bleeding. The segment accounts for the remainder of Energy-Based Devices’ sales.

Vessel sealing, the largest business segment, also is seen as the area with the greatest potential Hanson said. Part of that potential exists, he said, because hospitals and medical providers are looking for cost-saving measures in the form of reduced surgery time or shortened hospital stays.

“They’re really beginning to look at, ’how do I bring value to the entire system?’” he said. “Not that many years ago, it was different.”

One example of how Covidien is trying to address the providers’ tighter budgets is with products that can seal a blood vessel in two to four seconds, Hanson said. In the past, it took eight seconds.

Other devices — such as radiofrequency tumor ablation products, which uses radio-frequency currents to eliminate or lessen masses of tissue — have not only benefited from the advances within cancer screening technologies, but also the greater demand for preventative care as the U.S. population ages, he said.

By 2050, it’s projected that 86.7 million people in the United States will be 65 or older and account for 12 percent of the total population, according to U.S. Census Bureau population projections. That compares with 2006, when 37.3 million people in the U.S. were 65 or older.

Among Covidien divisions benefiting from the changing demographics is the local Respiratory & Monitoring Solutions, Drake said.

In the airway management market — which includes endotracheal tubes, resuscitation bags and critical care ventilators — there are opportunities for the unit’s products to address more therapeutic and diagnostic needs within the home-care sector.

To further additional growth and bulk up its offerings, Respiratory & Monitoring Solutions benefited from Covidien’s Aug. 7 acquisition of technology assets of CardioDigital Inc. Covidien officials said CardioDigital’s patient monitoring technology would complement their Nellcor blood oxygen monitor.

The acquisition followed a number of product launches this year that included a handful of new continuous positive airway pressure (CPAP) devices under the Sandman name. One features integrated heated humidification along with “adaptive pressure stability,” which measures a patient’s breathing pattern during sleep and automatically adjusts the amount of air he breathes from the device.

The products also are designed to adjust to barometric pressure changes at altitudes up to 9,000 feet. That makes the devices more portable and travel-friendly, Drake said.

In June, Covidien announced that its CPAP devices would be used as part of a campaign with Sleepe Pointe called “Unite to Treat Sleep Apnea.” The initiative — designed to provide information about sleep apnea to people in the transportation industry — involves “Mobile Sleep Solution Centers,” 53-foot trailers equipped with diagnostic equipment, sleep labs and doctors.

The market’s reaction

During the past several years, thanks to a bit of an inherent buffer from dips in the economy — people need health care regardless of economic conditions — the medical device industry has performed solidly, said David Cassak, a managing partner of Windhover Information Inc., which provides analysis and commentary on the health care industry.

Tyco Healthcare always has been a very strong player, despite taking a bit of the road less traveled: being a “high-value, low-margin, efficiently run company” and not investing as much as others in the field, Cassak said.

According to Securities and Exchange Commission filings, for its fiscal year 2005, Tyco Healthcare invested $232 million in research and development endeavors. Conversely during that period, competitor Medtronic Inc. spent $951.3 million. Nine months into this year, Covidien’s fiscal 2008, the company has spent $238 million on research and development.

Covidien made $269 million, or 66 cents per share, on revenue of $2.6 billion in its most recent quarter that ended on June 27. In the same period last year, the company reported a $1.1 billion net loss, or $2.29 per share, on revenue of $2.3 billion.

Calling the results “excellent,” Leerink Swann analyst Rick Wise said Covidien’s “’transformation’ story is rapidly evolving in a positive direction.”

“Over the next 12 to 18 months, Covidien’s transformation from a cash-flow focused conglomerate division into a faster-growing, more nimble and more profitable MedTech player should continue to evolve and progress,” he wrote in an Aug. 6 research note. “As management’s investment and portfolio-reshaping initiatives bear fruit, in (fiscal year 2009) and beyond, Covidien’s top-line growth should gradually accelerate.”

Wise does not own shares of Covidien.

Fueling that growth are strong sales in surgical and energy-based devices, Wise wrote. However, Wise wrote in a note published the day before, Respiratory and SharpSafety continued to be the “sole laggards” in Covidien’s growth story.

Bruce Farmer, Covidien’s vice president of public relations, conceded the company’s respiratory products have not kept pace with a market that is growing “fairly rapidly.”

“Thus far in 2008, we have not grown as fast as the market,” he said. “We need to do a better job, no question about it.”

However, he noted, the company has taken steps to turn things around such as moving the unit’s headquarters to Boulder from California.

The cost of living advantage and the local talent pool are expected to play a huge factor in future growth, he said.

“On the R&D side, we’ve been able to attract the kind of people we need to get the flow of products going.”

A look at Covidien

Formerly: Tyco Healthcare, which spun-off from Tyco International in July 2007

2007 sales: $10.2 billion

Worldwide employees: 42,000

Local employees: 1,775 (at Energy-based Devices and Respiratory & Monitoring Solutions units)

Key brands: Kendall; Autosuture; Syneture; Valleylab; Mallinckrodt; Nellcor; Puritan Bennett

Notable products: Monoject Magellan Safety Needle; Valleylab RF Ablation System; Kangaroo ePump Enteral Feeding Pump; Optivantage DH Dual Head Injector; Syneture Wound Closure Device.

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