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Covidien (NYSE:COV)

Q1 2013 Earnings Call

January 25, 2013 8:30 am ET

Executives

Coleman N. Lannum - Vice President of Investor Relations

Jose E. Almeida - Chairman of the Board, Chief Executive Officer and President

Charles J. Dockendorff - Chief Financial Officer and Executive Vice President

Analysts

David H. Roman - Goldman Sachs Group Inc., Research Division

David R. Lewis - Morgan Stanley, Research Division

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Matthew J. Dodds - Citigroup Inc, Research Division

Kristen M. Stewart - Deutsche Bank AG, Research Division

Frederick A. Wise - Stifel, Nicolaus & Co., Inc., Research Division

Matthew O'Brien - William Blair & Company L.L.C., Research Division

Sean D. Lavin - Lazard Capital Markets LLC, Research Division

Anthony Petrone - Jefferies & Company, Inc., Research Division

Raj Denhoy - Jefferies & Company, Inc., Research Division

Matthew Taylor - Barclays Capital, Research Division

Joanne K. Wuensch - BMO Capital Markets U.S.

Michael Matson - Mizuho Securities USA Inc., Research Division

Glenn J. Novarro - RBC Capital Markets, LLC, Research Division

Lawrence S. Keusch - Raymond James & Associates, Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2013 Covidien plc Earnings Conference Call. [Operator Instructions] Following the prepared remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the presentation over to Mr. Cole Lannum, Vice President, Investor Relations. Please proceed.

Coleman N. Lannum

Thanks, Stephanie, and good morning, everyone. With me today are Joe Almeida, Covidien's Chairman, President and CEO; and Chuck Dockendorff, our Chief Financial Officer. We'll be making some brief introductory comments and then spend most of the time this morning answering your questions.

The press release with details of our first quarter results was issued earlier this morning and is available on our website and the newswires. During today's call, we'll be making some forward-looking statements, and it's possible that actual results could differ materially from our current expectations. Please note that under the Safe Harbor rules, we are under no obligation to update these forward-looking statements even if actual results or our future expectations change materially. We ask you please refer to the cautionary statements contained in our SEC filings for a more detailed explanation of the inherent limitations of such forward-looking statements. We'll also discuss some non-GAAP financial measures with respect to our performance today. A reconciliation of non-GAAP to GAAP measures can be found in our press release and its related financial tables, as well as in the Investor Relations section of our website, covidien.com.

For the quarter, we reported GAAP diluted earnings per share of $1.03, and after adjusting for certain specified items, our non-GAAP earnings came in at $1.10 per share.

Now I'll turn it over to Joe, who will go into more detail on the first quarter results. Joe?

Jose E. Almeida

Thanks, Cole. Let me begin by saying that we are very pleased with our first quarter results. Sales were above plan, up 6% operationally and up 5% as reported. In several key categories, including stapling, Energy and Vascular, we continue to grow ahead of the market, and our investments are contributing to our robust performance.

In the Medical Devices segment, we had a very strong quarter, with 9% operational growth, with broad-based increases across the segment. In the Pharmaceuticals business, sales were flat overall, but we, again, registered an outstanding performance with Specialty Pharmaceuticals paced by EXALGO. Our late December approval of generic CONCERTA should help accelerate growth even more throughout the year, and we will talk more about that in a moment. And in supplies, reported sales were above a year ago, reflecting increases in Nursing Care and SharpSafety.

Before I go into more detail on this results, I would like to spend a brief moment discussing the health care products marketplace. Overall, there has been very little change in the market environment over the last several months, though we have seen a slight rebound in the U.S. in procedures of interest to us. In Europe, austerity programs and the economic slowdown continued to pressure all of med tech, though our European business grew better than the market yet again. And despite the media attention it has received, we saw relatively little impact in the quarter from the flu. We did have a slight increase in pulse oximetry sensors, but do not believe there was any significant flu-related volume in our supplies or ventilation business.

Emerging markets are growing rapidly, and we expect this to continue, as access to health care expands and the demographic trends are favorable. In our emerging markets business, comprising Eastern Europe, Middle East and Africa, Asia and Latin America, we had one of our best quarters ever, with operational sales growth in the high teens and double-digit increases in all regions and all product lines. The performance was led by even stronger growth in the BRIC countries. These results reflect the investments we've made in the last couple of years to expand sales and marketing and to build an on-the-ground presence. One thing people don't get, don't generally realize, is that this expansion is not detrimental to our gross margin as emerging markets generate very good margins for Covidien.

We continue to see excellent opportunities in emerging markets, and we will be ramping up our investments throughout this year. The results we are now delivering from our prior investments give us confidence that this expanding ramp-up will deliver further growth in this fast-growing regions going forward.

Before moving to the product line results, I would like to briefly comment on one other area of significant opportunity for the company. As we discussed at Investor Day last September, increased penetration of minimally invasive surgical procedures will be a key driver of our growth in Energy and Endomechanical.

In Japan, where current laparoscopic penetration is far lower than other developed markets, the government has recently initiated a program to incentivize surgeons to move from open to MIS procedures. We strongly support programs like this if MIS offers significant benefits to both the patient and the hospital, including faster recovery time, lower cost and more efficient operating room utilization. We believe programs like this can help accelerate the shift to MIS that has been occurring over the last several years.

Let me now turn to our first quarter performance in individual product categories. As in the past, I will discuss our growth on an operational basis, excluding the negative impact of foreign exchange. I'm doing this because I believe it provides a better picture of our progress. In our large Endomechanical business, stapling products continue to perform extremely well, led by the innovative Tri-Staple reloads. We are experiencing strong demand for Tri-Staple, as we continue to grow above the market and gain incremental share in stapling. We recently crossed the $1 billion threshold in cumulative sales of the Tri-Staple family of products since the launch in mid-2010. For the quarter, we had one of the best performance in several years in our stapling franchise.

