Covidien Reports First-Quarter 2009 Results

First-quarter net sales up 6%, led by increases in Pharmaceutical Products and Medical Devices First-quarter diluted GAAP earnings per share from continuing operations were $0.74; excluding specified items, adjusted diluted earnings per share from continuing operations were $0.76

Covidien Ltd. today reported results for the first quarter of fiscal 2009 (October – December 2008). First-quarter net sales rose 6% to $2.5 billion from $2.3 billion a year ago, fueled by very strong growth in Pharmaceutical Products and continued strength in Medical Devices and Medical Supplies. Sales growth was driven primarily by higher volume and new products, including oxycodone hydrochloride extended-release tablets, which accounted for about $100 million in first-quarter sales. Unfavorable foreign exchange reduced the quarterly sales growth rate by approximately 4 percentage points.

First-quarter gross margin of 54.8% was up 1.3 percentage points from the prior-year period. This significant improvement reflected positive product mix, including oxycodone hydrochloride extended-release tablets. The improvement was also aided by the incremental investments made over the last few years to grow the Company’s higher-margin businesses.

Selling, general and administrative expenses were higher than in the first quarter of last year. The increase was attributable to legal settlements and planned growth in selling and marketing, partially offset by benefits from foreign exchange. Research and Development (R&D) expense in the quarter climbed 18% from the prior year and represented 3.7% of sales.

For the first quarter, the Company reported operating income of $531 million, versus $455 million the year before. First-quarter adjusted operating income, excluding the specified items shown in the attached Non-GAAP Reconciliations table, was $570 million, versus $472 million in the first quarter of the previous year. First-quarter adjusted operating income represented 23.2% of sales, versus 20.4% a year ago.

The first-quarter effective tax rate was 25.8%. Excluding the specified items shown in the Quarterly Non-GAAP Reconciliations table, the first-quarter tax rate was 28.3%.

First-quarter diluted GAAP earnings per share from continuing operations were $0.74, versus $0.89 per share in the first quarter of last year. The first-quarter non-GAAP diluted earnings per share, excluding the specified items shown in the Non-GAAP Reconciliations table, were $0.76, versus $0.59 a year ago. Sales of oxycodone extended-release contributed about 11 cents of first-quarter earnings per share.

“We are off to a good start in fiscal 2009, as operational growth of 10% was in line with our expectations,” said Chairman, President and Chief Executive Officer Richard J. Meelia. “We benefited from the September, 2008, launch of oxycodone extended-release, as well as several other new products. Despite unfavorable foreign exchange, we reported strong growth in our first-quarter operating earnings.

“Our Imaging segment again posted disappointing results, however, and we are executing on our plan to improve its performance going forward. We will continue to make the investments that will drive our business growth in 2009 and beyond, including our strong, ongoing commitment to increasing R&D spending to competitive levels,” Mr. Meelia added.

Results by business segment follow.

Medical Devices sales of $1.63 billion in the first quarter were up 3% from $1.59 billion in the comparable quarter of last year. Operational growth, excluding the impact of foreign exchange, was 7%, reflecting new products and higher volume. Sales in Endomechanical were above those of a year ago, led by sharply higher sales of laparoscopic instruments. Energy again registered double-digit quarterly growth, paced by vessel sealing, but sales growth was below that of recent quarters due to a slowdown in capital-related hardware products. Sales in Soft Tissue Repair were above those of the prior year, primarily due to stronger sales of hernia mesh products. All three product lines — Endomechanical, Energy and Soft Tissue Repair — registered double-digit operational growth.

Imaging Solutions first-quarter sales declined 9% to $265 million from $291 million a year ago. Unfavorable foreign exchange was responsible for 4 percentage points of the decline. Radiopharmaceuticals sales were lower than those of the year before, chiefly due to molybdenum supply constraints. First-quarter sales of Contrast Products also were below year-ago levels, reflecting lower volume and continued pricing pressures in the United States.

Pharmaceutical Products sales of $331 million in the first quarter were 50% above those of the prior year’s $221 million. Growth was attributable to significantly higher sales of Dosage pharmaceuticals, due primarily to oxycodone hydrochloride extended-release tablets. Dosage also benefited from higher sales of branded products. Sales of Active Pharmaceutical Ingredients were little changed, as a decline in narcotic products was virtually offset by higher sales of acetaminophen.

Medical Supplies first-quarter sales grew 8% to $235 million from $217 million in the first quarter of the previous year. The increase was primarily due to higher sales of Nursing Care products.

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