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Covidien plc (NYSE:COV)

September 08, 2011 2:00 pm ET

Executives

Bryan C. Hanson - Group President of Surgical and Energy Devices

Matt K. Harbaugh - Interim President of Pharmaceuticals Segment and Chief Financial Officer of Pharmaceuticals Segment

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

Michael Tarnoff -

Brian D. King - Former Senior Vice President of Corporate Operations

Peter L. Wehrly - Group President of Respiratory & Monitoring Solutions and Vascular Therapies Businesses

Coleman N. Lannum - Vice President of Investor Relations

James C. Clemmer - Senior Vice President and President of Medical Supplies

José E. Almeida - Chief Executive officer, President and Director

Analysts

Adam T. Feinstein - Barclays Capital, Research Division

Matthew J. Dodds - Citigroup Inc, Research Division

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

Thomas J. Gunderson - Piper Jaffray Companies, Research Division

Daniel Sollof - Barclays Capital, Research Division

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

Michael Matson - Mizuho Securities USA Inc., Research Division

Frederick A. Wise - Leerink Swann LLC, Research Division

Robert A. Hopkins - BofA Merrill Lynch, Research Division

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

Kristen M. Stewart - Deutsche Bank AG, Research Division

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

Unknown Analyst -

Sara Michelmore - Brean Murray, Carret & Co., LLC, Research Division

David R. Lewis - Morgan Stanley, Research Division

Jason Wittes - Caris & Company, Inc., Research Division

Lawrence S. Keusch - Morgan Keegan & Company, Inc., Research Division

Operator

Ladies and gentlemen, please welcome, Vice President of Investor Relations, Cole Lannum.

Coleman N. Lannum

Thank you very much, and good afternoon, everyone. It's nice to see everyone here, not only the people that are joining us live but also the roughly 500 plus people that have already dialed in and are joining the webcast.

For the folks here in the Plaza, I hope you took the opportunity to see our product displays outside a few moments ago. We told every single year that that's the most popular piece of the Investor Days that we do. It's a chance for everyone to meet intimately with the senior management team in a way that you don't often get to do from a depth standpoint, so we hope you got some use out of that. Now while most of the senior management team that you saw out there will not be formally presenting today, you will see a number of them later on whenever they get up on stage and we go to our first Q&A session, you'll have a chance to ask them then what's going on.

Before we get started, I need to go through a few logistics. First of all, you may have noticed that the wireless reception in this room is relatively spotty. I know better than to stand up here and to tell you to actually turn off your BlackBerrys and phones because I know that's just not going to happen. But what I would ask you to please, as a courtesy to everyone else here, please do at least put them on silent or vibrate so that we can get through the day without too many interruptions.

Today's full agenda is in your books. This past year's obviously been a very tumultuous one for the markets, for the healthcare industry, for overall healthcare investing as we know. And for both the equity and the credit markets, we've seen a lot of things going on. One of the things that we're going to try to do today is give you a little bit of perspective from the Covidien standpoint. Talk a little bit about what we see, some of our strategies, some of the things that have gone on, some of the end markets out there and also how we expect to address some of these issues compared to other companies in the hospital supply and medical device world. Hopefully, by the end of the day, you'll have a better understanding of exactly where we stand from that standpoint.

Now as I believe you are aware, Rich Meelia resigned as our CEO earlier this year and Joe Almeida took over. You probably know Joe very well from his years as the Head of our Medical Devices segment. But today, he's going to share some of that strategy and some of what he sees -- what's going in the markets out there.

After Joe's remarks, we're going to ask some of the senior management team to come up on stage and we'll do the very first part of the Q&A session. You'll have an opportunity to get deeply into the different businesses and to pick their brains on what they're seeing from a market standpoint. That will probably go until a few minutes before 4:00. At that point, we'll have a break. We'll return back here a few minutes after 4:00 when Chuck Dockendorff, our CFO, will come up and give our 2012 guidance for the first time.

I would note to you that as in past years, just out of respect for the people that can't be here with us live and those who can't be on the webcast, we will not be discussing any of our particular guidance numbers until after 4:00, until after the market is closed. So please keep that in mind whenever we go through the first Q&A session.

Now after Chuck gives his guidance comments, we'll open up for another broad Q&A session. That will go until about 5:00 or so or until we run out of questions. At which time, there will be a reception in the foyer.

Last year, we tried something new. It ended up being pretty successful, so we're going to do it again today. For those of you listening on the webcast as well as for those of you here, you can either anonymously send in your -- any questions to the website that's on the screen. Or for those of you on the webcast, just type in your questions. We'll try to get to as many of those questions as we can, both here live and for those of you in the virtual audience.

I think it's important for a second to talk a little bit about some of the fine print. And before I hand the podium over to Joe, I want to talk about a little bit of the forward-looking statements. During the presentations, we will make some forward-looking statements, and it is possible that actual results could differ materially from current expectations and differ materially from the statements that we make today. We are under no obligation to update any of these statements even if they change dramatically over time. I would ask that you please refer to the cautionary statements contained in our SEC filings for more detailed explanation of the inherent limitations of such forward-looking statements.

We'll also be talking about some non-GAAP financial measures today, particularly, but not limited to, Chuck's commentary later on this afternoon. You can find a reconciliation of our non-GAAP to GAAP measures at our website, covidien.com.

With those preliminaries out of the way, I'd like to now introduce you to our President and CEO, Joe Almeida. Joe?

José E. Almeida

Thank you, Cole, and welcome to our 2011 Investor Conference Day. This is my first conference as the CEO and President of Covidien. And for the last couple of months, I've been thinking, what are the things that I want really to tell you today? What are the things that are important to me as a CEO of the company and to Covidien that I'd like you to take away with you today? And there's about 3 major objectives. One is, I want to go back quickly and review some of the achievements that we had in the last 4 years. And why is that important? Because going forward, I want you to understand the credibility that we have built with our investors in terms of delivering what we promised.

Second is, we're going to talk about the market. The market has been changing. There's some good things and there's some tough things. And after we talk about the market is how Covidien will react and how Covidien will grow and win in this market that is ever-changing?

So if we just look at the performance that we had in the last 4 years, we had a CAGR in our sales from 2007 to '10 of about 7%. We just released our earnings in July and we spoke about our 9-month performance. And that, you can see provided some substantial growth versus the same period of 2010. When we look at our earnings per share, 11% growth with some good momentum in 2011.

Our growth outside the U.S. and the U.S. has been different. We grew 5% in U.S. and about 9% outside the U.S. It is 9% is the blend of Europe, Japan, Canada, Australia and emerging markets. And I have to tell you, the emerging markets growth has exceeded our expectations in this near 20%.

When we were here about 4 years ago, I remember clearly and most of you were with us, we spoke about taking money from our profitability and re-invest in research and development. We went from about 2.9% to 4.6%. And the result of that is 75 new products we're able to launch since 2007. They are responsible in great part for the great performance in sales. We're not there yet. However, we're looking forward to more productive and more effective R&D spending even going forward.

We increased our gross margins and basically, there are couple of things that we've done well. One is the mix of products into our gross margin. Medical Devices are higher margins growing faster than the rest of our business. Second, we are relentless about our operational excellence programs and we've been delivering strong cost reductions for a long time. And the result, you can see, is about over 500 basis points of improvement.

And I've been asked many times during the last couple of years, when are you going to top off your gross margin? How much more headroom do you have there? As we continue to grow, our gross margin -- our Medical Device business is faster than the other business and we're going to show you how. You should expect our gross margin to continue to improve.

We're aggressively managing our portfolio. We look at some of our businesses that did not make sense to be part of Covidien. We divest the business that were distractions to us and made sense to be with somebody else. But we acquired some really good businesses. We have done acquisitions that provided the technology to Covidien, which is the case of Power Medical. And you're going to see that you probably saw in the demonstration before our meeting that, that is a great product they're going to continue to enhance the ability to deliver economical value to our customers.

We acquired Aspect Medic and Somanetics that amplified adjacencies in our monitoring businesses. And finally, Ev3, which was a great acquisition, bringing the neurovascular and the peripheral vascular business to Covidien. So the job done here was well done.

We used our strong cash flow to finance areas that we're not very good at. In 2007, when we stood in front of you guys and just spoke -- and Rich has spoke and I spoke, we said we have some deficiencies in our sales and marketing. We don't have people where we should have, so we used this investment to add sales reps in the right places. And that has paid off, as you can see, in our surgical business, energy business, the growth of above market. We also had a very limited ability to do business development and licensing. We went ahead and hired some really good people under Amy Wendell. They are able to do a great job with the acquisitions and the divestures that you just saw.

Most importantly, and this is for the future, the investment medical affairs and healthcare economics. This is paramount for the future. As things are changing, that capability acquired by Covidien and led by Dr. Michael Tarnoff is absolutely a necessity going forward. And above all, one of the greatest opportunities for Covidien is emerging markets, and we're investing heavily there.

We also used our capital prudently. We have maintained a strong balance sheet; we continue to target a credit rating; we employed free cash flow to growth initiatives; but when we don't have the right acquisitions, we say we're going to return the money to the shareholders. We have not hold money or hold cash in our balance sheet. As we announced in July, we, on a trailing basis, have returned over 50% of our free cash flow to our shareholders.

But no, Covidien needs to evolve. And how do we accelerate growth in the current market environment? So what are the tailwinds? And what are the things can make me so excited about this business? Growth access to care remains a political and social goal worldwide. If you go to Brazil, you go to China, to India, what you see is a tremendous essential in the middle class. And what does the middle class want? They want wellness. Medical technology is a great space to be in, in those markets. Ongoing demographic trends support demand growth. Why? Global population is aging. The fundamentals are there. And lastly, we made the right investments in healthcare economics and medical affairs. So we have the infrastructure to look forward to a space that becomes more demanding in the clinical needs of our customers, as well as the economical needs of our customers.

But what are the things that keep me up at night? The condition of economy impact on provider economics is changing. The unemployment rate in the U.S. is over 9%. The consumption of healthcare is middle-class driven. So it is important to understand that the lack of improvement that we've seen in the last few quarters is somehow driven by unemployment, which is mostly driven by unemployment of middle class.

The dynamics and impact of adoption in pricing of new technology is also a factor. The surgeon, the physician is not the decision makers solely anymore. They have a voice. The economical buyer has a stronger voice in many cases. Things are changing in some of our markets. Blue Cross Blue Shield [Blue Cross and Blue Shield] recently, if I'm not mistaken, in Illinois now owns 3,400 physicians and 350,000 patients. So if you think about the ACOs, everybody's dibbling. Everybody's trying to figure out what that really means.

Things will be different in the future. The way the care is delivered is different. Today, it would be different in the future. The market growth rates have somehow shrunk a little bit since 2009. And the regulatory environment is concerning, not only FDA, and the approval processes becoming more complex, more complicated, more unpredictable, but also you see behaviors there similar to that in China and Brazil and other economies that are also growing. So the ability to be the best in the way we behave and file our PMAs, our 510(k)s and approval in foreign countries is important to Covidien.

So how is this whole thing going to impact our business and how are we going to win in this new market? We have some real good strengths that play well in these conditions. We are competing in very attractive and growing markets still. Our end markets have not changed. So let me walk you through some of the growth rates of the market in our Medical Device businesses. We're #1 and #2 in most of these businesses. The Energy business is 7% to 9%. That growth is staying by the mix of lower-end, more commoditized energy products on the 3% to 4% growth, all the way to a 14%, 15% of vessel sealing. Very attractive Covidien large market growth there. Great product for us. So very excited about the Energy business. Endomechanical is still a very attractive business for Covidien. And Vascular, this is also another branded rate for Vascular, which has neurovascular growing market about mid-teens. Peripheral Vascular at the lower end of the growth spectrum is the Compression business. So this is the -- the Medical Device business is a good portfolio, 4% to 6% growth. And we are growing at or above market in most categories.

When we look at Pharmaceuticals, we are in some tough markets here. This is not a high fly growing market, but it's a business that we do well in API, in Radiopharmaceuticals and provides Covidien with strong cash flow. 0% to 2% growth is our estimate for the market in Pharmaceuticals. And finally, Supplies, we're #2 in most products that we compete. And the Nursing Care business is the highlight with 2% to 4% growth. Total Covidien market growth, 3% to 5%, and we are growing at or above market growth in all, if not most categories.

So when we talk about the diverse of the portfolio of Covidien, the good news is that we don't have highly concentrated businesses, and more than 80% of our sales from categories where we're #1 and #2. Highlighting specifically Medical Devices. Medical Devices is about 78% of Covidien's overall sales in 2010 -- I'm sorry, of operating income and margin in 2010. Highly profitable business with really good growth. So our end markets, still very attractive. Medical Device is leading Covidien's growth and leading its profitability. It is delivering some really good growth rates across the board.

We use the money that we, in 2007, said we're going to put into sales and marketing to drive an exceptional commercial organization. I've got to tell you that in the U.S., Europe and every continent, every country that we participate. We have a very strong approach how we get our sales force motivated, how our sales force become productive. Our execution of commercial side is excellent.

