Ireland-based medical device maker Covidien (NYSE:COV) notched a couple of wins in recent days, beating Wall Street’s expectations for its 1st quarter and notching a patent litigation win over Johnson & Johnson (NYSE:JNJ) subsidiary Ethicon Endo-Surgery.
COV shares were up 3% today, trading at $68.82 as of about 12:30 p.m. after the company released Q1 financials that exceeded per-share earnings expectations, despite a major slip in profits. Covidien posted a 2.8% increase in revenues, but its bottom line sank more than 19%, largely due to increased expenses.
Covidien reported $398 million in profits, or 87¢ per diluted share, on sales of $2.64 billion for the 3 months ended Dec. 27, 2013. That compared with profits of $493 million, or 96¢ per share, on sales of $2.58 billion during the same period the prior year. Excluding special items, the company reported per-share earnings of $1.00, beating Wall Street’s consensus estimate by 6¢.
The drop in profits was attributed largely to the impact of the 2.3% medtech tax, which Covidien did not pay in Q1 2012.
"Selling, general and administrative expenses for the 1st quarter of 2014 were above those of the prior-year quarter, largely due to the medical device tax, which was not effective until the company’s 2nd quarter of last year, and spending on growth initiatives, partially offset by productivity improvements," according to the earnings report. "Both operating income and adjusted operating income for the current quarter were reduced by approximately $45 million due to the impact of unfavorable foreign exchange and the medical device tax."
Covidien’s 1st-quarter tax rate was 22.4%, compared with 16.9% during the same period the previous year.
Covidien executives have previously taken an unflustered approach to the medical device tax, which CFO Charles Dockendorff in January 2012 called "just another business issue that we will deal with."
"Our commitment has been to long-term, double-digit EPS growth over time," Dockendorff said at the time. "And we don’t think that something like that, particularly, should knock us off that goal."
Covidien also touted a legal win this week, announcing that the U.S. District Court of the Southern District of Ohio ruled that Covidien does not infringe on any of the 7 named ultrasound patents held by Ethicon Endo-Surgery, and the judge further ruled that 5 of the disputed patents were invalid.
"The Court recognized that Covidien’s Sonicision system is differentiated from the devices and intellectual property of our competitor," Covidien Advanced Surgical president Chris Barry said in prepared remarks. "As we demonstrated in this case, we will vigorously protect our innovative products, solutions and intellectual property."
Covidien in January 2010 filed a patent infringement lawsuit against Ethicon, 2 years after a federal court judge had essentially declared their long-running patent fight a tie, siding with Ethicon by dismissing the case but also telling Covidien predecessor Tyco Healthcare that it was free to re-file.
Ethicon in December 2011 filed a lawsuit accusing Covidien of infringing on technology used to make ultrasound surgical staples, aiming at the time to take down Covidien’s Sonicision ultrasound surgical cutter before it even hit the market.
Covidien in March 2013 won nearly $177 million after a judge ruled that Ethicon Endo-Surgery infringed 6 claims in 3 patents held by Covidien’s corporate predecessors, Tyco Healthcare and U.S. Surgical Corp.
Covidien and Ethicon have gone several rounds over the technology but the fight didn’t start with Covidien or even with Tyco Healthcare. Tyco inherited the bad blood between Ethicon and U.S. Surgical Corp. when Tyco acquired USSC in May 1998.
