Covidien Moves Ahead
(6/2/2010) from The Hartford Courant
(Full story link below)
Surgical Strategy: Investment In Innovation Pays Off For Covidien
By MARA LEE
When Covidien spun off from the implosion of Tyco International in 2007, it gained more than a new name unconnected to the disgraced Tyco CEO's $6,000 shower curtain, $2 million birthday party and other ill-gotten perks.
Covidien's 3,400 workers in Connecticut design, make and market surgical devices, particularly instruments used in laparoscopic surgery that cut and staple shut the incisions.
That surgical devices division a $3 billion-a-year global business whose largest U.S. location is in North Haven has been on a major hiring spree for the past three years, adding hundreds of engineers, dozens of scientists and hundreds of sales and marketing professionals.
In expanding its research and development staff by 300 people, most of them in North Haven, the division has transformed itself from what its president called a "non-competitive" player in the medical device industry to an innovation powerhouse. That was the reputation of its predecessor, United States Surgical Corp., which Tyco acquired in 1998.
Covidien's overall employment in the state has been flat for the past year, but the evolution of the surgical devices division has continued as it adds engineers and technical sales staff to replace other types of workers who leave.
Scott D. Flora, president of surgical devices for Covidien, told Wall Street in 2007 that for the next three years, the division would invest heavily in research and development, and in marketing. He said he expected a "pass" on shareholder demands for fast profits for that time.
Tyco cut hundreds of Connecticut jobs after it bought U.S. Surgical for $3.3 billion. Tyco did not pay enough attention to innovation, instead relying on acquiring companies to keep driving profits, said Flora, who became division president in 2006, before Tyco spun off Covidien.
The new direction has been very good for Connecticut. Hourly manufacturing workers in North Haven have stayed steady there are 2,500 workers in the plant, including engineers, chemists and managers but the engineering workforce has grown rapidly.
About 800 salaried people have been hired in Connecticut since Flora's push began, about half of them engineers and many of the rest technical sales people and marketers. More than 100 MBAs have moved to the company, hired away from other medical device companies in Atlanta, or recruited from Dartmouth College, Cornell University and the University of Connecticut.
While Covidien has benefited from other Connecticut factories' moves to Mexico, or engineers around the country getting downsized out of jobs, Flora said some potential recruits from out of state can't accept the offer. "People can't sell their houses," he said.
Most of the engineering hires the R&D staff is roughly 80 percent engineers are right out of college or early in their careers. Flora said that while manufacturing engineers have been a little harder to find, the talent pool in Connecticut or people interested in locating here is abundant.
"They like the resurgence of New Haven" and recreation opportunities along the shoreline or in the Vermont mountains, he said of recruits. Covidien has a bike team and a fly fishing group. The state's amenities are "a real draw for engineers and techies," Flora said. "There's a lot of things to do."
Manufacturing engineer Thomas Ellison came to Covidien five years ago after three years at Pratt & Whitney, which was his first job after graduating from UConn.
Ellison proudly shows off charts that every production employee sees at the beginning of each shift, detailing productivity goals and patterns.
The devices Covidien makes in North Haven are used for small-incision surgeries. Many both cut and staple inside the body in places surgeons can see only with the aid of cameras. One of those families of tools is involved in endostapling. The workers who make endostapling tools have reduced the amount of materials used by 10 percent and the labor efficiency has also increased by 10 percent, saving several million dollars each year, Ellison said.
Michael Guarente, 31, has been a team leader in the plant for the last year. He took the job when Proctor and Gamble's Clairol plant in Stamford closed and the majority of the work moved to Mexico.
He likes the productivity charts, too. "It's really hard to have manufacturing in Connecticut," he said. "We're still here, so we must be doing something right."
The company is now advertising for seven engineers, a chemist, a librarian, a medical writer, sales reps and five managers in Connecticut.
"We've done 70 percent of the hiring," Flora said in May of his division, but he added that R&D is only halfway to where he wants it to be. He hopes to reach the goal by 2013.
In August, Covidien will close its office in Norwalk where U.S. Surgical was based and move 300 people to a new location in New Haven.
Overall, Covidien had $11 billion in global sales in 2009, including $6 billion for medical devices, including the surgical division. The parent company also makes pharmaceuticals and medical supplies.
Covidien moved its headquarters from Bermuda, a tax haven where Tyco had its head office, in 2009, to Ireland, which also is known for its low corporate taxes. Covidien has several thousand manufacturing employees in Ireland, as well.
Flora's R&D push is seeing results. When he started work, one new product had been introduced in the previous five years, he said. In 2008, there were 10. In 2009, 18. This year, there will be 10.
In the first quarter of 2010, medical devices was the segment with the strongest sales growth.
Stock analysts have been impressed with the pace of product launches, and with Covidien's growing reputation among surgeons. David Roman of Goldman Sachs said he believes Covidien is in a stronger position than Johnson & Johnson (together the two companies have more than 80 percent of the market share in general surgical devices). He said in a report that Covidien is likely to have above-market growth rates and higher profits because of "continued success in new product introductions."
Flora said the new sales reps are told that "evidence-based medicine" is everything meaning the staff cites scientific studies to support sales. Already, 24 percent of sales are in Europe, where national or provincial panels decide whether pharmaceutical or device innovations are worth their price tags. With health care reform coming to the United States, there will be more of that sort of systematic cost-benefit analysis.
"Because we're mid-tech, we're not going to fall under individual scrutiny as much," Flora said.
While Covidien sells a $600 cranial sealant, for example, many of its products are lower cost. Generally, minimally invasive surgery is gaining favor among health policy researchers as both more cost-effective and safer, and that's Covidien's specialty.
Some of Covidien's tools allow surgeries where the only entry is through natural orifices, or through the belly button, with no scars at all.
And while there will always be price pressure, Covidien has attractive expansion possibilities, both in places like China, where millions of people are becoming wealthy enough to have surgery, and in Europe and the United States, where as the population gets older, they also get sicker.
"Most of my business is cancer surgery, and obesity/diabetes," Flora said. "Definitely aging is the driver."
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