We also have improved mix because we've been focusing on Energy, Vascular and Endomechanical through the acquisitions and through investments, organic investments. The mix is a strength of Covidien. And the operating leverage that we've been getting from restructuring programs. If you recall, we had 2 programs that we complete. Those 2 programs are responsible for great part of our very good performance in our gross margins. We just have a third one that we just announced recently. So we are on our way to continue to deliver that operating leverage and going after savings in our operations. Our objective is to grow top line at or above mark and deliver double-digit EPS growth in the long term.

So let's talk specifically how we're going to grow the business? What are the things that we're going to do differently to grow this business going forward? I'm going to talk about broadening the innovation focus. What is broadening the innovation focus and how can Covidien leverage that? We were, for the last couple of years, 2 or 3 years, #1 or #2 in the Patent Board, which gets published by the Wall Street Journal, as the most innovative company in medical technology.

The ability to file for patents and become an innovative company is not enough going forward. Launching new products alone won't do it. The ability to provide clinically and economically advantage products and solutions to our customers in what place as well as the data, the outcome data and the healthcare economics that go with it. So look at the products that we have, we have a significant amount of clinicals that we're having -- that we're undertaking today. And our ability, our ability to deliver the 2 components, the clinical and the healthcare data, the healthcare economics data, is what differentiates innovation only from the broader focus that we're going to have going forward.

We also need to innovate in a win-win solution. So if you're able to stop by the Surgical Devices table, you saw our power instrument there. That power instrument not only delivers the clinical proposition which it was designed for, but also has the ability to reduce the overall cost of delivery. So this is the win-win situation.

Our capabilities to realize higher returns is key. That's not about going from 2.9% to 4.6% of R&D spending over sales. It's about doing in the most effective and efficient way. One of the reasons we're putting R&D centers in Asia is also to leverage higher throughput in India and -- as well as China and Singapore.

Launch a steady stream of innovative products is key to Covidien. If we don't realize that innovative product stream, we're not going to be able to grow at or better than market. And I want you to remember that launch products and innovative pipeline doesn't mean only new technology. It means clinically relevant technology, economical relevant outcomes.

So how do we bring this in a most efficient and effective manner is what's going to make Covidien different than others. So if we look at the pipeline that Covidien has launched in the last 12 to 24 months is vast. You can see we have significant amount of products here coming from Medical Devices, but also for Pharmaceuticals and you have Medical Supplies. This is only possible not because we're spending more money, because we're very efficient how we spend money. If you compare our spending with the spending of our competitors, we're still below what they spend. It's not about the amount of dollars, it's how you do it and how effective and efficient you are.

So let me talk about 4 products that we have launched recently. First one is the great launch of Tri-Staple. This is the longest product launch I've ever seen in my life. I keep asking the folks at Surgical, are we done? Are we done? So we still have 18 more SKUs to go. However, the 12 that we launched are accountable for about 80% of the sales volume.

This is a great product. This is the first-of-its-kind technology featuring intelligent compression with a graduate design to reduce tissue trauma and it has staple-line security. This product is the product responsible for our Endomechanical franchise growing above market. Great acceptance. I wish we could make more faster, but I know Bryan Hanson and his team are working very hard to get this done.

When we look at our Energy franchise, this is another product that has done very well. This is the Small Jaw. It is a vessel-sealing instrument intended for use in open surgical procedures, where a Small Jaw footprint is needed. This is another product, another product in the vast arsenal of products that our Energy folks have, that had done so well for the vessel sealing franchise. The Vessel Sealing business in our Energy franchise has grown 20-plus percent every quarter for the last 4 years.

When we look at our new acquisition of ev3 from last year, we have -- in the Neurovascular business, you have the Pipeline Embolization Device. The product was launched in the U.S. just recently and commenced in Europe in 2009. It's indicated for inoperable, very large neck aneurysms. This is a life-saving product. This has a clinical and an economical appeal across the board. It's doing well. Now our neurovascular franchise has really a good portfolio of products, starting with the PED, coils, liquid embolics and accessories. Strong player in the Neurovascular business.

And lastly, I want to cover the TurboHawk. It's a plaque excision system, was launched in the U.S. and outside the U.S. in March 2011. It's intended to treat calcified and non-calcified lesion in small vessels and is above the knee. There's another product called SilverHawk. It's below the knee.

Let me tell you a quick story about this product. I was -- about 30 days ago, I was in New York City. I was visiting New York-Presbyterian Hospital. And I was going to see a case -- it was very difficult. The patient was an elderly male. Patient who had a prognosis of leg amputation. There was no circulation on his artery below the knee. That was the last chance and this was a referral that he decided to ask for. And through several different techniques and products, including the Hawker [ph], this patient was able to -- probably his limb was spared. And it's touching to see our products make a difference in people's lives. This is clinically, again, and economically relevant for the system.

Looking forward, how does our pipeline look like? Despite the fact we're not going to give a lot of details what we're launching, we have here a very good representation of number of products that are in the pipeline for '12, '13 and '14. And if you look at, this is across the board, this is Medical Devices, this is Pharmaceutical and Medical Supplies as well, some very interesting products coming out of Jim Clemmer's group in Medical Supplies. We're very excited about this. And these products have that appeal that I spoke to you folks about in this last 4 products that I just reviewed.

Let's talk a little bit more about Pharma. I got a lot of questions today about Pharma pipeline. We have 12 ANDAs lined up. 6 of them are with the FDA, 2 in clinicals and 4 in formulation. It's also exciting we have the PENNSAID Viscous Solution which is sNDA in clinical trials as we speak, as well as 2 505(b)(2) applications that will go in and once we finish the clinicals, which are products derived from the Depomed patents that we purchased and licensed. So good portfolio across the businesses, Pharmaceutical, Medical Devices, Medical Supplies.

So we spoke a lot about innovation. But innovation alone is not going to do it. We've got a mix that with a good portfolio management. So let me speak to you about my take on acquisitions and where I stand on acquisitions. Acquisitions are opportunistic. Covidien will continue to look for tuck-ins, all these opportunities we have several of them being evaluated as we speak. We're going to focus on adjacencies as well as technologies. I've got asked a lot in the last 6 months, "What about large deals?" This is my take on large deals. They're not off the table, but they have to be a growth platform that delivers acceptable strategic and financial returns. As always I say, acquisitions are opportunistic.

As we continue to manage our portfolio, we'll continue to deploy our resources to businesses that have the highest growth, the highest potential for gross margin and businesses that have higher market share so we can defend our position.

We also are going to identify new market opportunities. So as we speak, we have 4 different teams at Covidien today. And we're using a hybrid method system that we learned from private equity [ph] to have in-house resident knowledge. We bring the person in from the outside or from inside the company, and this person is going to lead an area of white space for Covidien and find out if that business is something we should get in.

So this is something new for us, and we think we need to do it. We have Covidien -- the venture capital group which is doing quite well. So now the next step for us is to really understand what is out there that we don't participate today, that we should be in, if it is new, naissant, or an area that is attractive for Covidien. We started with more than 50 different areas. We narrow down to 4. We have really, really good plans and teams in place. They're looking at these areas. The portfolio management activity is too critical for us to meet our performance goals.

Let's talk about the emerging markets for a little bit. Brian King is going to be up here and doing the panel. Now you should ask him a couple of questions how well his business is doing. Our emerging markets opportunities, primarily in China and India, in terms of adding significant amount of sales reps, our aspiration, Brian's aspiration is, in 5 to 6 years, we're going to go from $1 billion business to a $2 billion business.

How we're doing with the projects that I have spoken to you last year? We're delivering double-digit sales growth in all accounts. I can tell you, they were growing faster than most of our competitors. We're rapidly expanding our on-the-ground presence. I talked to you guys last year about 1,000 to 1,100 sales reps. We are ahead of schedule in hiring those folks, as well as creating the infrastructure to keep them in place. It's very easy to hire a lot of people in China, India, Brazil. It's very tough to retain those folks. And the last review I had in China with Brian and his team, our turnover rate is well below the industry average.

So the importance -- we hear a lot of plans that talk about expansion in emerging markets. It's not about the 2 first bullets here. It's about the creation of the systems and the back office that can hold people in place and make them more productive every year.

Our current focus is in Asia. But I tell you rapidly speaking to Brian and his team in Latin America, they are ready to submit another growth plan for Latin America that includes Brazil. In some areas, they actually have emerging markets in Europe. So we're very excited. This is something that is quite important to Covidien, and Brian's aspirations are the ones I'm very anxious to make sure that we realize.

As we have key initiatives in innovation, in portfolio management, emerging markets, let's talk about optimization of spending because this is an important thing for us. What do I mean by that? We need to continue to execute what Covidien used to be known for either under Tyco Healthcare. Excellent operations, excellent team. We've consolidated facilities, we have cost reductions, we have extremely well put together procurement organizations across the globe, in China, India and other low-cost countries. That thing is now in our DNA, and we're going to continue to excel at it. We're going to continue to restructure a global footprint to bring it down and continue to improve our cost.

Those 2 things are the things that we've always done. But how do we take the DNA and move that to the rest of the organization? How do we take that and move into the SG&A? How do we get that DNA and become more productive in the areas that are not related to operations? And that's when -- Chuck's going to speak a little bit more about it -- but we're going to expand our shared service and better utilize our corporate functions, and look for additional opportunities to increase efficiencies in all of these functions. It's not all about -- in the sales, we need to get more productive in our sales reps. We do quite well. That's what some of the programs that we're so good in manufacturing to work across the company. We've got to be able to finance the investment that we're making in some areas such as I spoke to you white space and other areas. And it has to come from this and also this has to continue to help us deliver the double-digit growth on the EPS pledge that I have spoken to you. Our end goal is to continue to deliver increased shareholder value.

So I would like to summarize the growth drivers. We spoke about organic growth. That comes from our portfolio of products. We also spoke about allocation of resources. The innovation, that stream is only good if I can deliver the clinical and economic advantage with it. The flexibility that we have in spending to support growth and return, return commitments to our shareholders. And let me tell you this, it is not about the technology, not about the processes that Covidien has developed as for portfolio management or for business development, it's all about the team that we have. It's all about the people, the 42,000 people at Covidien. They are committed to come every day to work. But I tell you, the latest reorganization that I had before right after I took over as CEO made our senior team even stronger. We have some really, really capable executives among ourselves. I'm very fortunate that these folks are in charge of our business and our functions and make what Covidien is today. The growth rates that you see, the technology, the innovation, that these folks are doing a great job. At the end of the day, they're very connected to what really matters most, which is our patients.

Covidien has a very bright future. The market has changed a little bit. Our growth rates for the market have gone down a little bit. We still have a great portfolio of businesses. They have great leverage in our end markets. Our businesses are growing at or above market. We delivered on our commitments. So when I spoke to you about establishing the credibility as going forward, the things that I spoke to you today about, if you look at what we deliver, we're going to continue to deliver in the future. But the team that we have, I have no doubts that we're going to be able to do it.

Thank you very much. And now I'd like to bring Cole Lannum back to the stage.

Coleman N. Lannum

Thanks, Joe. So we're going to go now into the first part of our Q&A session. First of all, as a reminder for those of you listening on the webcast, feel free to send your questions to the e-mail address on the screen. We will get through them intermittently throughout the day. We also have a large room here. And for the benefit of everyone, I'm asking that you please wait to ask your questions until I've called on you. We've got several runners around the room with microphones. If you raise your hand, they'll come to you with a microphone, then I'll call on you in order and I'll try to get to you in that form. And when called upon, I'd ask you please state your name, affiliation and then your question. Before we get started, though, I want to ask the members of the team to come on up here.

And as they're coming up, just very quickly. Later on today, as I earlier noted, we're going to have Chuck talking about the guidance for 2012. We'll have Joe come back on stage and have Chuck up here at the end of the day to address those things. But for the time being, obviously, if there's a burning question right now for Joe or Chuck, we can do that. But for this opportunity, I really want to get to the gentleman we have up here on stage, the people who really run the businesses, the chance to get a little bit deeper and what's going on.

So let me introduce them. Just to my left, we have Bryan Hanson. Bryan's the Group President in charge of our Energy, Endomechanical and Soft Tissue businesses. Next to him, we have Pete Wehrly. Pete's the Group President responsible for Airway and Ventilation Oximetry and Monitoring, Vascular and International Devices in Developed Markets. We next have Jim Clemmer, our President of the Medical Supplies segment; Matt Harbaugh is the Head of Finance and the Interim President of our Pharmaceutical business; Joe Woody, the President of our Vascular franchise; Dr. Mike Tarnoff. Mike's the Global Chief Medical Officer for Covidien. And then finally, Brian King. Brian is the President of Emerging Markets.

With that, if you could please go ahead and raise your hands. The runners will be right over to hand you a microphone.

Question-and-Answer Session

Coleman N. Lannum

Okay, we're going to start up here with #1 and then go to #2.

