Medical Device Daily Executive Editor

Somewhat more than a year ago, the business formerly known as Tyco Healthcare (Mansfield, Massachusetts), sporting its new identity as Covidien, was spun off from struggling industrial conglomerate Tyco International (Pembroke, Bermuda).

How has it done?

At least one veteran industry analyst thinks the answer is "Just fine."

Joanne Wuensch of BMO Capital Markets (New York) issued a research report on Friday taking a look at Covidien's results since its late-June spin-off last year.

Calling it "a year of accomplishments," she cited several acquisitions that have added to its product portfolio, the launch of a number of new products, a co-promotion agreement with Allergan (Irvine, California) for that company's sector-leading Lap-Band gastric banding system, the sale or pending sale of several business units as a move to sharpen the focus of its overall portfolio, and, far from least on the list, an 11% increase in sales in the first nine months of FY08.

"Our investment thesis on [Covidien] has been that the company should stand to benefit from the 'freedom' enabled by no longer being part of a larger, non-healthcare-focused company, but that it had a long row to hoe as it invested in R&D and SG&A [selling, general and administrative expenses], while streamlining its business portfolio," Wuensch wrote.

Noting that Covidien had delivered 3Q08 results that clearly exceeded expectations, she added: "Without argument, over the past year the company has accomplished quite a bit."

The "quite a bit" included unexpectedly strong revenues and earnings reported on Aug. 5 with third-quarter net sales rising 14% to $2.6 billion from $2.3 billion a year earlier, driven by higher volume and new products, operating income of $545 million vs. a loss of $761 million in the prior-year period, and diluted EPS from continuing operations of 65 cents vs. a loss of $2.29 a share in 3Q07

For the first nine months of fiscal 2008, sales of $7.3 billion were 11% above the $6.6 billion in the prior year, with operating income of $1.4 billion vs. $199 million a year earlier, and diluted EPS from continuing operations of $2.03 vs. a loss of 86 cents a share in the comparable period.

"Given the company's ... earnings results, we are adjusting our estimates and increasing our price target," said Wuensch. "While there is some tinkering to our revenue estimates, the more significant changes are reflected in our EPS estimates. We are increasing 4Q08 EPS to $0.70 (up 11.8%) from $0.64, bringing the full-year 2008 EPS estimate to $2.66 (up 1.1%) from $2.52. In FY09, we are increasing EPS to $3 (up 12.6%) from $2.75. In fiscal 2010, we are increasing EPS to $3.34 (up 11.5%) from $3.10."

Wuensch noted that almost 70% of Covidien's revenues are generated by its Medical Device business, which she termed "the company's bread and butter." Those revenues increased by 5% in the 3rd quarter.

Imaging Solutions, the firm's second-largest product category at roughly 13% of sales, posted 18% growth in the quarter, buoyed by its radiopharmaceuticals and contrast agents/delivery systems.

"The strength in the company's gross margins was noteworthy," Wuensch wrote, "hitting 53.7% in the 3Q versus 52.2% last year."

With brand names that include Autosuture, Kendall, Mallinckrodt, Nellcor, Puritan Bennett, Syneture, U.S. Surgical and Valleylab, Covidien operates in five business segments: Medical Devices, Imaging Solutions, Pharmaceutical Products, Medical Supplies and Retail Products. The company employs some 43,000 people in 57 countries, and its products are distributed in more than 130 countries.

Covidien has scheduled a Sept. 10 investor meeting at the Pierre Hotel in New York for an update on the company and its growth initiatives, strategic priorities and financial outlook. The event will begin at 11 a.m.