Sales in Soft Tissue Repair were above last year. We made good progress in the large suture category, as well as in synthetic mesh. Results in mechanical fixation were up but restrained by the continued impact from the competitive product launches in both the U.S. and Europe, which we expect will continue for the next couple of quarters. Despite difficult comps, our Energy business turned in another strong performance, led by a double-digit gain for vessel sealing. New products, including Sonicision and LigaSure Small Jaw, contributed to our good performance.

For the reminder -- I meant to say for the remainder of the year, we expect low-double digit growth in Energy, as it is a key growth engine for us, driven by low penetration, technology adoption and hospital patient economics and outcomes.

Turning to the Vascular business. Our first quarter results were on plan. We again delivered very strong growth in Neurovascular products, led by Solitaire. We also registered good performance in peripheral vascular and chronic venous insufficiency products. While we face difficult comps this year on both Solitaire and pipeline, we continue to make investments in selling market and clinical trials to deliver further growth in new products in the Vascular category. This remains a key growth opportunity for the company.

Sales of Oximetry & Monitoring products were all above a year ago, aided by the Oridion acquisition and positive performance for pulse oximetry sensors. Our franchises: Nellcor, BIS and INVOS provide us a broad platform for growth, and the monitor business grew at a double-digit pace this quarter. The addition of capnography adds a market-leading, fast-growing monitoring platform to complement our portfolio.

In the Airway & Ventilation category, sales also were well above a year ago. We registered double-digit growth in ventilators, reflecting good performance by the mid-range ventilator from Newport, which drove strong sales growth in emerging markets.

Turning to the Pharmaceuticals business, while sales were flat overall, we continue to execute our strategy of growth and expansion in Specialty Pharmaceuticals, which again registered exceptional growth paced by EXALGO and aided by the recent acquisition of CNS Therapeutics and the launch of generic CONCERTA.

In Contrast Products, as expected, sales were well below last year due to significant declines in both media and device sales. We expect this weakness in Contrast to continue for the foreseeable future, as the business becomes more commoditized. This is driven by negative market trends, lower utilization in developed markets and further pricing pressure. Sales of Active Pharmaceutical Ingredients were below a year ago, primarily due to a decline in narcotics, reflecting competitive dynamics in the quarter.

In Radiopharmaceuticals, sales were about even with a year ago, as higher generator sales in the U.S. were offset by softness in international markets. As you may be aware, one of the reactors that supplies the raw material for our generators in The Netherlands was shut down last November due to technical problems. Consequently, we're using alternate sources of supply, but these come at a significant higher cost to us. Our current expectations are that this reactor will restart in April, and this has been built into our plans. However, this restart is out of our control and presents a potential risk to us if it is delayed. We remain on track for the planned spin-off of the business in mid-2013. We plan to file the Form-10 in the next couple of weeks, and we have nearly completed assembling the senior management team.

Turning to the Medical Supplies. The 3% operational sales growth was the highest quarterly growth rate in a couple of years. The increase was driven by a particularly good performance for SharpSafety, coupled with a good increase for Nursing Care. The Nursing Care improvement reflects a strong growth for enteral feeding products, as we are benefiting from a competitor withdrawal from the market.

Overall, we are very happy with our first quarter results. Our confidence in the business is reflected in the raising of sales guidance across board. That said, we will continue to make incremental investments in expanding our capabilities and to capitalize on opportunities we are capturing from increased penetration of our products, particularly in Vascular and Energy.

I will now pass the call over to Chuck, who will discuss the first quarter in more detail, as well as our outlook for the rest of fiscal 2013. Chuck?

Charles J. Dockendorff

Thanks, Joe. As Joe noted, we're pleased with our performance in the quarter, as sales came in somewhat ahead of our expectations. Unfavorable foreign exchange lowered the first quarter sales growth by 1 percentage point, and our 2012 acquisitions added about 2 percentage points.

During the quarter, we made further investments in R&D, selling and marketing to enhance our future growth. As noted in the release, we registered a 130-basis-point decline in adjusted gross margin this quarter as unfavorable foreign exchange rates more than offset positive business mix and further progress in our ongoing manufacturing cost reduction program. The pricing impact in the quarter was more favorable than historical norms.

Reported SG&A spending was above a year ago, reflecting the investments we are making in emerging markets and the impact of acquisitions, partially countered by productivity improvements and leverage on our back office cost and base business SG&A. The investments we've made over the last couple of years have driven organic revenue increases, and we will make additional incremental investments in both R&D and SG&A to accelerate our growth going forward.

R&D represented 4.9% of sales in the quarter. As we noted when we announced the acquisition of CV Ingenuity, we expect to make incremental R&D investments for the next several years to fund the clinical development of CVI technologies. These additional expenditures are expected to be about $25 million for the remainder of fiscal 2013 and more than $30 million in fiscal 2014. On an adjusted basis, our first quarter operating margin was 22.4% of sales, in line with our annual guidance in 2012 results, but somewhat below last year's unusually high 24.3%. Net interest expense was slightly higher, reflecting lower interest rates on our invested cash. The adjusted tax rate was in line with our annual guidance, and we delivered adjusted earnings per share of $1.10.