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

David Roma, Goldman Sachs. I have one question on top line growth in Medical Devices then a follow-up on Pharmaceuticals. I look at the guidance, the commentary around the market growth that you provided this year versus last year. Clearly, Joe, you highlighted that it is a little lower. You also highlighted emerging markets as growing somewhere in the 20% range. So just doing some math, it sounds like developed markets, U.S. and Europe aren't growing faster than 2% or 3% right now. Could you maybe give me some perspective, is that correct? And then the numbers you presented today, what are the assumptions you're making about the trajectory of potential end market volume recovery?

Coleman N. Lannum

Obviously, each of you is going to have a little bit of a different perspective depending upon your market. So why don't we go in order. Brian, Pete, Joe, just go down the line for the Medical Device businesses. Bryan, why don't you start out?

Bryan C. Hanson

So obviously, Joe presented some information on growth, a range of growth through 2015. I'm not going to say anything else out of that. But clearly, we have technologies that are going to grow much faster than the rate that you suggested in the U.S. and other developed markets. Overall, though, we'll stick within the range that Joe had mentioned for each of the businesses. If you look at endostapling, though, for instance with Tri-Staple, it's upper single-digit growth. If you look at some of the vessel-sealing technologies -- even in developed markets, if you look at vessel-sealing technologies, we're well into the double-digit growth. So it's a mix. And then we have other technologies that will be in the low single digits. So again, I think that we've got great opportunity in developed markets, more significant for growth standpoint as a percentage in emerging markets, but we certainly have had room in developed markets.

Peter L. Wehrly

What I can add to that I think that shows on the slide that Joe showed early about the diversity of our product portfolio, I mean, clearly suggests to us that we have many products and technologies that are going at market or above and others that aren't. And I think that's a proof of a great product portfolio for the company. So similarly like in our businesses, airways is a different growth profile than patient monitoring. And Joe Woody's business, certain parts of vascular are growing very nicely and above market in all markets. So I think it's just a good thing for Covidien to be so diversified.

Joe Woody

I want to add at Neurovascular, we're growing well above our market growth. In Neurovascular, market growth is 12%, 5% to 8% for peripheral vascular and 7% for venous vascular. The difference for us would be we're growing above market.

José E. Almeida

I'm just going to -- there's a part of the question regarding the volumes and how the volumes are behaving. We haven't seen any change in the volume of behavior in the last few quarters. So we don't see the volumes worsening. We don't see them picking up. Now if you take markets and slice them in specific areas, you may see bariatrics has a little better performance and maybe thoracic. But in the main, I will say volumes are unchanged from what we had reported.

Coleman N. Lannum

David, do you have a follow-up?

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

And just a follow-up on the Pharmaceuticals business, I think the most glaring change is on the Specialty Pharmaceutical business versus what you presented from an end market growth perspective this year versus last. Let me just talk about the dynamics in that business. Has the pricing environment worsened materially? Has the pace of product approvals changing? And what's driving the big delta there?

Matt K. Harbaugh

Yes, on the Pharmaceutical business, if you break down, especially Generics franchise, it has been much more stable over the last year than we saw this time last year. We also had the fentanyl patch, which we brought into the marketplace and we'll get a full year of that as we move into next year. We also have a number of very small products that we're going to bring into that portfolio in fiscal year '12. So I think especially Generics business will be more steady and consistent as we move forward. Where we have more significant growth will be in the branded portfolio. We're looking to nearly double the sales volume in EXALGO and also continue to see success with PENNSAID. We've also been successful this year with our API franchise. That business, if you looked at our presentation this time last year, had some declines in previous years, and that business has also stabilized significantly for us this year. Turning to the imaging side, pretty consistent and steady would be what I would forecast as we move forward over the next year.

Coleman N. Lannum

It would be fair to say, though, we put these numbers together last year, I think we had hoped for better long-term growth on the API in contrast business than what we're seeing today. I think as we look to the new ones, that's probably the 2 pieces that have declined the most, if you will, last year versus this year. Is that fair?

Matt K. Harbaugh

That's a fair point, yes.

Coleman N. Lannum

Great. Let's go over to #2 and then we'll go back to #1.

Thomas J. Gunderson - Piper Jaffray Companies, Research Division

It's Tom Gunderson from Piper Jaffray. Joe did a good job of summarizing some of the headwinds that you're facing and medical technology is facing. And I was wondering if you could give us some specifics, maybe on how your tactics have changed in the last 12 months to adjust to what we're all struggling with to decide whether this is the new normal or not. And whether we're talking about physician employees of hospitals or utilization or a slow FDA or a global austerity, maybe just something that's changed specifically 12, 18 months ago, you'd say, "Well, we don't do that."

Bryan C. Hanson

I think probably one of the most relevant things that we've seen is probably a change in the way that we focus on key account management. And key account management for us would be in the U.S., for instance, group purchasing organizations or just large IDNs or healthcare groups that kind of function together. And what we've really done is to increase our focus from a key account management perspective to ensure that we have better contracting strategies, and that we're showing the value of the products that we bring to market at a higher level. Joe mentioned the fact that you've got clinicians that still make a lot of decisions, but the economic decision makers are becoming much stronger. So we've really shifted the way we focus on the customer to ensure that we're telling the right story at a very high level of the economic decision maker. Again, most of that has happened in the key account management group. Anything anybody else has?

Joe Woody

I would just say the I see a bigger focus on economic outcomes in our studies and we plan for that as we look at our products. And we're dispassionate about where we spend. We spend in the high-growth areas that's different than the past.

Coleman N. Lannum

We're going to go to #1, then I'm going to go to the Internet, then I'll come back to #2 again.

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

Joanne Wuensch from BMO Capital Markets. 2 questions. There's been a lot of speculation about divesting, spinning off the specialty pharmaceutical or the whole pharmaceutical franchise. The form of [ph] us, we'd love to hear your current thoughts on that? And no disrespect meant, but if you are keeping it, where are you in hiring a permanent leader for that franchise? My second question is you put up a slide there talking about doubling the emerging markets footprint aspirationally over the next 5 years. What does it take? What kind of investment will it take to get there?

Coleman N. Lannum

Joe will take the first part of the question on Pharma, and then Brian, you can follow up with Emerging Markets.

José E. Almeida

Joanne, we have a very, very laser-focus discipline in running our businesses to extract the highest profitability in the market and the growth of the businesses. So right now, we are really focused in doing that for the Pharmaceutical business. I've said this many, many times. If we get offered good money for any of our businesses, any of our businesses would be for sale. It's just a matter how much money people want to pay for it and if we're willing to accept how much people will pay for our businesses. Second, in terms of hiring a President was just a matter of days. I will be able to announce something in a couple of weeks. We're very near our candidate. We are very, very close. It was an unfortunate thing, but the logistics of the whole process that did not have it faster. But we're very, very close to get somebody on board.

Brian D. King

I'll take the second part of your question. I would say how we're going to double the plan and we've had some strong growth for the last several years. I would answer that 3-part answer. First of all, we have very strong sponsorship from the senior level of this organization from Joe to the Board of Directors, to the leadership that's up here on the stage. It is a unified effort to target emerging markets. And why would you target emerging markets? Over the next 9 years, these markets are going to grow an aggregate 11% to 12%, from a $900 billion spend to $3.5 trillion in spend by 2020. So it makes a lot of sense. That's not in of itself anything awe-inspiring. What's very important to note is, second, I would say we have a well-thought-out strategy that has a 6-chapter strategy that took us much time. I just spent 3 years in Asia living there, and we had a great team to build the strategy out that focuses organically and inorganically on how we can grow. We've talked about the 1,100 sales reps we're putting mostly in Asia. We're also building that infrastructure, enterprise systems, looking at sales, management systems, sales tools, looking at tools to help us look at transparency through supply chain and also focus on talent. Talent is extremely important to retaining and developing talent in the markets that we have is a critical. The other side is in both strategic marketing, making sure we understand the markets to develop the right products. We have development assets in place now in China, Singapore and India. And they're mostly focused on exactly developing tailored products for our markets. And we're working as well with the business unit leadership and their development groups to build products for these emerging markets. So it's a two-fold approach. And lastly, I'd say, we have business development now in emerging markets. We have it in the businesses

and we have it at corporate, all looking at mostly adjacencies with spaces that will help us grow, and we're not afraid to utilize that DNA. And that's something for us that gives us the full thread and the ability to grow in exceedence of market growth.

Coleman N. Lannum

Okay. I'm going to switch over to one of the questions we've gotten from the Internet, then we're going to 2 and then back to 1. And this is a question we've been getting a lot lately. So it's certainly very timely, and Dr. Tarnoff, this is probably for you to address. The question is, it addresses the current environment in Medicare and the political environment in Medicare, and it's what type of impact do you expect from the possible Medicare cuts discussed during the recent debt ceiling process?

Michael Tarnoff

Yes. So certainly an issue we have paid a lot of attention to. And as you sort of analyze Covidien, and Joe did a nice job of articulating the classes of trade and the diversification that we have, if you look under the hood and the details of that, we feel pretty well-positioned. I can't sit here and say that Medicare cuts are good for the healthcare industry. But if they're going to come, our company in particular and the classes of trade and the procedures we deal with are particularly well-positioned, and we even think somewhat insulated. We largely come under DRG reimbursement, so we don't have a specific focus in unique product codes from Medicare. We have procedures that tend to be on the higher acuity end of the spectrum. Just having this conversation discussion with a few of your out in the demo room. But that higher acuity area tends to be away from the focus of cost cutting. When you talk about cancer care and life-saving procedures, like those that you see on our Vascular franchises in particular, are somewhat insulated from this environment. And I think the most significant thing and probably the detail that we've looked at the most recently is the average age of our patient population. All the products that you have the opportunity to look at, those products are used in an average patient population that is typically well below the threshold for Medicare coverage. So whether you're looking at the Endomechanical franchise, perhaps a colectomy procedure, a thoracic procedure, a hernia repair, a gastric bypass, the average age of patients undergoing those procedures are down to the 50, 55 range or so. When you look at our Peripheral Vascular franchise, we see a little more exposure there because that average age is slightly higher. But on average, if you look across the portfolio, there's a relative insulation from this for all those reasons.

Coleman N. Lannum

Got it. Thank you, Mike. We're going over to 2 and then back to 1.

Michael Matson - Mizuho Securities USA Inc., Research Division

Mike Matson from Mizuho Securities. I guess, just as a follow-up to the question on Medicare, and I realize that Covidien does not have a lot of exposure to capital equipment, but do you expect any sort of different amount of pushback from your hospital customers with regard to your disposable products versus your Capital Equipment products as some of the Medicare cuts play out?

Coleman N. Lannum

Really, our biggest capital size, probably for Pete and Bryan, just want you to both take that and then Jim, you might want to talk a little bit about what's going on, on the disposable side as well so.

James C. Clemmer

Well, specific around the capital approach has been in the hospitals. I don't think Medicare discussions have been in the discussions in the recent past. Last 18, 24 months has all been about what hospitals are going to pay for, what they need from the infrastructure standpoint and the capital moneys they're budgeting for equipment versus other needs that they have for capital equipment and building facilities. As you know, there's a huge mandate from an IT perspective to be conforming by 2014. So I'd have to say that we're pushing up against the priorities within the hospitals more than we are pushing against any the Medicare cuts. In the Ventilation business, while you're spending anywhere between $15,000 and $25,000 for a piece of equipment that really does not generate any revenue for the hospital. So it's pretty tough slogging in today's market. It's not only in the U.S. but also in the EMEA and emerging markets.

Bryan C. Hanson

Yes, I don't know if I'd have anything really significantly different to add. I would just say that it's a capital in general -- from my business is a relatively small percentage of the business. And when you look at it from an expense standpoint, from the hospital, it's a small expense as well. But we don't have high-ticket items. So I don't see any major impact as a result of the changes.

Coleman N. Lannum

Joe, why don't you talk about just general price that you've seen?

Joe Woody

Sure. When it comes to many disposable medical supplies and disposable devices, we've seen price pressure for many years in the space. So it's not really a new area for us. These products have been under pressure for many years by hospitals looking to cut costs. Good news is our people are used to it, we're good at it and we have leverage throughout the supply chain that we can use. We're usually one of the largest suppliers into the distribution channel that go on to our hospital and non-hospital customers. We're also able to sell, as you saw earlier, our bundle of products together, where people might get continued value by choosing a few together. But there is price pressure, it exists today and has existed for a while in the space, and we're good at handling it.

Coleman N. Lannum

And just as a reminder to everyone, because I know the capital equipment question is one in everyone's minds, we've said this before, our entire -- for Covidien on a worldwide basis, our entire exposure to all capital equipment is well under 5% of our overall sales. The vast majority do come in consumables and disposables.

Jason Wittes - Caris & Company, Inc., Research Division

Jason Wittes from Caris & Company. If I look at your growth for the last several years, especially the operating leverage, it's primarily gains in gross margin and tax rate. But it have really allowed you to reinvest in SG&A and R&D. And so my question is 2-part. First off, I understand that you've kind of been playing catch-up in the R&D and you're pretty proud of your productivity. But does it anticipate a new -- changes, potential changes to the FDA, which especially given that a lot of your competitors especially are having problems with product delays, although I think if I ask you guys across the board you would say different things to me. And then secondly, as it relates to that, on SG&A, I did notice that you talk about optimizing SG&A more so than before. But does part of that offset by further investment in emerging markets and how do we think about that?

