Exec talks on Covidien's fit with Medtronic

Stacy Enxing Seng

The president of Covidien's ($COV) $1.6 billion vascular product group said that the impending merger with Medtronic ($MDT) was necessary from her perspective because being "a vascular player without cardiovascular, I think long term that would have been a real issue."

Covidien makes a variety of neurovascular, peripheral and other vascular products, but not cardiology ones. Besides the companies' complementary portfolios, group president Stacy Enxing Seng stressed the importance of vertical integration.

Customers such as public and private insurers and rapidly consolidating hospital systems "want to work with not just one supplier, they want to work with a partner. It's a partner that's now going beyond product and moving into services and solutions, and you really can't do that unless you have scale," she said, in a long, personal interview with Mass Device during the DeviceTalks conference in Minnesota.

Seng is a veteran of previous previous takeovers of American Hospital Supply by Baxter in 1985, Scimed Life Systems by Boston Scientific ($BSX) in 1995, ev3 by Covidien in 2010 and now Covidien by Medtronic. She was on the acquired company end of each transaction.

"I think it's very important for the acquirer to actually give the freedom to the entity that they have interest in acquiring," she said. Former employer ev3 failed to do that when it acquired FoxHollow Technologies in 2007, and the acquisition didn't go very well, she said.

"I was pleased to hear in the announcement with Medtronic and Covidien the concept of an integration office, because I think it allows you to really focus on the vital few things that we need to get right," she said. "What are the real drivers of this acquisition that we need to nail and ensure that we get right so we can deliver on our shareholder commitment? And then on those other things, letting those kind of come in due time."

Much has been made of the deal's tax inversion status. "It's not a tax rate issue. I think that's a very important clarification. It's really about getting access to your outside the United States capital," Seng said.

The facts support her contention. Covidien's effective tax rate was 21% in 2013 (though it was 14.7% in 2012), compared to Medtronic's 18.4% The Wall Street Journal said. But by shifting its tax domicile to Ireland, Medtronic can pay dividends from foreign profits without paying the U.S.'s 35% corporate tax rate, the Motley Fool points out. In fact, the company announced an 8% increase in its dividend on June 20, soon after the acquisition was made public.

Finally, Seng discussed the evolving industry landscape. "Innovation is now really moving beyond product, to pre- and post- care. It's moving beyond the actual disease treatment itself, and it's moving beyond the hospital in terms of a place," she said, adding Covidien often discusses methods of enabling devices to be used in the home, for example.

She said the industry no longer feels like it gets "paid for" some incremental product innovations. For example, Covidien could add imaging capabilities to its atherectomy devices. "It would be better if the physician could see better inside the vessel, but that's not going to get paid for. Or at least put it this way, we're not going to prioritize the clinical trial work that would be necessary to demonstrate that we can dramatically improve the clinical outcome through visualization to get it through the regulatory bodies around the world when the performance of the device right is excellent," she explained.

Overall, Seng stressed that "critical mass is power," saying, "I don't think it's some new strategy. I just think that more organizations are perhaps a bit more galvanized around taking action on that."

- listen to the interview

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