During the quarter, we repurchased about $250 million of stock. In the last 12 months, we have returned more than $1.7 billion in cash to shareholders, representing nearly 100% of our free cash flow. Looking at the remainder of 2013, as we noted in the release, we raised our sales guidance across the board and lowered our tax rate guidance. There was no change to our operating margin guidance as we plan to spend back the benefits from the higher sales on growth driving investments in R&D and SG&A. This is consistent with the comments we made last quarter when we said that any favorability from improvements in the business during 2013 would be spent back on growth initiatives. Because of these additional investments, we will likely see pressure on both the SG&A and R&D lines, particularly in the second half of the year. Increase in sales guidance reflects our strong first quarter performance in both devices and supplies, coupled with more information on the positive impact generic CONCERTA will have on our Pharmaceuticals business. We now have a much better idea of the market opportunity, quota requirements and the timing of launch of additional dosages and are now estimating sales of at least $100 million in fiscal 2013 generic CONCERTA.

I should note that the higher sales guidance for Pharma assumes that we receive adequate quota to supply CONCERTA throughout the year, as well as a restart of the reactor in April. If either of these does not occur as planned, we may need to revise guidance later in the year. The lower tax rate guidance largely reflects the extension of the R&D tax credit in the U.S. The impact of the extension will be reflected in the tax rate starting in the second quarter. I'd also like to comment on a couple of other items that will impact the quarterly flow. As we noted on the last call, the 2012 acquisitions will be dilutive by several cents per share over the next couple of quarters. Also, the medical device tax is now upon us, and will start to impact our results in the second fiscal quarter. As a reminder, this will be a component of SG&A for us and will be on the order of $25 million or so for the quarter.

As we all know, foreign exchange rates have been volatile. At today's rates, FX will be negative to EPS for most of the year, but the impact will lessen as we move to the second half. Overall, the FX outlook has deteriorated since our call in November, primarily from the significant downward move in the Japanese yen. We are on track to continue to deliver a strong operational performance in fiscal '13, with positive momentum from the investments we've made in emerging markets, productivity improvements and recent portfolio additions. We see a number of opportunities for investment spending to enhance our growth in 2014 and beyond and will look to prudently fund these growth-driving investments. We remain committed to balance these investments for future growth of the business while staying focused on delivering shorter-term earnings growth. We continue to feel very good about our prospects, given our expanding product portfolio, geographic diversity, growth-driving investments, new product pipeline and strong cash flow.

I'll turn -- I'll now turn the call back to Cole for Q&A.

Coleman N. Lannum

Thanks, Chuck. [Operator Instructions] Stephanie, can you once again please review the process for signaling a question and go to the first question, please?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of David Roman with Goldman Sachs.

David H. Roman - Goldman Sachs Group Inc., Research Division

I was hoping you could go into a little bit more detail on what's really changed since the last call. And I guess, really, the context why I'm asking is it's obviously a very, very strong quarter, but then a pretty decent raise in the guidance for the balance of the year. I understand the CONCERTA pieces of it. Maybe you could talk through, Joe or Chuck, the device piece of it? And what gives you confidence one quarter in the year that what you've seen so far can be sustained over the balance of fiscal '13?

Jose E. Almeida

Good morning, David. We have -- we don't plan our growth on a quarter-by-quarter basis. So this is a crescendo that has -- is resulting from a significant investment, some key franchise of the company. We've been very hard investing in emerging markets, and what we've seen now is not only taking advantage of local growth, but also having the infrastructure to take market share in some key franchises, primarily surgical, which is Endomechanical and Soft Tissue. And then we also have invested significantly in our neurovascular franchise, which is -- continues to do well and grow above market. So what we have spoken to the Street in the past, the slightly gain in procedures in the U.S. were not enough just to get Covidien to be where it is today. It was a relentless pursuit of investing in technology, in Energy, in Endomechanical, in Vascular, in emerging markets that really got us here. We feel very confident about what we've done so far, and we think we still have a great deal of technology in our R&D pipeline that will give us good runway ahead of us.

Charles J. Dockendorff

David, this is Chuck. I would also add, I think a big area too where we see some big opportunity is in emerging markets. You know we had very good growth there in the first quarter. I think it was a little over 19%, which is above what we finished all of last year. So as we continue to make investments over there, we just see nice penetration into those markets, and we expect that to continue through the balance of the year, and that's why we've kind of re-committed some more additional funding to emerging markets in the balance of the year. We've seen those investments pay off. They continue to and we just think there's some more opportunity over in those marketplaces.

David H. Roman - Goldman Sachs Group Inc., Research Division

Okay, that's helpful. And maybe for my follow-up, Joe, you brought up the Japan opportunity in your prepared remarks, and obviously, there's going to be -- that's going to take some time to ramp up and train physicians, et cetera. But can you maybe help us think through what the long-term opportunity is there? Maybe any perspective on the size of the surgery market or current penetration rates or as we think about the multiyear opportunity set that, that provides.

Jose E. Almeida

So David, this was great news for the industry in general, but mainly for Covidien in terms of our leadership and in terms of market share when it comes to endoscopic instrumentation. The current penetration rates in Japan are low, probably one of the lowest in the developed world, I would say sub-10%. So you can see there's significant opportunity, and there's incentive from the government. We have internal program at Covidien that we've been working for the last 6 months to really take advantage of this opportunity. We have the sales force. We have the products. Tri-Staple is quite important in this venture. Energy products will be very important in getting us there, and also, we have a very good training site just outside Tokyo. So we feel very bullish about the opportunity in Japan so there's great upside there for the industry in general.

Operator

Next question comes from the line of David Lewis with Morgan Stanley.