Coleman N. Lannum

Before we get started here, I want to, whenever Chuck comes up, he's going to go into a little bit more detail on that. So make sure you repeat that question for him later on today. But having said that, why don't we go through this real quick? Particularly perspective on the FDA and maybe each of you could just, in a bullet point or two, talk about some of the investments you've made on the SG&A side of things that has been funded by gross margins over time.

Bryan C. Hanson

So I'm going to answer the question based on what I think you asked. When I look at SG&A spend and optimizing efficiency in SG&A, I look at it from a broad perspective to say, dispassionately, where do I have opportunity to grow the business? What has the most, not just today, but the growth potential in the future? And in those areas that we're in today that aren't potential big growth areas for me, how do I begin to transfer resources, not just in research and development but in SG&A to those higher opportunity areas? Joe talked a little bit about it in his presentation, the increase in focus around portfolio management. And we all look at portfolio management, not just in the way we're going to spend research and development dollars or acquisition dollars, but also how do we structure and go to market in SG&A. So I think you're going to see the biggest impact coming from that. Just a discipline around admitting to ourselves when a technology is over the hill, if you will, and start to decelerate expense there and refocus the expense in other areas that are higher growth opportunities and better margin. From an FDA standpoint, I'm still going to concentrate on innovation. FDA has become more less predictable. But I do believe we're still going to get products through mainly 510K. So although there's less predictability, I still think we can get products through so we're going to focus on bringing innovations to market. So hopefully, that answers the 2 questions.

Jason Wittes - Caris & Company, Inc., Research Division

I mean most of your products are not implantable, so imagine you had less resistance from the FDA than say, a surgical mesh. Is that a good way to think about it?

Bryan C. Hanson

Yes, they're mainly pretty straightforward 510Ks. That said, we are seeing less predictability around timing of when we're going to get those approvals, claims or what have you from the FDA, but not to the extent where I would change my strategy around innovation.

Coleman N. Lannum

Pete?

Peter L. Wehrly

Partly off of what was just described by Bryan. From my point of view, having run the Respiratory business, even though we don't report it publicly, within our businesses, we do practice portfolio management, as Bryan described, and that's not just R&D or acquisitions. It's also funding your SG&A proportionately about how the business can grow, what investments you have made and how the fast the market's growing. So we dispassionately put sales forces together and spend infrastructure dollars based on the different portfolios. Specifically around the FDA, in our view, specifically at Respiratory, I think we're a little bit mystified by what 510Ks are now going to have to be supplemented with some clinical data. So I think that's a little bit up in the air from our point of view, specific around ventilators and that type of technology. So I think there's just a little bit of mystery.

Coleman N. Lannum

Jim?

James C. Clemmer

The Medical Supplies business has a lower SG&A profile as part of our model, starting with the lower gross margin model, obviously. To maximize our profitability, though and not to give up sales leverage, we've employed a new telesales model we've put in place a few years ago. So now we've moved about 15% of our acute sales efforts towards a lower cost telesales model, able to put more of our slower growth and tougher markets there, lowering our sales costs. Then we're able to utilize our more expensive field sales presence and higher growth opportunities. It's working well for us. We'll see that percentage get larger over time.

Coleman N. Lannum

Matt, why don't you talk about the SG&A that you've been spending, specifically the part of it as well.

Matt K. Harbaugh

Yes. We've done some very significant restructuring over the course of the last 4 years, and there has really been 2 primary focuses there. The first has been taking out businesses through divestitures or eliminating product lines where the costs were very burdensome and the returns were not worth the effort involved. And we've translated some of the economic returns from that by investing in higher-margin opportunities such as EXALGO and PENNSAID, as well as investing further in R&D to bring our pipeline through. We've put more money in R&D over the last 4 years than where we started. So we have gotten significant leverage. We've also really looked at a lot of restructuring programs both in supply chain, as well as more broadly, to make sure that we are as efficient as possible in every market we do business in around the world. We've driven a lot of efficiencies out of our U.S. portfolio. Turning to your question around the FDA, we have been very successful in getting a number of product approvals over the last few years. What we have done in our strat plan is we've adjusted it to reflect some of the timing delays that seem to be occurring in the pharmaceutical industry as far as getting approvals and adjusted the strat plan accordingly so that we don't have surprises. But generally, our productivity out of our regulatory group and in R&D group has been very high, and we've been very blessed in that way.

Michael Tarnoff

And so we've invested in sales territories and in R&D to enhance the value of the ev3 acquisition. I think that was noted by Joe and Chuck in the recent earnings release, because we're seeing the growth trajectory increase from ev3. Our experience on FDA has not been a bad one, it's been a good one with acceleration of the PMA for pipeline. I think that has to do with the studies and the preparation for the approvals.

Coleman N. Lannum

Brian, do you want to add anything to that?

Brian D. King

Yes. I think from the emerging market standpoint, it's certainly not a one size fits all. What we do is basically, when we talk about growth plans and the number of sales reps, for instance, that we're putting in Asia, we don't spread those evenly. We are looking at the higher-growth businesses and the higher-margin businesses. It just so happens the higher-margin business are higher-growth business as well. So most of those sales reps are going into Energy and Surgical and Vascular. And so it's a double entendre in that we get the benefit of the higher growth and the higher margin. We also utilize, from a channel perspective, distributor partners quite effectively in lower-margin products. We utilize distributor partners in supplies, in respiratory, ventilation especially, and we've utilized those quite effectively. So hybrid commercial models and strategies to utilize and best leverage SG&A is part of what we're doing.

Coleman N. Lannum

Okay. More hands please? Okay, we're going to go to 2 then back over here to #1. And then we're going to go to another Internet question. Go ahead, David.

David R. Lewis - Morgan Stanley, Research Division

It's David Lewis, Morgan Stanley. I guess this is 2 quick questions. First on emerging markets for Brian. You talked about emerging market actually being the single biggest growth driver of this company in the next 5 years, going from $1 billion to $2 billion. I wonder, is that going to be an accretive to corporate EBIT margins? If so, when do you see it being accretive to corporate EBIT margins?

James C. Clemmer

I'm going to look at Cole for that to see how -- why don't you address this? Clearly, in the short term, as you just talked about, there's a big investment on there. Talk more broadly about what the profitability profile is and where you expect to be over time just stay away from too many numbers?

Brian D. King

Great. Our profitability profile is not dissimilar to the mature markets. Certainly, we're making an investment, a significant investment, and we've accelerated any dilutive phase of that investment. I won't go into the exact details, but we're going to dive into that tomorrow at 7 a.m. with my internal team. But it's a good story. In fact, it's such a good story that we're doubling down on those investments. Joe mentioned we're looking at a 5- to 6-year horizon to double the size of the business. That's because from a company perspective, the credit rating is there. We've done what we've said we're going to do over the last couple of years, and we're accelerating. And actually, we're ahead of plan and we're hiring ahead of plan. So we're hiring the 2012 folks right now because we've had success in that degree. So the return on capital has been significant. And it's been something from a macroeconomic perspective, it makes sense for us.

David R. Lewis - Morgan Stanley, Research Division

It sounds like your ad mature market margins today, you would expect to be a mature market margins in 5 years?

Brian D. King

They're not dissimilar, I'll say that.

David R. Lewis - Morgan Stanley, Research Division

Just a follow-up question, if I could. Just on this idea of medical device taxation, maybe a question for Joe and a question for the panel. Various companies across the continuum were either in the sort of repeal, absorb or passthrough the medical device tax. So I want to get opinion on where Covidien sits on those 3 dynamics. And specifically for the division managers or segment managers, where do you think you could pass through the tax? Do you think in the areas where you're growing faster and there's greater innovation, you can go to your customers and pass the tax and then, ergo, the ones that have less innovation, you think it is going to be more challenging? So that perspective would be valuable.

José E. Almeida

We will not comment on our strategy in terms of how we're going to internalize the tax. Despite the fact that we find the tax to be not fair and not done in the way that should be done. The mechanics of the tax are not established by the IRS yet, and we'll keep confidential to Covidien how we're going to deal with the tax itself in terms of passing or retaining, how we're going to deal with it. Chuck, do you have anything to... Okay.

Coleman N. Lannum

We're going to have Mike.

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

Mike Weinstein, JPMorgan. Investors are struggling with slower healthcare and markets in particular in the device industry and are searching and struggling to find new end markets in which companies can participate in. So I was very interested in Joe's comments about white spaces and the company's increasing efforts to identify appropriate spaces for new opportunities. It would be great to hear from Bryan, Pete, Joe about areas where they see new market opportunities. Bryan, maybe Sonicision could be described as a new market for the company? I would be interested in hearing from all 3 of you in terms of new markets adjacencies or portable white spaces that the company is looking at or could see as incremental opportunity over the next 5 years?

Coleman N. Lannum

Maybe what we'll do is, we'll turn it around, start on that end. Joe, why don't you go first and come this way?

Joe Woody

Just make sure, Cole, that you're comfortable that we share white spaces that we're looking at currently, competitively or... [indiscernible]. I can speak to that because we have 2 spaces right now, ischemic stroke and flow diversion, that despite the fact that we're already in those spaces, there's tremendous runway growth that I think is going to be great for our Neurovascular business. The other thing to think about is that we service customers now vascular surgeons, interventional cardiologists and neurologists that use a whole host of other products that we can either organically develop or look at bolt-on acquisitions or technologies. And some of those types of technologies could be things like you would think about triple A, you would think about hypertension as an example.

Coleman N. Lannum

We'll go to Bryan. Why don't you add...

Bryan C. Hanson

It's better to go first because you get to say anything. It's easier. What I would say is a couple different ways that I look at it. Lifecycle management is extremely important in the way that we manage the business, either in the businesses that we're in today. So those core businesses that we're in today, we're looking at new growth areas. And so I'll take first kind of in the businesses we're in. We look at categories that we have today, and we start to kind of dissect those and we look at what would be the most -- the best opportunity from a runway standpoint to invest our dollars. So you brought up a good one. We're in Advanced Energy today. There are segments of Advanced Energy, for instance, that we don't play in well today. Sonicision, Small Jaw, are those opportunities where we can double down in a very attractive space that we're already in, we take advantage of areas that we haven't played as well in the past. So that would be one. The second thing that we do is also look at other opportunities for growth that would be strategically aligned to the business that would give us future runway for growth and would take some of the risk out of the categories that we're in today. So it's not just the core areas that we have kind of, again, doubling down from an investment standpoint there, but also looking for new growth platforms to take advantage of strategic links to the business.

Coleman N. Lannum

Anyone else want to address it? Pete?

Peter L. Wehrly

I'm happy to. I think in the Respiratory business, Joe has spoken about the vascular business, I think there are areas in our business that we do have gaps. Specifically, what comes to my mind is we really don't have a ventilator system that's appropriately, from a product perspective, has the right features for markets that Brian is playing in. We have high acuity for U.S. and the EMEA, we have portable ventilators. So we have a bit of a gap there, that I think is probably in our wheelhouse that we need to address and identify, especially as these markets continue to grow. If we look over like Bryan just described, lifecycle management, this patient portfolio management, clearly the airways space, are probably not a lot of areas for us to grow in that area and white space maybe some small adjacencies. Now I'm very excited about the patient monitoring business and the white spaces and adjacencies that we feel that we can participate there in the longer run based on all the issues going on in healthcare. As we've talked out of the hallway, with several of you, all the patients are coming to the general care floor much faster than ever before. And they're a little sicker than they used to be. So we're working very hard to make sure we have technologies that address those issues. In combination with those patients not going to general care floor, the percentage of nurses to patients is getting more widely -- anywhere between 12 and 15 to 1. So we need to address their needs to make patients safe and effective and also understand what healthcare that they need to address in those acuity settings.

Coleman N. Lannum

Okay, great. I'm going to go to an Internet question then we can go to number 2 in and back to #1. So this question probably better for Bryan Hanson and Dr. Tarnoff. And again, it's a question we get a lot, is what is your opinion on robotic surgery? And is Covidien developing products for robotics?

Bryan C. Hanson

I'll start, Mike, and pass it over to you. So I got this question a lot in the breakout session as well. I think a lot of people in the healthcare industry are getting the same question. I was also asking some of the investors their opinion on it. I'm smiling a little bit because it is one of those cases in the current embodiment of robotics that's a bit of befuddling. Joe mentioned I thought very well that there are a couple of characteristics that you need either in a procedure or a technology to typically get sustained adoption or widespread use in the marketplace. And that's -- you got to have a clinical superiority platform or you've got to have an economic benefit, and probably preferably in today's market, some combination of the 2. And so when I look at Intuitive and I look at the traction that they're getting in the robotic procedures, it is surprising to me because they don't bring, from what I've seen, either one of those 2 variables to the marketplace. So for me, when I look at it, I don't believe that it is sustainable in the market environment that we're playing in and what's unfolding around us, given the pressures around healthcare costs. That said, they are having success. And when I look at it, I want to put it in perspective, because a lot of people talk to me about it in a way that says, "Boy, if they do well, you're in real trouble." But with all the hubbub and all the press around in Intuitive and robotics over the past number of years, it's a very, very small percentage of the market. It's de minimis impact to us during the time that they've had all those press. So even if they continue down the path, I definitely don't see this as a significant or material threat to our business. So I just want to make sure I put it into context. That said, around the, "Are we developing technologies?" I kind of look at this more as intelligent devices. What Intuitive has done, is it's opened my eyes and others' eyes to say that intelligent devices will definitely play a role in surgical procedures in the future, and I would kind of categorize robotics as a part of intelligent devices. So we'll be looking at bringing intelligent devices to the marketplace that are clinically relevant and economically viable so that we can get widespread usage. And as we get closer to those technologies, I'll talk more about them. But clearly, from my perspective, intelligent devices will be a very important part of surgical procedures in the future. I just don't think that Intuitive's embodiment will be that answer.

