The chief executive of one of the largest medical device companies said the Great Recession, which put a stranglehold on the global economy from 2008 to 2009, destroyed the myth of healthcare being a downturn-proof business.
“The biggest pressure we felt over the last year-and-a-half was from the economy and too many people [being] out of work,” Covidien plc (NYSE:COV) CEO Rich Meelia said. “This is the first recession, and I’ve been in the business for 40 years, that I actually saw a softening of procedure volume. It actually translated over.”
Speaking at an MIT Enterprise Forum at the Mass. Institute of Technology last night, Meelia touched on a number of issues including the company’s founding as a unit of Tyco International Ltd., a holding company that grew a health division out of a series of mergers and acquisitions in the mid-1990’s; the Dennis Kozlowski scandal that nearly took down the entire company; and the eventual spinout of Covidien as a stand-alone firm.
Meelia told the crowd that he felt the company might feel more pressure from changes made by healthcare reform but not as profoundly as some companies in the orthopedic and cardiovascular spaces — and not nearly as much pressure as the recession piled on.
“I think some of the segments [of the device industry] that have more visibility — like orthopedic implants, spinal implants, stents — would be more affected,” he said. “I think we’re in a good position because we don’t have 70-plus-percent gross margins, we’re not as visible and we’re not reimbursed as a product.”
Half of the company’s business is already outside of the U.S., Meelia said, where most healthcare systems are government-run, which also puts Covidien in a good position.
“You gotta learn to navigate in different waters. No matter how they come at you,” he said.
The company’s fastest-growing sectors are in emerging markets like South America and Asia, Meelia added. The challenge for him has been transforming the culture of the company from an “EPS [earnings per share] era to the innovation-era,” putting significant resources into research and development. Covidien, which started a venture fund to identify strategic acquisitions at an early stage, won’t be looking to move outside of its traditional business areas, he said.
Meelia’s tale became compelling as he detailed navigating the company through the 2002 scandal involving Kozlowski, the former CEO of Tyco, who was convicted in 2005 of taking more than $100 million from the company. He is serving eight to 25 years in a New York state prison.
“No one knew that there were all these apartments, $6,000 shower curtains, $15,000 umbrella stands, forgiven loans. That was when it wasn’t so great to be a part of Tyco,” he said. “That was when all the U.S Surgical t-shirts and the Kendall t-shirts started being worn and all the Tyco clothing was put in the back of the closet.”
Meelia said Tyco Healthcare’s decision to preserve the brands of the companies it acquired “saved our bacon” during the scandal, as they avoided being lumped in with other corporate pariahs like Enron.
The scandal taught him a valuable lesson about compliance, he noted.
“If you don’t have the compliance, the controls, the processes, the policies, the things that keep you out of trouble, you just get into places you don’t ever want to be,” Meelia said. “The first time I understood what a forensic accountant was was when I had 12 of them sitting across the table from me. We were fortunate we had good control that didn’t cause any criminal activity, but that was just luck.”