David R. Lewis - Morgan Stanley, Research Division

Maybe a question for Chuck and a quick follow-up for maybe Joe and Chuck. I guess, Chuck, just thinking about gross margins in the quarter were obviously stronger sequentially than what we thought we were going to see here in the first quarter. If you think about FX trends throughout the balance of the year and in addition to what looks like pretty significant positive mix that you're getting, I mean, your better price mix you discussed in the quarter, do you still see gross margins improving across the quarters throughout the balance of the year?

Charles J. Dockendorff

I think our gross margins do go up and down in the quarter, and a lot of that has to do with the mix of our business and how strength comes in from one quarter to the other. I think, while we're down versus the prior year 130 basis points, and a big driver of that was foreign exchange, we're up from Q4. So if you look historically at our quarters, we do tend to trend up and down on that piece of it. But I think, going forward, with the trends you're going to see continue, we still expect to see continued favorable product mix, the rate of that, again, not to be -- but would depend on the mix of the products within the quarter. Pricing was a little at the lower end of our -- where we've been in the past. We are anticipating that pricing pressures will continue. How fast those come, how we can mitigate those, it's kind of difficult to predict, but we have been more in the range of 50 to 100 basis points that we talked about, and certainly, in the first quarter, we saw better improvement there. FX year-over-year, the first quarter is the worst when we do a year-over-year comparison, and it should just continue at the current rate as to what it is this quarter going forward. So those are our components of gross margin. I would expect it to stay at this rate going forward through the balance of the year.

David R. Lewis - Morgan Stanley, Research Division

Okay, very clear. And then maybe for Joe or for Chuck, I wonder if -- maybe you can share with us your sort of management philosophy, heading into the spin here, the middle part of the year. I guess the main message from Covidien the last several quarters has been significant reinvestment to drive growth, and you're once again today reinvesting to continue to drive that growth this year. So as you head into the spin, how do you approach that? There's obviously going to be some G&A step-up dilution. Is your strategy continue to invest in the business, the G&A dilution is what it is? Or do you back off on some of that relative reinvestment and offset some of that dilution?

Jose E. Almeida

David, we will -- the reason we're successful today is our relentless portfolio management and how we select investments and place our bets. And I don't see Covidien change our philosophy at all. We will deal with what Covidien's numbers will be going forward later in the year once we have the Form 10 out there. But I want to make it very clear that we have a philosophy to double down in areas that we think there are great opportunities, and we're going to continue to do that. If you look at life cycle curve of our products, we continue to make bets in early-stage businesses, but also we're not neglecting at all business that are getting to maturity like Energy and Endomechanical and some other Vascular products so -- but that does not negate the fact that Covidien is relentless in pursuing cost reductions, and a great deal of investments that we've been doing have been saving money in G&A through shared services and cost reductions by closing down plants and moving plants and getting efficiencies and reinvesting them in sales and marketing and research and development. So that DNA is not going away, but I will reserve more specifics about what the plan is going to look like to us between May time frame when we speak to you guys about that.

Operator

Your next question comes from line of Mike Weinstein with JPMorgan.

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

Joe, first question, the commentary around the U.S. environment, are you able to identify specific procedures where you think volumes are increasing? And part of what I'm asking is trying to separate macro commentary on utilization, let's call it, versus areas where laparoscopic surgery may be gaining incremental traction, and it may be more the latter than the former.

Jose E. Almeida

I think you have couple of things going on. You have a conversion in the U.S. of open to MIS. So if you think about, I would venture to say 40% to 45% of the hospitals in the U.S. are penetrating in terms of MIS. So there's opportunities, continued growth there that Covidien is taking great advantage. Then you have the specific procedures and that is the Vascular procedures that affect Covidien, and we speak about them all the time. It's the laparoscopy, the colectomy, the VATS, the video-assisted thoracic surgery. So those are the ones we start to see a little bit of life. But I would point your attention less to that, more to the conversion of open to MIS, and that's a positive for us.

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

Okay, let me switch. If I look at the patient monitoring business and the Oximetry business, that business, kind of under the radar, in my view, has kind of found new legs and picked up steam. Even if I adjust for the Oridion acquisition, which looks like it's doing better than expected, your growth has certainly picked up. Can you just give us a minute on what's going on in that business and kind of how you view it going forward?

Jose E. Almeida

Yes, I will have to say that it's execution, and we have a good team there led by Bob White in Colorado, and they are relentless in going after the opportunities. His execution on the sales level, account by account, is not an easy fight, but they are doing a good job. So I also want to point that the diversification strategy, Mike, that we have in place in terms of moving away of exclusive SPO2 and going into cerebral oximetry, going into depth of anesthesia, now capnography, and we've just launched a few months ago the respiration rate, I think, speaks to the advantage that Covidien now presents to our customers in terms of being a more comprehensive player in that space. Don't forget the fact there was a slight help from the flu in the quarter, at least in the beginning of the quarter, which we don't think is significant enough, but was some kind of a help there.

Operator

Your next question comes from the line of Bob Hopkins with Bank of America.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

So first, a product question and then a question on the spend. First, on the product side, obviously, congrats on a great quarter in devices. Vascular was the one area that was -- I mean, strong growth, but not quite as strong as we thought. And so I was wondering if you could disclose what was the Neurovascular growth rate this quarter relative to the last couple of quarters? And what do you view as a sustainable growth rate for Vascular going forward?