Coleman N. Lannum

Mike, do you have anything to add to that?

Michael Tarnoff

I think you covered most of it, Bryan; I think the other way to look at this is to understand sort of the stages of surgical procedures, particularly where robotics is focused today. There's the dissection aspect, which is the movement of tissue and the preparation of tissue, the identification of vessels. And then there's the resection or the division of tissue, the sealing of tissue, which is where staplers and energy solutions are applied and then removal of tissue from the body. Robotics today is really all squarely focused on that dissection enablement. And while that value proposition really hasn't been borne out or proven in empiric [ph] Literature, there is reference to value in the fact that visualization has changed, ergonomics have changed and patient demand is there. Whether that value proposition can sustain itself at the cost of that system to the healthcare environment, I think it's highly debatable and potentially suspect. But our focus on the resection, the division, the sealing of tissue is decades in the making and is hard to replicate. So we feel very, very good, Bryan alluded to it. The impact that robotics have had on us today because of that dissection focus and because of the procedure focus, if you look at the procedures where robotics have had some uptake and some penetration, they're independent of the core procedures that Covidien focuses on today and for the foreseeable future. So that impact is minimal and the bar is set rather high for any kind of penetration or any kind of market share gain into areas that we have spent decades innovating, have all the institutional knowledge, have all the supply chain relationships and the capability and the competency to bring those technologies to market around vessel sealing and dissection and stapling.

Coleman N. Lannum

So we're going to go over here to #2 and then back to #1, then we'll go back to #2 again.

Matthew J. Dodds - Citigroup Inc, Research Division

Matt, Citigroup. Brian King, for you first. There's been a lot of industry discussion about locally targeted products in emerging markets. When do we start to see them and how long will that process be before you have a good stable to address tier 2?

Brian D. King

All right. Yes. We have been working on locally and what we call tailored products. We will see the first of these tailored products in the third and fourth quarter next year, and then we get into a cadence in the out years of 3 to 4 of those types of products a year.

Matthew J. Dodds - Citigroup Inc, Research Division

And then a quick one for Bryan Hanson. On the ultrasound product, is this going to be 3 things, about a tiered rollout or is this going to be a little more of an aggressive rollout versus say the stapling technology?

Bryan C. Hanson

Sonicision, we're addressing Sonicision. They're very different. You really can't compare them. If you look at Tri-Staple, Joe alluded to this in his presentation, it's 30 products in a family where Sonicision is a product. So it's very different. It's hard to compare the 2. What I would tell you is we'll do a limited launch of Sonicision to really get some learnings. It's a bit of a different business model. So I want to get learnings from it. And then we'll go full launch. Once we go full launch, there's no additional phases. That's the product, that's the lion's share of the market that we'll be able to pursue with that embodiment. And we'll go all out. What I would tell you is once we do launch the product, we now have an opportunity to sell it across sales organizations. Not just have the energy-based device organization, also have the endomechanical organization. I would definitely see an opportunity where everybody would have an opportunity to sell that product. But it's very different than Tri-Staple.

Matthew J. Dodds - Citigroup Inc, Research Division

And Bryan, this is pretty typical, for most new products, we have a beta launch, if you will, for a small set of thought leaders and then it launches into a more broad launch?

Bryan C. Hanson

We always do that. But that time period that I'll utilize for Sonicision will be longer than normal, because it's of a different way to go to market that the product is. And I want to make sure we get the right learnings before we go full bore. We've talked before, I get one shot at going after somebody else's market, I want to do it right.

Coleman N. Lannum

Number 1?

Sara Michelmore - Brean Murray, Carret & Co., LLC, Research Division

Sara Michelmore, Brean Murray Carret. Just in terms of your market leadership positions and then product areas, specifically that you have those positions, with all that's going on in healthcare macro backdrop right now, what specifically are you doing in each of your areas to not only defend or maintain your leadership positions, but actually take advantage of the environment to actually extend the leadership in your specific areas?

Coleman N. Lannum

Go ahead.

Bryan C. Hanson

It's good to be next to you. So specifically, if I look at the macro environment, it is a -- there's a risk but there's an opportunity to get out ahead of I think to your point. There's a lot of things that we're doing around changing the messaging and who we are communicating to and what that right message is from a bank proposition standpoint and putting key account management infrastructure in place as I talked about before, but putting the right messaging clinical data in front of them that really applies to the value that our products bring outside of clinical value. We've gotten out ahead of that, and we have tools in the marketplace today that I think are ahead of the competition and that's really helped us. I won't get into specifics, but there are tools that we're using through iPhone technology. It really relatively inexpensive apps that we've created that allow this to be very material for our customers and digested by the customers. So we've taken that as an opportunity. I think we've jumped ahead of the competition in this area.

Peter L. Wehrly

I think what I'd like to add to that is just the view point of being more of a clinical type of sales. Several of our sales forces, in probably most of them, we have added incremental clinical specialists that really truly understand the clinical benefit of our technologies and also the economic benefits of our technology because today's market is there's just not one sole decision-maker, so we're talking to the actual person that actually utilizes the product all the way up to the carpeted hallway. So I think that's been a big change, I think, that we've done to really address the changing market and then the additional robust investments we've made in our clinical and economic evidence areas under Mike Tarnoff and collectively within the businesses, laser-focused on making sure that we have set the hurdle that if our new technologies don't prove both economically and a clinical benefit over what's in the marketplace today, we probably shouldn't be launched in that market so that's our hurdle rate.

Joe Woody

In the Medical Supplies business, we've also watched our patients migrate from the areas of care that we knew them well. So the follow -- make sure that we maintain our -- the adoption rates of our products being used. We've put specialty focus in sales forces on the home care and extended care models to follow those patients outside of the hospital, where their growth rates are much higher. So we've used internal specialized selling resources and partnered with external channel partners who have expertise in those areas to combine our strength to follow that patient and hopefully grow outside of the hospital.

Coleman N. Lannum

Any other comments? Okay. We go to #2 and then Alice, right behind him, for #2 and then we'll come back over to #1.

Frederick A. Wise - Leerink Swann LLC, Research Division

It's Rick Wise, Leerink Swann. Two more specific questions, first for Bryan then maybe for Pete, if I could. Bryan, as the new head of your business, I'd be curious to hear what your thoughts are as you take over the division, what you're going to emphasis or what changes that we might see that maybe specifically as well talk about the power instrument launch and what kind of impact that could have on growth, mix, profitability over the next couple of years?

Bryan C. Hanson

Sure. I'll tackle the first part of the question. The businesses that now that I have just fit. So it was a natural step, natural evolution to bring them back together. What I would say right out of the gate, I look at opportunities like Tri-Staple, I look at Sonicision which was a question over here, I look at products like Small Jaw, these are game changers. These are really technologies that can get the peak sales quick and move market share. The difference that we have now, we'll implement this right away is how do we take advantage of the significant infrastructure we have around the world between the 2 businesses and make sure that everybody gets an opportunity to sell those products and we can move share quicker. I think leverage across the businesses from that perspective, as well as contracting the key account management piece that I talked about will be across the businesses rather than independent of -- individual in silos. So that's one of the biggest out of the gate. From a future standpoint, we service a lot of the same customers. We do it with different modalities, but we service the same customers. So the question is how do we start creating embodiments or ideas of embodiments that would combine in modalities to provide better patient outcomes? And better solutions for our customers? So that will take a little longer, but it's something that we'll be concentrating on. Specifically, on iDrive, power stapling, intelligent stapling, I want to put that into context. We're very excited about power stapling. iDrive is already the market. We're focused on open colorectal procedures today, specifically lower anterior resections, but that's a relatively small market. Again, it's the whole idea of let us learn what's important in intelligent stapling and then later, towards the back half of 2012, we'll launch the iDrive Ultra, which will give us access to laparoscopic procedures and vas procedures, which is really when the thing starts to crank up. But we'll do that on a limited-launch basis. And some time, towards the beginning of 2013 is when we'll actually go full launch. So just from a perspective and context, you got to think about powered stapling and intelligent stapling as a real material impact sometime later in 2013. Up until that time, it's learning, getting our traction, making sure that we have the right embodiment of the product and then we'll go full from there.

Coleman N. Lannum

And Rick, do you have a follow-up?

Frederick A. Wise - Leerink Swann LLC, Research Division

Yes, for Pete. Pete, I was struck listening to Joe talk. Clearly, strong emphasis on growth, thinking about acquisitions, he meant growth. He put up the table with the 5%, 6%, 7% growth for the rest of divisions, but airways and ventilation, obviously, falls below that. What's going to -- I don't know if turnaround is the right word, but what's going to get that business? What do you need to have, say get that business closer to the average of the other businesses? And is it acquisition? Do you have -- that some of the new products? What's going to change things?

Peter L. Wehrly

Just going to be very, very blunt. I don't believe that there is a way to move the airway market growth from 1% to 2% up to 5% to 7%. I just don't think the capability is there. But what we've seen with technology, I don't see any technologies that would be a game changer because that's a big market. We have large market share, and I don't see a pathway to do that. We've talked a lot about portfolio management, and we're managing that portfolio based on the market growth, we're investing in the right areas, we're cutting back on the SG&A and in certain areas, we don't think the market is growing fast, that can keep up with overall Covidien's growth profile. So I wouldn't suggest to you that we have some magic pill that all of a sudden we're going to be growing that marketplaces between 2% and 3% and it will magically be at 5% to 7%. We're working very hard to outperform the market growth. I don't believe we'll have a quiver -- an arrow in our quiver -- to make it 5% to 7%, but we're sure going to try.

Coleman N. Lannum

Okay. We're going back here to #2. Can I see the hands again? And we've got several over here on #2, let's start. Bob, go ahead.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Bob Hopkins, Bank of America Merrill Lynch. A couple of question on Energy for Bryan. First of all, cold you just be specific in terms of when are you in that sort of full all-out launch for Sonicision?

Bryan C. Hanson

So right now, what I'd be willing to say on Sonicision is that we're going to launch in the first half of '12. And when I talk about '12, I always talk calendar year. My goal is to do an all-out showing of the product at stages. And then depending on where we are and if I feel like we've got all the engines running, we'll go full bore there. But I'm going to commit to first half of 2012 and probably not get more specific than that.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Okay. And then also in Energy. Could you comment on changes, new technology entering the marketplace there, the combination technology? And do you think that's going to show up in your numbers temporarily while you get some trialing and just some comments on J&J's new launches as your #1 competitor?

Bryan C. Hanson

Yes. So there's 2 facets of the launch: it's the combined generator, which combines ultrasonic modality with RF; and then it's the new product that takes advantage of some that, which is the G2, which is much like our Impact product, which is an open vessel sealer. So right now, I have all the respect in the world for J&J, a great competitor. I believe that particularly on the RF side of the business, they have an inferior technology, and that's played out in the marketplace. So the good news for us is even with a new generator, although it's combining 2 modalities, it hasn't, from what we can tell, it hasn't made them better. And the G2 that's been launched is using the same RF technology they've been using in the past with EnSeal, and we've been able to defeat that in the marketplace. Trust me, I'm worried about them. They have great contracting ability, a very good marketing capability, but we've won in the past around that technology. And from I've seen with the new G2 and the new box, nothing's changed relative to performance. It's just taken 2 niche generators and put them in one box.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

So you're not worried about it impacting your numbers?

Bryan C. Hanson

I'm always worried, but I'm not worried about it impacting my numbers.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Okay. And then finally, on the market, Joe gave some projections that were a little bit different for Energy than the last time we spoke at the Analyst Day a year ago, just by one point. And I'm curious is that a function of pricing getting a little bit tougher or is that just a function of your markets getting a little more mature?

Bryan C. Hanson

Could you ask your question one more time? I'm sorry.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Sure. For energy-based devices, the market projections that were given for the next 5 years came down by 100 basis points relative to what you gave one year ago. Is that a function of a tougher pricing environment? Or is that just a function of a more mature marketplace?

Bryan C. Hanson

I think it's more mature. I mean they the kind of go hand-in-hand, right? I don't know if you can disconnect the 2. As you see more entrants, whether I'm materially concerned about any one of them, there are multiple players coming in the market. We always knew that would happen. And so when that happens, you're entering a more mature phase of the lifecycle, and pricing always becomes a part of that equation. Key for us is to make sure that we have technologies and we have them now that we've already launched, and we have the technologies in the portfolio that will continue to change the game so that we can hold onto our premium pricing. But I think it's some combination of the 2.

