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Covidien plc (COV)

31st Annual JPMorgan Healthcare Conference

January 07, 2013 11:30 am ET


Jose E. Almeida - Chairman of the Board, Chief Executive Officer and President


Michael N. Weinstein - JP Morgan Chase & Co, Research Division


Michael N. Weinstein - JP Morgan Chase & Co, Research Division

Good morning, everybody. Thank you for joining us. Let me introduce our next speaker. We have from Covidien the company's Chairman, President and CEO, Joe Almeida. Following Joe's presentation, we will have a breakout session across the hall. Joe?

Jose E. Almeida

Thank you, Michael. Good morning. I like to spend about a few seconds on the Safe Harbor statements, and all of the statements we're making here today will be forward-looking.

I'd like to start with our pharma, our Mallinckrodt Pharmaceuticals spin. We're on track for spinning the business off by the end of June. In about a month, we'll be ready for the Form 10, and there's a significant amount of work being done today in terms of segregating the business outside the U.S., primarily by getting the assets split and also getting the business established in all the countries that today are Covidien businesses.

If you look at what we spoke about back in September in New York City, there are 3 major areas that will affect the financials. The tax rate will be a transitory one. As you know, Covidien had the same issue coming out of Tyco International back in 2007. But it's a transitory, affects all 3 non-GAAP, GAAP and the cash flow statements. Deal cost is going to be onetime, and we said that will affect GAAP EPS and cash flow. And most importantly is the shared services that will be created for both organizations, so they will have an impact also in the 3 financial statements.

Now I would like to spend the rest of the presentation, invest my time today, talking about Covidien. In about 18 months ago, we came out with a 4 very key points to drive the company forward and to achieve a top quartile total shareholder return. Let's start with the innovation.

We not only speak about product, the technology, innovation, but we also speak about go to market. You have to imagine that in a market like today, primarily in the U.S. and Europe, going to market like we used to do 5, 6 years ago is not going to cut anymore. So it's important for us to test and learn several different ways of getting the customer, the products, the technology, economical value with an eye on how much it costs to do it. So Covidien is very attentive and has several different models going on today across many divisions and how we go to market.

We also think about innovation not by delivering the product to the marketplace and the technology that saves lives, the economically sound and clinically is relevant to the patient, but also internally how we look at our productivity. So we have set very lofty goals about 2 different things. One is the productivity of our R&D group, which has to improve by 40% to 50% in the next 3 years. But also we set internal goals for our vitality index, which are very lofty. So we're very focused and continue to deliver the best innovation to our patients and our surgeons and providers and payers.

When you think about how Covidien today is structured and how we achieve above-market growth, a lot has to do with the choices that we make in our portfolio. If you think about the companies that we divest, the companies that we achieved, there are 2 major levers that drive total shareholder return in our view: top line growth, ROIC. So having the ability to trade businesses with higher gross margin and higher growth on the top line was key in decisions that we make every single day in companies that were out there to acquire or businesses that probably don't fit with Covidien anymore. So we've been -- we believe that we've been a good steward of our shareholders' money.

When you look at the strategy that Covidien takes for acquisitions are always opportunistic, despite the fact that we have a significant and very long list of companies that we continue to look into acquiring. We are very opportunistic. So it's very different to forecast. We also are very focused in tuck-in acquisitions, acquisitions that have value for Covidien in terms of research and development or technologies that suffice an unmet market need. We tend to become more focused on adjacencies, and I don't want to put off the table any large acquisition like we did for Covidien back in 2010, the acquisition of ev3.

When you think about the principles that govern our acquisition strategy are very simple. We use acquisitions [indiscernible] for R&D, and you can look at our track record back in 2012, MindFrame is one that comes to mind and several others that we made in our franchises, neurovascular, peripheral vascular and our surgical franchises. There are replacement for company internal R&D. But always keep in mind that we have an unbendable set of criteria that financially govern the way we buy companies, and we lost more companies that we ever bought. And we lost them primarily because they didn't meet our financial criteria. And we don't bend those rules. I want to make sure that investors have a very clear understanding that Covidien will be very disciplined in the way we deploy cash to our shareholders.

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