Jose E. Almeida

I want to just point to you to begin with very difficult comps when you talk about pipeline was part of the mix next -- last year that we didn't have the year before. Pipeline has a certain universe that we can penetrate based on the indication, and I think we did a great job bringing that product to a very high level very fast. The growth of the neurovascular business is about in the mid-teens for the quarter, and we don't foresee anything lower than growing faster than the current market across both -- all the franchises within Vascular.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

And then on the spin, over the next few months, obviously, people are going to start to value Cov more as sum of the parts of new Cov and Mallinckrodt. And we've done some analysis and at least, initially, our analysis suggests the dilution could be up to $0.35 in 2014. Obviously, your results today and some of the things going on at Mallinckrodt suggest that dilution might be lower. And I was just wondering, Chuck, if -- I know details -- more details are coming later, but can you just give us a rough sense if kind of a range of $0.25 to $0.35 of dilution is, at least, in the right ballpark of a way to think about initial dilution and knowing that, over time, that'll come down?

Charles J. Dockendorff

Yes, I think -- I read the announcement, Bob, I think it was very well done, and the assumptions that you've used in that were very reasonable. I don't want to comment on the specific dilution at this time. We're still going through it. We're well along the way. We've hired the management team, but we're still going through the final impacts of what will be the specific tax dilution, what will be the final build out cost for Pharmaceuticals, how will the service agreements be in place, how long will they be, how much will they be, after that, what we have for leave-behind costs, and we're also working up options to minimize those leave-behind costs with cost-reduction programs. I think the important thing and a point you raised is that some of the initial dilution is temporary. We feel that although there'll be some tax dilution from the increase in tax rate as we split apart legal entities, that through tax planning initiatives, we can get back to the rates that we had previously. I think same thing with as we split this business out and create the infrastructure for it, certainly, there's going to be some duplicate of cost to make sure that the company is managed correctly once it is out there, but we are working hard to make sure that we bring Covidien and Pharma back in line to be competitive on those lines. So I think, over time, a lot of that dilution will be mitigated.

Operator

Your next question comes from the line of Matthew Dodds with Citigroup.

Matthew J. Dodds - Citigroup Inc, Research Division

A couple of quick ones on CONCERTA. Chuck, can you say where the gross margin is for CONCERTA versus the corporate average, how close it is?

Charles J. Dockendorff

It's definitely higher, yes, so it's going to be a positive to our gross margin going forward.

Matthew J. Dodds - Citigroup Inc, Research Division

Okay, can you say it's at least like 10 percentage points higher like that...

Charles J. Dockendorff

No.

Matthew J. Dodds - Citigroup Inc, Research Division

Oh, you can't say or what?

Charles J. Dockendorff

That's all you get, Matt. It's higher.

Matthew J. Dodds - Citigroup Inc, Research Division

That's good enough. And then one other question on that business, are there -- because I don't -- I don't think you highlighted this at the Investor Meeting, are there any -- are there what you would deem high-profile ANDAs in the pipeline that could hit in the next 12 to 18 months?

Jose E. Almeida

Matt, like this concern was a surprise to everyone. ANDAs are not very predictable. It can be with the agency for a while, and exclusivity can be quite risky. So do we have other ANDAs? We do have. Are we disclosing what they are? No, we're not exactly for the reasons that I just outlined.

Operator

Your next question comes from the line of Kristen Stewart with Deutsche Bank.

Kristen M. Stewart - Deutsche Bank AG, Research Division

First, just a real quick one for Chuck. Can you just help us maybe quantify what FX is expected to be for the full year at this stage because I know your guidance is all in reported terms?

Charles J. Dockendorff

Yes, year-over-year, we're looking at about $0.11, a little over $0.10 of negative FX year-to-year.

Coleman N. Lannum

On an EPS basis.

Charles J. Dockendorff

On an EPS basis.

Coleman N. Lannum

On the top line, you should think of it as being in the 50 to 100 basis points range.

Charles J. Dockendorff

Right, right.

Kristen M. Stewart - Deutsche Bank AG, Research Division

Okay, perfect. And then just kind of following back on Vascular, can you maybe just give us an update on the time lines for CVI, and then just what other pipeline milestones may be coming up over the next 12 months for that business?

Jose E. Almeida

Sure. We're going to probably have a launch in Europe probably in the next 2 to 3 years. And then subsequently to that, when we're successful completed PMA and do the application and get approval in the U.S. will be posted by a year or 1.5 years.

Kristen M. Stewart - Deutsche Bank AG, Research Division

Perfect. And then any updates on the renal denervation program?

Jose E. Almeida

Well, we launched in Europe, and it's too early to tell, but Covidien is not only focused in Europe, but we're focused in other continents like Japan. So we like that technology but, as you know, there's a significant amount of players out there. And we think our technology is one of the best out there, and we continue to make improvements in the future to the technology, but a little too early to speak about that now.

Kristen M. Stewart - Deutsche Bank AG, Research Division

Okay. And then just one last quick one, just on the supply business that was a little bit better, was flu kind of seen within that category? Is that something that we should expect kind of in the upcoming quarter?

Jose E. Almeida

Very tiny impact, if any, there. I think I will point you to the comps as well. And also, if you think about the future quarters, if you think about the opportunity that Covidien has in the enteral feeding business, one of the suppliers in the industry exited the business, and Covidien was able to execute very well in getting to that space. So if you think about some key successes for that business, would be the execution, which is underway and well done by that team in the next 3 quarters on the enteral feeding platform.

Operator

Your next question comes from the line of Rick Wise with Stifel, Nicolaus.

Frederick A. Wise - Stifel, Nicolaus & Co., Inc., Research Division

Back to the emerging markets investment, just remind us what -- where emerging markets are, as a percentage of sales now, if you would. And just in terms of the infrastructure investment and build you're talking about, is this something you're going to take just step-by-step over time? Or is this -- is the investment something that might have a more finite end. Where do you -- and to sort of where do you think we're going in terms of your investment in terms of product, infrastructure, acquisitions, et cetera, Joe?