Coleman N. Lannum

And Rick, I want to add to that too. Remember, some that's a little bit of law of large numbers. The entire market has grown so fast over the last several years, it's just a bigger market -- and that's consistent with what J&J has said as well. We're going to go back to #1 and then #2.

Kristen M. Stewart - Deutsche Bank AG, Research Division

Kristen Stewart from Deutsche Bank. I was just wondering if you could comment on your Europe. That's obviously's been a little bit slower. A lot of what you've been discussing right now is they're more focused on changing the strategy to adapt to the U.S. [indiscernible] Environment. Just wondering what you may be doing differently in Europe from a strategic standpoint that may help you weather the storm and just get an update on what you're seeing there overall.

Coleman N. Lannum

So who wants to take the Europe thing first? Joe?

Joe Woody

So we're not seeing an impact in Neurovascular as much obviously. These are very serious cases. We see a small amount of impact but not great in Peripheral Vascular and more so around austerity and products like compression and tent [ph] stockings or dialysis. But they aren't significant enough that they dramatically impacted our growth trajectory. And it's more about additionally on right studies, health economic discussions as well.

Coleman N. Lannum

Pete?

Peter L. Wehrly

I'd have to say that in Europe, more than ever, we focus country by country. We used to peanut butter Europe, and that is no longer what you can do. And then we see a lot of differences between the U.K., Italy, Spain and every country is different. So we kind of specifically understand what's going on in each of those countries and address it specifically. Again, the Ventilation business is awful difficult. And again in Europe, like in the U.S., capital spending is tough. We know that there's a lot of austerity programs, including having doctors go home at 2:00 in the afternoon in Spain so they can't use any products prospectively after that. So we look at each one very, very carefully to make sure we understand how to be successful in those market places.

Coleman N. Lannum

Bryan?

Bryan C. Hanson

I don't know if there's anything materially different. One thing I would say that we did do in Europe to take advantage gets into the whole portfolio management piece. Energy-based devices, we never had a dedicated or focused sales organization in Europe, and we recently actually, as of this year, put in a dedicated sales organization to take advantage of the market opportunity there, but you've got to remember, in Energy-based devices, the beautiful thing about it, is it's an adoption game, it doesn't depend on procedural growth. So 1% or 2% changes in procedural growth don't matter as much. And so we've put a lot of focus and increased the SG&A in that area so that we could get additional growth, and that's happened and we realized that in Europe.

Coleman N. Lannum

Joe?

José E. Almeida

Yes. First, just to summarize this, I would say that technology still gets paid in Europe. And the example is Joe Woody's products, Neurovascular and Peripheral Vascular, some of the energy-based products, some of the Tri-Staple, the more commoditized products always have pressure. But as a summary for you, despite the differences amongst all the countries, is we have not seen a change from what we reported for the third quarter, second quarter, first quarter. We've been talking about this, we have not seen a change in the environment. But I would say that technology, if you have it, and it's proven clinically and economically, it gets paid.

Coleman N. Lannum

Right. We're going to go to #2 and then can I see those hands again? Okay. We're going to go to #2, and then I'm going to go to an Internet question and back over to #1, right.

Adam T. Feinstein - Barclays Capital, Research Division

Okay. Adam Feinstein, Barclays Capital. And I have to say I like the Safe Harbor statement with a magnifying glass. So we'll have to start using that in our research as well so...

Coleman N. Lannum

It's funny, our lawyers like that as well.

Adam T. Feinstein - Barclays Capital, Research Division

So I have just a 2-part question. Maybe just first for Joe, just curious to get your thoughts in terms of what, since you've been CEO, what's been the biggest surprise, either positive or a negative? And then just wanted to ask the panel, the company has done an amazing job at taking market share in most business lines. So just as you think about the future, should we think about, and Cole talked about the law of large numbers in response to other questions, so as you think about your businesses, are you thinking more about just maintaining market share is being a victory or is there still market share gain opportunities?

José E. Almeida

All the surprises, all the bad surprise I attribute to Rich. No, there's no surprise. I've been part of the strategy, I've been around for a while and know the management team, the functions that report to me today, they used to report Rich. I have very few changes, all of them reporting to me and it's a tribute to him and the legacy he left with us. So we have a very successful company, and I'm very humble and proud to be part and take command of it. I would let it -- the big opportunity for us is what I spoke to you guys about is our portfolio, is our ability to clinically deliver the products, the ability to economically deliver the products. Those are the things that make me excited. When I go see our customers, I see patients being treated with our products, those are the things that really get me excited. That was sort of the bend of answering your question. They're very exciting areas. I know probably, Joe, you should see some of these areas. But also in the energy and even in monitoring, in Somanetics and aspect products that we acquired, a significant amount of upside. So these guys should be able to take it.

Adam T. Feinstein - Barclays Capital, Research Division

So in our venous vascular business, which is compression, tent [ph] stockings and so forth, there's less share for us to take because we have a strong #1 share positions. There's a lot of share for us to continue to take in the Peripheral Vascular space. And in particular, in Neurovascular, in the Coil segment and obviously, driving the ischemic stroke, the Solitaire flow diversion with pipeline. And it's not only based in the U.S., there's opportunities certainly in Europe, but also in the emerging markets, where Brian King resides. So a lot of share for us to take still.

Coleman N. Lannum

Bryan?

Bryan C. Hanson

So it's an interesting question. Are we willing to stay at our share position or take share? As uncomfortable as this chair is, I'd like to be sitting up here again next year, and if I said to you that I'm comfortable with the same share position, I probably won't be up here next year. So clearly, in every product category, I want to take share. But getting into the whole dispassionate portfolio piece, there are certain areas, energy being one, obviously, that we think we can take real share moving forward. There are also opportunities, even outside of taking share as you're shifting the market. If you look at open procedures versus laparoscopic procedures, there's still a lot of procedures that are being done open that should be moving to the laparoscopic procedures. And we need to be able to get out of ahead of that and enable it, so that ultimately, we can pick up revenue in that way. It's good for the healthcare system because it's a lower cost alternative to open. And quite frankly, in the procedure, we make more money. But it's something that we have to push. So I definitely will be focused on taking share and growing the market.

Coleman N. Lannum

Pete?

Peter L. Wehrly

Yes. From my viewpoint, I look at Joe Woody's business and I look at Bryan's business and certain section within Respiratory, the grass is very green I think we need to take advantage of the ever-changing marketplaces. There's a lot of innovation that is taking place and can take place that takes advantage of the changes in healthcare market. And also at the same time, simultaneously, makes sure that we're set up to be successful in Brian King's area. In some places, sometimes, I'm with Joe and his team and you just don't know where to go first. It's just so exciting, you don't know where to make the first investments first. So are the markets tough? Sure, but I have to tell you, in Covidien's portfolio, we've got a lot of great things that can come to bear. No question in this changing environment.

Coleman N. Lannum

Okay. We're going to go to an Internet question that we've got Glenn, over here #1. And can I see your hands one more time so we have time for maybe 1 or 2 more questions before we break. Okay, give it to Glenn. Before we get to Glenn, there was another Internet question, and this one's going to go to Joe Woody. Joe, this is regarding SWIFT trial. Can you tell us when we will see any data from the SWIFT trial regarding your Solitaire product? And how does the recently announced acquisition of Concentric by Stryker affect Covidien?

Joe Woody

So we are preparing the data for IDA [ph] submission of Solitaire in the U.S. and we're very excited about that. I would anticipate sort of a second half 2012 type of response from the FDA. That is the study where we're looking at substantial equivalents to the Concentric device, which is the mercy retriever. That's the company I refer to that Stryker purchased. I'm not surprised that another company made a purchase in the ischemic stroke segment, because it's extremely attractive and has a good growth trajectory going forward. That said, I really believe that our technology has what could possibly be a year and a half to 2-year advantage over a lot of our competitors.

Coleman N. Lannum

Great. Glenn?

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

Thanks, Cole. Wanted to follow up just with Joe on his commentary on surgical volumes. Just some clarifying points. One, are you saying that surgical volumes are unchanged as of September 7? Or you were referring to surgical volumes as of June 30? Because I know you guys have a policy of not commenting in inter-quarter. Second, on the surgical volumes, are you referring more Covidien's overall business? Or are you referring to the overall market? And the reason I'm asking that is that if you look at hospital volume surgery, hospital surveys, if you look at physician office surveys, they're showing major downticks in the last couple of months. I'm just trying to find the disconnect. So that will be my first question, and I have a follow-up.

José E. Almeida

To answer the second question first, we don't comment in inter-quarter volumes. Your question on the last 2 months, that falls right squarely in our fourth quarter, we're not going to talk about that. But we have not seen changes since we had significant changes in volume last -- in 2010, primarily February then March in 2010, just really tough then April, May, June last year. Since their beginning October this year, we've seen those volumes a little bit of pickup we saw, and then they stabilized. So there's no downturn in volume. Now when I speak about our surgical volumes, I'm not a market forecaster. I speak about volumes that Covidien participates, markets then surgery and procedures that we participate. No, I'm not speaking about overall admission to hospitals, the ratio between admissions and surgical procedures. We can talk more about that, but that's not what we speak about. So we haven't seen -- it's been unchanged in this fiscal year, last 3 quarters , and we don't comment on the inter- quarter.

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

So unchanged as of June 30, not as...

José E. Almeida

October 1.

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

Of last year?

José E. Almeida

Yes.

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

Okay. The reason I'm asking is you've also seen, just over the last 2 months, a dramatic slowdown in the global economy. So we're all sitting here wondering well, that's got to impact surgical volumes and companies.

José E. Almeida

We will comment, we'll get our thoughts together when we release earnings in November, we'll be talking about that. But basically, when I look from October on, when I say no major -- there are variations in procedures that's -- But in the main, and you know our numbers, the way we report, so we haven't seen a significant change between quarters.

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

Okay. And then just over the last couple of meetings, Covidien meetings, you've talked a lot about SILS. And it seems like that's becoming more of a niche product. Is that a fair way to think about SILS? Or does it have more legs to it?

José E. Almeida

Great thing about being a CEO, I can ask Bryan Hanson to answer.

Bryan C. Hanson

I was hoping you were and I was hoping you're -- so all along, SILS was intended to be a niche product, so I don't think there's any major deviation from what we expected of the product. What I love about SILS is that it has allowed Covidien within the Surgical business to be a leader in innovative thought around reducing the number of ports that you're going to use in the procedure. So reducing the surgical insult to a patient. We always knew it would be a niche. We talked a lot about it. We're excited about it. It took off faster than we expected out of the gate, but it's normalized now. It's not an easy procedure to do. I think it'll continue to be a niche, but the products that we've developed to be able to work in a SILS procedure have also helped us gain traction within regular laparoscopic procedures. So all those SILS in and of itself will likely not be a blockbuster for us. It certainly has been great to be out ahead from an innovation standpoint and also to optimize some of our laparoscopic products.

Coleman N. Lannum

Okay. For the last question before we take a break and we go back to the Internet and then we're going to break for a few minutes, and this is a pharma question, so this is going to go to Matt, and the question is what are your plans for growing pharma? Will you stay focused on pain management or should we expect to see you expand into other areas?

Matt K. Harbaugh

Yes, the growth opportunities for our business really are around our branded portfolio as I mentioned earlier, we see upside as we move forward with both PENNSAID and EXALGO. As I mentioned earlier, we're hoping to double the revenue of EXALGO next year. And we've got a really strong team that's focused on delivering that. In the generic space, we also have a number of products coming out over the course of the next 12 months, and we should have pretty good productivity goal from now until 2015, as we look at the generic space. From a pipeline perspective, we have a number of significant branded products that are also going to come out later in that '14, '15 timeframe. And that is part of the reason why EXALGO and PENNSAID are so important to us because they enable us to build the infrastructure and get prepared for those launches in the future. Turning to the imaging side of the pharmaceutical platform, we're going to continue to look for growth, much like Brian in Asia and Latin America. Our Asian business has had a strong year. Looking to our Latin America team to have a strong year as a move into 2012. We also will continue to grow at market rates. Many of the questions earlier, how do you grow above market? We have iPad apps. We have every tool possible to create as many sticky factors with our customers to continue to take share away from our competitors. But the real growth drivers as we look forward are really in the generics and the branded space.

Coleman N. Lannum

Got it. Thank you, and thanks to the panelists for doing this. We're going to take about a 10-minute break or so. We'll be back here at 5 or 10 after 4:00 for Chuck's part of the presentation, and then we'll wrap things up after then. Thank you.

Coleman N. Lannum

Okay. If I can have everyone take their seats, we're going to try to run through the next part of it. As you know now, traditionally, what we do is talk about the 2012 guidance. To run through the overall financials and to get into a little bit more detail as to what we see financially coming over the next 12 months or so, I'd like to introduce Chuck Dockendorff, our CFO. Chuck?

