Covidien denies layoffs tied to device tax

May 10, 2012 by Arezu Sarvestani

Contrary to a widely circulated statement, Covidien's decision to cut workers and shift production overseas was not motivated by the impending medical device tax, the company says.

Covidien logo

Although Covidien (NYSE:COV) chairman, president & CEO Jose Almeida considers the impending 2.3% medical device tax "absurd," he's far from implementing dramatic gestures to cope with the new burden.

The company confirmed with that reports of layoffs and overseas shifts ahead of the levy were inaccurate, despite being widely disseminated.

"While we believe the medical device tax may hurt investment in innovation and research & development, Covidien has never cited the device tax as a reason for laying off employees or transferring production to other locations," a company spokeswoman told us.

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Indeed, Covidien has bucked the norm in its rhetoric on the medical device, calling the levy "just another business issue" that the company will handle.

In a recent call with investors, Almeida declined to comment on how the device titan would deal with the tax, but said that the company would explore its options in much the manner it would for any other issue that comes its way.

"For Covidien internally, we need to deal with this like we deal with any business issue," Almeida said. "It's a business issue for us so there's cost reductions that we're attempting to put through to be able to offset. But all options are open and we're evaluating every single one of them."

A recent op-ed, penned by famed conservative columnist George Will and published in the Washington Post yesterday, blamed the device tax for 200 layoffs and the company's decision to shift some of its production overseas. The article appeared in a number of outlets including the Boston Herald, Kansas City Star and the San Diego Union Tribune.

George Will did not reply to requests for comment.

Some medical device makers have publicly announced job cuts directly tied to the tax. Stryker (NYSE:SYK) announced last November that it would lay off 5% of its workforce in order to offset the impact of the tax. Zimmer (NYSE:ZMH) cited the tax as part of the motivation for cutting up to 180 jobs before the end of this year.

Yet Covidien has remained resolutely demure in the face of the tax, which could endanger more than 43,000 jobs by one estimate.

"We're looking at a number of different options right now," Covidien CFO Charles Dockendorff told investors in a conference call in January. "But again, our commitment has been to long-term, double-digit EPS growth over time. And we don't think that something like that, particularly, should knock us off that goal. We get these kind of increases in raw materials or currency that are far greater than that all the time. So it's just another business issue, that we will deal with as we look in 2013."

News of Covidien's alleged tax-driven layoffs seems to tie back to a comment made by conservative pundit Ramesh Ponnuru in an opinion piece for Bloomberg, in which he dubbed the med-tech levy the "tongue depressor tax."

"Covidien Plc, maker of surgical instruments, said it would lay off 200 workers in the U.S. and move production to Costa Rica and Mexico. It, too, cited the tax," Ponnuru wrote.

He cited an article reporting Covidien's July 2011 decision to close a med-tech manufacturing facility in Argyle, New York, and a separate article about the company's expansion plans overseas, neither of which appeared to point the finger at the med-tech tax as the motivating factor.

The link between Covidien's layoffs and the device tax later appeared in reports by the National Center for Policy Analysis, the Senate Republicans Conference, Becker's ASC Review and, most recently, George Will's widely reproduced column.