Jose E. Almeida

Rick, the first part of the question is about 10% of Covidien today, including Pharma. And clearly, when the spinoff happens, that will be a bigger part of Covidien. In terms of the investment, I see this as a 3 phase. We had a first phase back in 2005 when we had a lot of experimentation how to get into those markets. Then we assemble a stronger team, that's when we brought Brian King and some of our best people to that region, and they are on the Phase II. And the Phase III is probably now going into tier 2 markets in some countries, and we'll do that as we go. I want to make sure that people understand that we're very focused and very disciplined in how we manage our investments and returns, and the reason we continue to invest because the performance is there. And the team has done a superb job, and I have all the confidence in the world that the new wave that is going on in Latin America, primarily in Brazil, will be a success, whereas we've done in Asia. We have countries like Russia, doing extremely well. So I don't see an ending to the Phase III. So Phase III has not even started, which is to go even deeper into those markets. The opportunity is there. If you look at growth rates across the globe, you've got to be compelled to continue to invest. If we don't make these investments now, there's a window to it, and we don't want to be looking from the outside in.

Frederick A. Wise - Stifel, Nicolaus & Co., Inc., Research Division

And Chuck, I have a quick one, just to follow up on the price commentary. I appreciate that innovation in the pipeline, everything is driving -- it sounds like better price performance. Any more color or granularity on where the delta was versus prior quarters in terms of geography or product line or business and how sustainable it is?

Charles J. Dockendorff

Yes, I think one point, Rick, is on the innovation piece, that price doesn't really reflect the impact of new products we launched because it's really the price on same-store sales year-over-year so it's our existing products. As far as where it is, I mean, clearly, we're seeing price declines in the contrast media business, probably lower in the Surgical business than what we anticipated. And we're seeing certainly pricing pressures in Europe and the U.S. on that as the hospitals get more sophisticated in their buying patterns. And they put more professionalism out there. Emerging markets, probably a little bit less on the price side. It's more volume generated as we go into new markets and expand in those areas. And I would just say one thing to follow up on some of Joe's comments. I mean, he mentioned this in his remarks, but it's very important on the emerging markets piece. While this is growing very well, it is very profitable to us as a company as well. So we're able to generate profits as we grow that business.

Coleman N. Lannum

And Rick, let me just add one more thing on pricing. I think this is a very important thing for everyone to understand. Obviously, in the quarter, the pricing was better than historical trends, but we're talking about basis points here. It's not like we had a 5 percentage point increase in price or anything like that. I would be very careful about assuming too much precision in these things. I don't want to imply that all of a sudden, the world has changed. If you take a look at our business for the last 5 years-plus, we've actually had very little deviation from this long-term pricing trend. And on a normalized basis, I would say this quarter is a similar kind of a number.

Operator

The next question comes from the line of Matthew O'Brien with William Blair.

Matthew O'Brien - William Blair & Company L.L.C., Research Division

I was hoping to drill down a little bit on the o U.S. Med Device growth in the quarter. Obviously, very strong, up 13%, but would you be willing to provide us some kind of sense of the growth coming from emerging markets versus Europe? And then would you share the general sentiment that's out there right now that Europe seems to be stabilizing, if not, improving a bit?

Jose E. Almeida

Sure. The outside growth of Med Devices, there's a huge difference between emerging markets and Europe by an order of multiple, multiple times. So there's no compares, but the basis of them are different. But if you think about the growth expansion in emerging markets, being Vascular, Endomechanical, Soft Tissue and Airway & Ventilation, if you think about the potential there so I don't know how those will be comparable, very different places in terms of their maturity curve. So when it comes to your -- the second part of your question, can you repeat that for me, please?

Matthew O'Brien - William Blair & Company L.L.C., Research Division

Sure. Just the sentiment out there that Europe seems to be stabilizing somewhat here.

Jose E. Almeida

We've seen that stable as -- I would make an exception for Spain. I don't think Spain is stable at all. It continues to deteriorate at a pretty good pace. But if you put Covidien in context with the market, we've been doing better than market, and we've been doing better than market for a while. So we do have positive results out of Europe. I think the situation is stabilizing, but that doesn't mean that it's better. We still -- I think we still have some more to go in places like Italy, as they continue to look at measures to curb prices, and as well as France.

Sean D. Lavin - Lazard Capital Markets LLC, Research Division

Okay. And then just a follow-up for me on the Vascular business. I'm not sure if you can tease this out of your results here from your fiscal first quarter, but any sense in terms of your ability to retain market share from the S.M.A.R.T Stent? And then just within the other pieces of Vascular, we tend to talk about neuro quite a bit, but on the ablation side with VNUS and atherectomy and EVAR Stent, can you give us a sense for how those businesses are growing and the opportunities going forward, be it domestic or international?

Jose E. Almeida

Well, we think we have a good opportunity to retain a good part of that business that we had last year from the recall, I think it was one of our competitors' recall. So we think we can retain not 100% but a good percentage between 50% to 75%. I want to remind you that in terms of the comps for the Vascular business being difficult because of the neurovascular business. When it comes to the peripheral Vascular business, that's a mid-single digit growth market, and we continue to perform above market.

Operator

Your next question comes from the line of Raj Denhoy with Jefferies.

Anthony Petrone - Jefferies & Company, Inc., Research Division

Anthony, in for Raj. One for Joe on drug-coated balloons and a follow-up for Chuck on numbers. Joe, can you provide just a higher level overview of drug-coated balloons just maybe beginning with how you size the market opportunity and maybe how your approach with CVI differs from the competition, I guess, with a focus on Lutonix there?