Charles J. Dockendorff

Thank you, Cole. Yes, this afternoon, I'd like to talk about some of the financial results for Covidien but more importantly, talk about the guidance for 2012. I would refer you to the forward-looking statements. We will be talking about some projections and Cole has talked more about that as we look at it.

I'd like to just start off and again, these are our long-term financial goals. You heard a lot about this today, and it really is balancing off the short-term financial goals along with continuing investment for the long-term health of the company. And you can see that we're doing this off of driving a mid single-digit sales growth rate, which is pretty much in line with our market growth as we see it today, and then driving toward double-digit earnings per share growth over time. And we're doing that through operating and financial leverage, through gross margins, improving operating margins, tax rates, as well as other parts of the P&L.

We also are very intent on utilizing the strong cash flow of the business to invest in it and drive both increased shareholder return, as well as further investments in the business for the long-term health of Covidien.

Since we have spun and you've seen the slides that Joe presented, very pleased to report that we have achieved this goal. And we've achieved this goal of revenue growth averaging 7% and earnings growth averaging 11% over this period of time. And in fact, if you look from 2008, which is our very first full year as a public company, the growth since that period of time has been 14%.

The nice thing about this is that while we have achieved this double-digit and this financial growth that we set out to do, we've also strengthened Covidien with some nice investments in selling and marketing, increase in research and development and a much stronger portfolio through a lot of the portfolio moves that Joe talked about. As you look at our sales growth, and this is reported sales growth through the 9 months that we reported in our last earnings call, you can see on an actual reported basis, we're reporting 9% of revenue growth with 7% on a constant currency basis. The majority of this is coming through Medical Devices, which is related to some acquisitions, and of course, clearly, the area that we put our greatest growth into. You can see Supplies is relatively flat and that Pharmaceuticals, because of the divestiture, is down slightly.

Now as we talked about it last year at Investor Day, we had a lot of moving pieces in 2011. We have divestitures, we have acquisitions that we have in here. And so, we've talked about the overall underlying growth rate. And in the fourth quarter, we had the extra selling week, the 53rd week. But overall, we see the underlying organic base growth rate for Covidien this year of 2% to 4%. And Medical Devices, we talked about that organic growth rate of 3% to 5%. And through the 9 months, that's pretty much where we are as best we can assess it, as we look at the detail, and we think we're right in the scope of those ranges and that really hasn't changed throughout the year.

The nice thing about as we move into 2012, the major portfolio moves that we made will be anniversaried. So we will have the full year impact of some of the acquisitions we've done, biggest one being the ev3, as well as some of the significant divestitures that we executed on in the prior years, Sleep, the U.S. nuclear pharmacies, which is really impacting the pharmaceutical sales growth in 2011, as well as the specialty chemicals which we got rid of.

Now the other thing in 2012 is we have the extra week that's going to come up in 2011. As we look into 2012, that extra week provides us headwind as we only have 52 in the next year. And that's roughly around 150 to 200 basis points. That's partially offset with some favorable FX that we see into 2012 as rates as they stand today of about 100 basis points.

So as we look at the guidance for next year by our segments, you can see that overall Covidien, we think, will grow at 3% to 5%; Medical Devices, 4% to 7%, as we see the big drivers in that is our Vascular business, Energy-based devices, as well as those areas in emerging markets which we continue, or expect to continue to grow at a very strong rate. Pharmaceuticals, again, we see now that turning to a positive sales growth rate. A big part of that, of course, is we've anniversaried that U.S. nuclear pharmacy divestiture, but also, we see continued growth in the Specialty Pharmaceuticals, both in the branded and the generic, with the fentanyl patch, the IT, and you've heard Matt talk about some of those opportunities. But one thing here about Medical Supplies, it is reporting a flat revenue growth in 2012. However, as you look at the impact of that extra week in FX, their business is less impacted by the foreign exchange. There's a smaller portion of their sales while Covidien, more than half our revenue was outside the U.S., is not that case in Supplies. So they don't get the benefit of that FX. So actually, if you think about their growth, they're actually growing in the 1% to 2% when you take into the component of that extra week that we have headwind on in 2011.

The gross margin, clearly, has been a big driver of the operating leverage that we've had in the business and has funded a lot of the investments we've made in selling and marketing and research and development. You can see here the 530 basis point improvement over this period, we knew this was a critical element going in. The nice thing about this, we don't give guidance on gross margins specifically, but we expect this gross margin improvement to continue. And you can see the drivers on the right side of this, what is driving this has been what has been driving it in the past. We have favorable product mix, our higher margin products are growing the fastest. We have manufacturing cost savings combined with our restructuring programs, reducing our manufacturing footprint. We've announced new programs, we see continued cost reduction in this area that's going to drive through some of the profitability. This year, foreign exchange is a positive for us in the manufacturing side. And the one thing about pricing, and also refer that back to the sales guidance we gave, historically, we've had a 50 to 100 basis point of pressure in price on our products. We've had this for a number of years, and that fluctuates within that. Within that sales guidance that we gave and it's also impacting us here in gross margin, we're going to be at the high end of that price range. That's what we've factored in and assumed because of the mounting pressures out there in the marketplace.

But nonetheless, we see this gross margin piece of it, that we can overcome this pricing decline with these cost reductions and savings, and continue to grow this accordingly.

As we look at selling, general and administrative expenses, you can see that here is where we've made significant investments in selling and marketing, Medical Affairs, health care economics, BD&L, and we've done it across a lot of our market segments. We see this going up to the 30.6%. A lot of questions around leverage on the SG&A. You can see some of the drivers of what is we see going forward, on this component in the P&L. Certainly, we're going to continue on with some savings around back-office consolidations, which we are continuing on. We've completed Europe. We've completed a big section of the U.S., have another part to go. We have organizational changes as we've combined some of the GBUs. But the things that are going to be headwind in this area are acquisitions and emerging market investments.

And I think the way to think about this is if you think about SG&A, it was pretty broad-based, the investments that we did in this over the last couple of years. Now they're going to be more targeted and there will be a allocation of resources from the slower growth revenue items to the higher growth potentials. The targeted investments will be around those specific areas that we think will offer real good growth opportunities.

You've heard a lot of the presidents talk about that. They're thinking about that, they're thinking about their products, the markets, the growth rates, what life cycle they're in, where they're spending their resources, there's more of this. So we expect to leverage SG&A going forward. We're also going to -- and Joe mentioned a lot of this, although we're driving productivity incentives around our productivity and improvements in SG&A, we're also going to even go harder at that because we know that is the area and what we need to do to fund further investments. So it's going to be a combination of investments and productivity improvements, as well as really being hard on the allocations of where we spend our dollars.

Our research and development, here, this has been consistent again with our guidance, 5% to 6%. You can see the growth of this over the years, it continues to grow in 2011. We expect it to grow in 2012 as well as a percentage of revenue and in dollars. I think the productivity within here has been very, very good, and you've seen it with our new product launches and the number of new products that have come out into the marketplace.

So through all of this, whether it's gross margin, SG&A, R&D, the ultimate game here is to get this leverage. We need to expand this operating margin. So we see the operating margin with the improvement in gross margin, some leverage or allocation within SG&A and a negative headwind from R&D. We would expect to be in the 22% to 23% range on operating income and continue to improve this over time.

On the tax rate, we've made this significant progress on tax rates, you can see dropping from the high of 29.3%, down to 18.3% in 2011. Certainly, this has provided us some good tailwinds as we've achieved that earnings growth and been able to reinvest a lot of that back into the business.

Going forward, we see marginal improvement availability here. A lot of what we do and a lot of our determination of our tax rate is where we earn money around the world. There's a little upward pressure on that as we look at the mix of income, but we do have tax planning opportunities to offset that, and we think also that drives some marginal improvement in the tax rate going forward.

The other thing in this area and it's not factored into it, but clearly, as you look around and see the countries around the world in these troubles, the tax rates and what they're going to do are in flux, but there's certainly pressure to increase those.

The other thing that we really see as a key asset of the business is the free cash flow. And again, in 2010, we have a very strong cash flow with over $1.8 billion that we're projecting to do right now. And we see that increasing to over $1.9 billion for 2011. And this would be capital probably in the $450 million to $500 million range. This is after we invest in our capital equipment for the plants.

So we see this as really a key asset that we need to use correctly into both driving shareholder value, as well as invest in Covidien going forward.

So as we think about our capital strategy, we're sitting here and again, this is a consistent strategy that we laid out a while ago. We want to, again, balance off the return to shareholders and drive that shareholder return, but also be able to invest in the business. And we -- our targeted goal each year is to allocate approximately 25% to 40% to shareholders through dividends and share repurchase. The balance, we would like to invest in acquisitions, and also maintain a strong balance sheet as we go through here so that we have the capability to move on opportunities as they present themselves. So we've pretty much followed this and as you look at prior years, we've done more acquisitions, this year has been a year without many acquisitions in it. We've done some but not many. And we knew we had to assimilate some of the portfolio moves that we did last year.

But we think this is the right balance as we go forward into allocating this capital to both shareholders as well as Covidien.

If you look at what we've done following this policy over the last couple of years, you can see that through 2008, '09 and '10, we've been right in line with that return to shareholders in that 20% to 40%. In addition, you can see that we've increased that much more in 2011. And I'll tell you, in 2010 was a year when we did ev3, a $2.6 billion acquisition, and still, we're able to return a significant amount of cash through dividends and share repurchase to the shareholders.

So in 2011, we've sat here now with $675 million back to shareholders. But in the fourth quarter, I think we just completed -- we had an original $1 billion share authorization program. In the fourth quarter, we executed that and completed and finished that program. We also initiated a new share repurchase program of $2 billion, and we've executed on some of that. So in the fourth quarter, as we sit here today, our fiscal fourth quarter, we've already executed over $500 million of share repurchase, would be in addition to this, what we've already done for the 9 months of 2011.

So at the end of the day for 2011, we're going to be well above our targeted high end of our return of 40%.

One thing about it, we would prefer to do more on the acquisition front. We have strong financial criterias, we look at these things and have not found those opportunities through 2011, though we hope to do more in 2012.

So just going through and just wrapping up the segment guidance, again, this is the revenue and 3% to 5%. You can see the Devices being the highest at 4% to 7%, with Pharmaceuticals coming in at 2% to 5% and Supply is flat. When we get into the components of the P&L, the operating margin improving to 22% to 23%, a tax rate of 18% to 19%. We have a decline in the shares outstanding as a result of the share repurchase activity that we've accomplished in 2011, and free cash flow of over $1.9 billion.

I think in general, as you look at all of these numbers and these guidance around the P&L, I've looked at the first call consensus, both on revenues and earnings per share, and feel very comfortable at this point with where those numbers are today.

So with that, I'll call up Cole and Joe to get some Q&A.

Coleman N. Lannum

Great turn, Chuck. Okay, everyone, same rules as before. We are going to get through as many as we can. Again, please make sure you state your name and affiliation before you start. And in addition to asking questions of Joe and Chuck, feel free, we can also talk about operating things. We have all the other managers here to address them if need be. We'll start with #1, then go over #2 and then to #4.

Kristen M. Stewart - Deutsche Bank AG, Research Division

It's Kristen Stewart from Deutsche Bank. Chuck and Joe, I guess, Joe, earlier you had mentioned that you were looking at deals and that you had a couple that you are looking at today, and then, Chuck, you just mentioned you hope to do more deals. So I'm just wondering to what extent your guidance may include some earmarking for deals so that you don't put out numbers and then have to make any changes in terms of any dilutions?

Charles J. Dockendorff

Well, I think if you look at the guidance we give on the share return of 25% to 40%, the balance of that free cash flow, there is -- that can be used for acquisitions. So it's a good sized number out there. As far as -- we don't build any dilution into our guidance numbers for deals not done. We wait until the deals are done and then comment on them in that respect. I don't know if that answers your question, but if you look at the 25% to 40%, take our free cash flow of $1.9 billion that's allocated to share repurchases and dividends, the balance would be kind of what we would like to do in acquisitions.

Kristen M. Stewart - Deutsche Bank AG, Research Division

Okay. And then just on the pricing side, you had said you were building in high end of that range historically. Can you just remind us where you're tracking year-to-date from pricing perspective and if there is anything that you think is moving? You would work that upper end?

Charles J. Dockendorff

Yes, we're in the middle of that 50 to 100 basis point-type range and we don't see anything dramatic changing out there. We see just a little bit more pressure, I think, in different parts of our business, and we try to reflect that into some of our sales projections going forward.

Coleman N. Lannum

We'll go to #2, #4 and then #3.

Unknown Analyst -

Frank Baberg [ph], FP Asset Management [ph]. I'm just becoming familiar with your firm. What was the net profit for 2010 and the first month in 2011 in dollars, not in per share? Or what you guesstimate it was?

Charles J. Dockendorff

In the first quarter?

Unknown Analyst -

In the year 2010 and so far in the 9 months of 2011.

Charles J. Dockendorff

I don't have that on top of my head. We can get you that...

Coleman N. Lannum

You know what, while we're going through some of the other questions, we'll get those numbers for you and we can give it to you in a moment. Okay, #4, #3 and then #1.