Jose E. Almeida

We had a pretty good understanding of the market and the competition going back 3, 4 years ago when Invatec was for sale. And Covidien looked at the whole landscape and looked at the technology, and more so, our strategy group is very keen in understanding what is the right entry point and what is the cost versus the opportunity. So what would be your net present value of this opportunity versus if you had entered a year ago or 2 years ago with different acquisitions and different price points. So we think the technology that we have at CVI is a great technology. We understand those technologies quite well, and our team thinks that the best NPV for the company is the one that was going to be achieved through the acquisition of CVI.

Raj Denhoy - Jefferies & Company, Inc., Research Division

That's helpful. And then for Chuck on the numbers, a few years ago, I believe back in 2011, you announced the restructuring program that would take out, I believe, around $450 million or so in operating expenses by 2014. Can we just get an update on what annual cost savings are in place right now and maybe how much more we have to go on that program specifically?

Charles J. Dockendorff

Yes, we had 3 separate programs, 2 of which have been completed. The one we're in currently now, I think it's for roughly $250 million -- or $175 million to $225 million of savings associated with that. We're about a little over 1/3 of the way through. That's a combination of things we're doing both in SG&A and manufacturing. We've made significant reductions in our facilities, and our cost improvements, it's baked into our gross margin, and we drive through 4% of cost reduction in our gross margin each year, as well as some of the SG&A reductions and productivity improvements we've made. So being through about 1/3 of that, a little over 1/3 of that. Some of those savings are in. We still have room for savings coming up the balance of this year, and we'll probably be finished with that program sometime in the middle of 2014.

Operator

Your next question comes from line of Matt Taylor with Barclays.

Matthew Taylor - Barclays Capital, Research Division

I guess I just wanted to ask because Endomechanical is so strong this quarter, you have good growth in stapling, how sustainable you think that is over the course of the year as this rolls through?

Jose E. Almeida

Matt, I will give a lot of credit to the folks in our Connecticut business that's running this, Bryan Hanson doing a great job with his team there. This is about pipeline. Tri-Staple is a great franchise, and as I spoke about the MIS, the transition from open to MIS, that favors Covidien. So we have a good franchise, some good proprietary products, and I don't see that changing in the next 12 months.

Matthew Taylor - Barclays Capital, Research Division

I know you're going to file the Form 10 soon here but was curious if you had decided to host a call or provide us any kind of updates on your outlook for the 2 separate businesses around that time frame.

Coleman N. Lannum

Yes, Matt, at some point in the future, well, after the Form 10, we'll be communicating that. You should not expect a call around the Form 10. The way I want people to think about this is that we'll give you an idea of that time frame in advance so we're not going to surprise you with it, but you should be thinking later in the spring, probably after our second quarter earnings call.

Operator

Your next question comes from the line of Joanne Wuensch with BMO Capital Markets.

Joanne K. Wuensch - BMO Capital Markets U.S.

I'd like to dig in to a little bit the respiratory business. How much do the acquisitions add to that growth rate? And can you discuss a little bit, it sounds like now, with a broader portfolio, you may have changed the marketing of that product line a little bit.

Jose E. Almeida

The acquisition of what business?

Joanne K. Wuensch - BMO Capital Markets U.S.

Oridion and if I remember correctly, you made a number of other acquisitions in that segment over the last 12 months.

Jose E. Almeida

So let me take your second question. Can you just repeat your second question?

Joanne K. Wuensch - BMO Capital Markets U.S.

The second question was with the broader portfolio, can you discuss a little bit how you may be changing the marketing of that business line?

Jose E. Almeida

The -- our intention and strategy is to continue to invest in proprietary or semi-proprietary parameters for the improvement of patient safety and perfusion, okay? So we're going to continue to look at opportunities, internally, externally, to bring a basket of products that will give our customers, our patients, the best outcome economically and clinical. So the acquisition of Oridion was well placed because it's a key parameter. You have the respiration rate that we launched, another one. We have a couple more things in the launch pad that I think will augment the basket. So we are not finished with the acquisitions, obviously, in that business, but also, we have a strong organic pipeline in that business, but making the bag bigger in terms of patient safety and perfusion is our objective. In terms of the -- your first question about the impact of the acquisitions, Cole was going to take that on.

Coleman N. Lannum

If you take a look at Oximetry & Monitoring and you exclude the purchase accounting of those acquisitions, it was up high-single digit, low-double digit.

Operator

Your next question comes from the line of Michael Matson with Mizuho Securities USA.

Michael Matson - Mizuho Securities USA Inc., Research Division

Obviously, you've had some really strong growth, and you're doing extremely well in the emerging markets. But I guess I was just wondering, we've seen some other companies and other areas of med tech that have gone in and done some M&A, particularly in China, to try to get into some lower-end products. And maybe that's not applicable, given the nature of your business, but I was just wondering if you felt like you had a need to do any acquisitions in any of the emerging markets to maybe get into some lower-priced, lower-cost product categories.

Jose E. Almeida

Well, every M&A is opportunistic, and Covidien will ensure that our models are very strict and applicable across the globe because our objective is to make sure that if I take a dime from our shareholders, I will be able to return that dime within a time frame. That's a bad investment then if I hadn't given back to our shareholders. So with that in mind, not discussing what tiers of markets we would be looking in emerging markets, we are indeed looking at several different opportunities in emerging markets. Those are difficult opportunities, and we want to make sure that the value for shareholders is there. Covidien is not going to make an acquisition that doesn't -- is not accretive to the shareholder over time or the acquisition will destroy value. But we have interest in a couple of locations such as China and Brazil, and we're currently looking into that.

Michael Matson - Mizuho Securities USA Inc., Research Division

Okay. And then my second question would just be about the procedural volume growth increase that you saw in the December quarter. I guess, it seems like we've seen a little bit of a pickup across a lot of product categories here or procedure categories. And I guess, I'm just a little bit scared that maybe this is just to increase seasonality as patients hit their deductibles, and we could see a drop off in the beginning of the year in the first calendar quarter. So do you have any thoughts on whether or not this volume increase is sustainable at all in the longer term?

Jose E. Almeida

Mike, we are a company that usually do not -- does not comment on specific quarter events or distributor changes or specific procedure volatility. It's almost impossible to detect procedure volatility on a monthly basis. And unless you have an event, like take us back 2 years ago when COBRA was extended and expired, and you can really see that difference, there's nothing here that points one way or the other. We don't have a trend yet. I have to say that we have not seen significant change in our market, and the results of our performance has to do with execution, our portfolio management and the ability to have the technologies that have better clinical and economical outcomes for our customers and patients.

Operator

Your next question comes from the line of Glenn Novarro with RBC Capital Markets.

Glenn J. Novarro - RBC Capital Markets, LLC, Research Division

On the guidance, for Chuck, if we put the sales guidance, the tax rate, we put that into the model, it looks like the midpoint of a very wide range is going to come in somewhere around 4 55 to 4 60. Is that -- are we in the ballpark in our math? And I'm just wondering, are we not taking into account the reinvestment? And then I have a follow-up.

Coleman N. Lannum

Yes, Glenn, yes, let me take that. First of all, I would warn people against using mid-points. If we wanted you to be at the mid-point, we would tell you the mid-point, not the ranges. We've put the ranges in for a very specific reason. I mean it could be -- it means that all those numbers can be anywhere within those ranges. And I want to be very explicit, you use the mid-point -- anyone uses the mid-point on these things -- at your own peril. So that is not what we are saying. In addition, I think you bring up a great point, we're very explicit here. We talked about this on the November call. When we see this kind of windfall that we're clearly going to get from CONCERTA, we said we are going to reinvest in the business. You are going to see SG&A and R&D go up. We've already talked about the impact from CVI. So from that standpoint, while we don't want to comment on the specific earnings out there, I think I'd be very, very careful as letting that flow through down to the EPS line.

Glenn J. Novarro - RBC Capital Markets, LLC, Research Division

Okay, good, good commentary. And then just as a follow-up, the reinvestment, particularly the spend, Joe, that you talked about into emerging markets, I would imagine most of that spend is going to be in headcount adds. When you add headcount, that translates at some point into faster revenue growth. Is that revenue growth something we're going to see this fiscal '13? Or are these adds going to be really the benefit for fiscal '14?

Jose E. Almeida

I'm just going to comment on the type of spending. We're not spending only in headcount. We're spending in training centers in several different locations, spending from Brazil, Turkey, India, China, everywhere. So there's headcount associated with the ability to train physicians in MIS procedures and so forth. When we think about return on investment and headcount, we have a certain motto. And I can tell you, it's not a 12-month return. I'm not going to tell you what it is overall, but it's not a 12-month return. So making a dollar investment headcount today does not return immediately in -- within 12 months, but it's not -- nothing that will be anything longer than 28 to 30 months. So we have an interval there, and then you start seeing the investment coming.

Operator

And the final question will come from the line of Larry Keusch with Raymond James.

Lawrence S. Keusch - Raymond James & Associates, Inc., Research Division

Just 2 strategic questions, Joe. First, as you think about emerging markets.

[Technical Difficulty]

Operator

Your next question comes from line of Larry Keusch.

Lawrence S. Keusch - Raymond James & Associates, Inc., Research Division

Yes, just 2 strategic ones. First, on emerging markets, obviously, your investment is targeted at infrastructure and sales functions, but I just want to get some thoughts on how you're thinking about in-country manufacturing and potentially the need to do some of that.

Jose E. Almeida

Yes, we do manufacture in China. We do manufacture in China, in Brazil, in Malaysia, in Thailand. And we have research and development facilities in China, in India, as well as in Singapore.

Lawrence S. Keusch - Raymond James & Associates, Inc., Research Division

Okay. So we shouldn't be thinking about any big CapEx expenditures for more increased manufacturing at this point, is that fair?

Jose E. Almeida

We'll place the manufacturing where we think is the best location. Some -- no, labor rates vary everywhere, and we need to make sure that the overall cost of manufacturing is the lowest possible. So -- and also, that is one -- if you think about our manufacturing process, labor is somehow a small component. You need to think about where your components are being made, and so outsourcing components in emerging markets are much more -- is a better value proposition. And we have our corporate operations group here, and Covidien does a great job bringing that to light.

Frederick A. Wise - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then just the last one was just, again, you've done a lot of M&A actively over the last year. Again, I just want to get some thoughts on how we should be thinking about the potential and appetite for larger deals than the smaller technology deals that you've been pursuing here the last several months.

Jose E. Almeida

As I said at the recent Health Care Conference in San Francisco, we do have the appetite for a larger deal. However, the opportunity to get a larger deal is very, very rare. No, we constantly are looking at new opportunities in terms of platforms for Covidien. I'm not opposed to a large deal, but at the end of the day, our shareholders' cash -- no, you guys entrust us with your money so we need to make the right decisions for our shareholders and for the future of the company.

Coleman N. Lannum

Thanks, everyone. I'm sorry we weren't able to get to everybody's call -- question in the queue, but I know that there were a lot of them today. Starting at noon, Eastern Time today, a replay of the call will be available. The replay will also be available on our corporate website, covidien.com. For analysts having more detailed questions involving nonmaterial information, both Todd and I are available all day to take your calls. Thanks, and have a great day.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a great day.

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