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

I'm Glenn Novarro with RBC. Chuck, a few weeks ago when you reported the quarter, you announced a major restructuring. Can you remind us if there's any benefit that we're going to see in fiscal '12? Is that potentially a source of upside? And then bigger picture, when you're looking out beyond fiscal '12, Joe, someone asked you about the med Medtec [ph] tax. Couldn't restructuring help offset the Medtec tax or any other unforeseen issues that come up over the next couple of years?

Charles J. Dockendorff

We announced the restructuring program, that was the third one. In our next year, we have a significant cost reduction built into our manufacturing costs. We've done that every year. we've been very successful at it. We think it's a real core competency of Covidien, and Joe talked about it in his presentation about how we really have that throughout the organization in every facility. Some of that cost reduction is capital we invest. A lot of that cost reduction is related to some of the restructuring programs that we've already launched. The ones we announced in the last quarter, some of that may hit into 2012, but the majority of that will be after 2012, more into 2013 and '14. If you look at our scrap plan[ph], we have continued cost reduction in these areas going out there. So that's all comprised into what we've built into our gross margin. We really look at it as a cost reduction amount for that component, and restructuring is a component of it.

José E. Almeida

I think to offset the tax, not only the restructure programs but productivity programs in our SG&A, as well as our manufacturing. And also, efficiency in research and development by using research and development facilities across the globe. So there's all encompassing, we would do everything we can to offset that burden.

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

Okay. We're going to #4, #3, #1 and then #2. So we're here, #4. Do we have anyone? Okay, so #3.

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

David Roman, Goldman Sachs. Chuck, you talked a little bit about re-prioritization of spending through SG&A. Maybe you could give us a little more detail on what areas of the business you're taking funding from and to what areas you're committing those. And then maybe as a follow-up to that, when we should start to see a return from those investments, whether those were long-tailed investments or more the near term in nature? And then whether that -- the last thing I wanted to say is whether that is driven by a structural view of the change in your business or if it's due to cyclicality in certain regions like Europe?

Charles J. Dockendorff

Joe, you might want to answer that one too.

José E. Almeida

Yes. But you're going to take one first?

Charles J. Dockendorff

Yes. I mean basically, I think you've heard the presidents talk about this. They're looking at the life cycles of the products. Some are slower and there's different ways to go to market there, and that's where we have to be probably a little bit more innovative of how we do that. Do we put a full sales force around that? Do we do more of the key management activities within a hospital with fewer people, where we can leverage out savings with our partner as well as us? So they're going through that and looking that all the time. Europe has turned into a slow growth area, will it continue that way? Do we need to think about how we go into that? So we're going through that all the time. We're certainly investing in emerging markets, that's a high-growth opportunity, we've committed to that. Is there more we can do in that area? I think there is and we'd like to. But those are the kind of things we're thinking about as far as an allocation standpoint. I think you saw it in -- we've already done it. And I don't want to say this is something new because a little while ago, we took a portion of our Medical Device business and merged it with our Supplies business. And through that drove big profitability in this, the Supplies people were able to drive a lot more profitability in that business, which we were able to use in investment devices. And I think you'll see more of that continuing on.

José E. Almeida

It's also the fine tuning of portfolio management. So it's not just kind of big picture like Chuck just said, but also, if you have categories, there are products that would be invested in R&D when we start amplifying our spending in R&D. We went and spent probably money in areas that today, we say, okay, you should have 1% of R&D as a percentage of sales. You should have 7% or 8% instead of giving people more money in areas that we don't think there's a potential for growth and the technology is not there.

Coleman N. Lannum

See everyone's hands again. Okay. We're going to go #1, and then #2 and then #4. David?

David R. Lewis - Morgan Stanley, Research Division

David Lewis, Morgan Stanley. Chuck, just 2 related questions. The first is at gross margin. The last 4 or 5 years, we've seen very dramatic shifts in gross margins at Covidien. A lot of that has been at portfolio management and obviously, some of that has obviously been mix. Do you think you should look forward? It sounds like more of the gross margin expansion comes from mix. I wonder if you could just help us understand, are we now at a point where we're just focused on mix, where annual improvements and gross margin are less than 100 basis points, more like 50 basis points? In past, we've seen 100, 200 basis point improvements a year. Is that less likely on a go forward basis, you are more focused on net mix?

Charles J. Dockendorff

You're talking about the rate of gross margin increase over time. It's interesting. As you look at the portfolio component that drives our gross margin improvement, that's pretty steady. We look at it. We can, based upon our forecast of revenue, if they come in that way, but we look at our forecast of the revenue down this Q and take a look at that and can forecast that product mix. That relative -- that is steady because the higher-margin products are continuing to grow faster. Some of that portfolio mix in the current year did come from portfolio moves. But the mix piece of it on our base business will continue at the same rate. The other components, we're going after the cost reduction. We feel real good about achieving that number. The other unknowns as you go into any year would be what's going to happen with the raw materials, utilities, oil, things like that and FX. And those are the things that can drive the gross margin. So I see on a continuation front, the mix of our product sales continuing as they have in the past, our cost reduction programs and restructuring continuing. It's the other components that can be variable.

David R. Lewis - Morgan Stanley, Research Division

And Chuck, it seems as if the emerging markets is very profitable from an EBIT perspective, but could be a headwind on the gross margin side. How concerned should we be about the gross margin headwind from emerging markets? And what do you think the peak SG&A investment year is for EM?

Charles J. Dockendorff

For emerging markets? I think as far as the gross margin on here, it depends on how we grow this business. I mean, Brian's talked about launching new products, local products that have a lower cost, and I think we can drive some of that gross margin up. I think clearly, the investment in the selling and marketing, we see this investment going up for the next 3 to 4 years. we have a 5-year plan at that, and Brian talked about it to really drive this thing up there. So we see continued pressure for the next 3 or 4 years on our SG&A from the emerging market side of the business.

José E. Almeida

I just want to add that Brian had made a point that the products that we really have invested sales force and marketing efforts are Energy, Endomechanical and Vascular. So those are the products that have higher profitability profile. And one comment on investment to echo what Chuck said about the pressure, we've been investing in emerging markets not at this rate, but we've been investing since 2005. We have a plant in Shanghai, we have expanded sales force there. So this is not something brand new to Covidien, but the acceleration and the pressure that Chuck mentioned is more recent.

Coleman N. Lannum

Okay. We're going to #2 and then to #4.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Great. It's Bob Hopkins, Bank of America Merrill Lynch. I just want to clarify, Chuck, a couple of points on the guidance, starting with top line and then working down. So 3% to 5% is what you're guiding to for reported top line revenue growth. And then if you net out the foreign exchange and the one less selling week, you get to basically $375 million to $575 million. Is that the right way to...

Charles J. Dockendorff

That's correct, yes.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Okay. In terms of like underlying organic constant currency growth?

Charles J. Dockendorff

Right.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

And then on the buyback, that negative 1% to 2% on the share count, is that relative to the $499 million number as of the 9 months?

Charles J. Dockendorff

That reflects the share repurchases we've done today, which includes the $500 million.

Coleman N. Lannum

And so to clarify that, that actually would include -- you should expect the shares outstanding to fall in the fourth quarter. And it will be an extra 1% to 2% or 10 percentage points decline beyond what we have in the fourth quarter.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

So a buyback of $300 million to $400 million assumed in 2012 roughly?

Coleman N. Lannum

Yes, I don't think we want to put a specific number. And as you know, we don't say publicly what we may be buying in any given period of time. Go back to what Joe said earlier, we clearly are not going to hoard cash, we will be buying back more shares. And as Chuck said, in the fourth quarter alone, we've already repurchased in excess of $500 million of stock.

Charles J. Dockendorff

And I think if you go back to the 25% to 40%, our dividend alone is close to $400 million. So you can see where the difference comes from.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

And then lastly, on just the operating margin guidance, just wondering what kind of conservatism might be built in here. Because the low end of the ranges would actually assume negative operating leverage in the year. Is that just conservatism? I mean, how confident are you that 2012 will be a year where you're going to achieve operating leverage for the organization and we really should be thinking more about like the midpoint of that range?

Charles J. Dockendorff

I feel very comfortable achieving the operating leverage. So it is a range that we give. We're finishing off the year here and we'll update it as we go forward. But clearly, we expect to leverage from the bottom line through some gross margin improvements and offsetting with R&D, and potentially, selling and marketing.

Coleman N. Lannum

Okay. We're going to #4 and then #1 and then right here for #2.

Thomas J. Gunderson - Piper Jaffray Companies, Research Division

All right. Tom Gunderson from Piper Jaffray. Chuck, just a couple on the balance sheet and use of cash from cash flow. Are there any new assumptions, any changed assumptions on maybe global austerity changing accounts receivable or inventory going up because of what Bryan said about wanting to make sure you did Sonicision right the first time? And then on -- is there anything new or big, particularly in emerging markets on CapEx?

Charles J. Dockendorff

As far as the investments around AR and inventory, things like that, it's interesting, was we look at 2011, despite the problems in Europe, our AR has remained relatively flat with a slight improvement, in fact, for Covidien in total and as we look at Europe. Inventory has gone up a little bit. We're in the middle of a rebranding project. And some of the restructuring programs require inventory builds, but that will be completed soon and we expect some of that to mitigate going into 2012. One of the things we did in '11 was actually exited a market in Greece. There was an area where they were not paying at all, and we were fortunate enough to exit that and actually got most of our receivables out through bonds that they gave us that we quickly resold. But going forward, we see Spain and Italy, they're still paying, certainly is slowing down. And that will put some pressure on some AR. But there's really no significant change or requirements in working capital that we see next year. And we've done actually a pretty good job this year, managing our way through it. As far as capital equipment in emerging markets, ignoring any acquisitions we do there because we would certainly would like to do something over there on the acquisition front, we do have systems we're putting in, things like that. But they're not material and well within the scope of our overall capital plan, which is over $450 million.

Coleman N. Lannum

Okay. We've got #1, then #2, then #3. Mike?

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

Mike Weinstein. So help me out. I'm a little bit confused, Chuck. So the comment that you guys bought back $500 million plus in stock this quarter, and if I do the math on that, would imply for FY '12, so I'm taking out -- I know where the stock price is, I'm assuming that, that nets out to the shares. And I'm looking at where your share count's going to be going into FY '12. You're already down that 1% to 2% in share count for FY '12 versus FY '11. So if I'm understanding you correctly, your FY '12 guidance assumes no additional share repurchase from here.

Charles J. Dockendorff

Well, I think as Cole mentioned, that guidance was up before we finish 2012. So I think...

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

What I'm saying is your share count is already there today. So your share count after the $500 million you just bought back is already at a 1% to 2% reduction versus where your average is going to be for FY '11. Am I understanding you correctly?

Coleman N. Lannum

Yes, let me sure that I explain this correctly. The average share count for 2012 is expected to be down 1% to 2% from the average share count in 2011.

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

And I'm saying you're already there today.

Coleman N. Lannum

Yes. And remember, the share repurchase is not the only variable that impacts shares outstanding. There are a lot of other things that go into account there. And in fact, I was having a conversation with someone offline a moment ago, explaining from an accounting standpoint, when you account for common stock equivalents, there are things that go into that calculation. So putting all those into the play, we still think it will be down about 1% to 2%.

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

Okay. And then I just want to make sure I understand this, the dueling commentary because you guys don't give EPS guidance but you give a lot of other numbers, and then everybody ends up at the end of the today with an EPS guidance range. Your cumulative guidance from revenues, operating margins, tax rate, share count, is going to get people to somewhere, say, 3% to 11% earnings growth, 4% to 11% earnings growth, fair call?

Coleman N. Lannum

That's a ballpark, yes.

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

We'd be talking EPS growth, [indiscernible] I misspoke. So EPS growth for FY '12. But you said you are comfortable with the consensus revenue and EPS estimates for FY '12. And the consensus EPS estimate is at 9% today, FY '12 versus FY '11. Everything there correct?

Charles J. Dockendorff

That's correct.

Coleman N. Lannum

Okay. We've got #2 here and then #3. Can I see your hands for the runners, please? And then we'll be back over here, first, #2.

Daniel Sollof - Barclays Capital, Research Division

Dan Sollof, Barclays Capital. I want to drill down a little bit on the guidance for Medical Device business, especially Vascular. We've heard you say really over the past year that especially with the ev3 acquisition, it's not only integrated well. It's actually proceeding. And we've seen it in the numbers, it's really kind have been better than expected. So kind of looking at the CAGR, you're kind of happy about 7% to 9%, that's the same as you had last year. Just curious with numbers tracking well with really great pipeline and really, as you guys say, still double digit growth in Neuro, why not consider taking that [indiscernible] considering comps you've made or it's not what it seems?

José E. Almeida

The 4% to 7% that Chuck just mentioned.

Daniel Sollof - Barclays Capital, Research Division

I'm talking about Vascular in particular?

José E. Almeida

But we didn't give guidance for Vascular. We gave market growth.

Coleman N. Lannum

That is market growth for that business. We didn't say that we were necessarily going to come in at the market growth rate.

Daniel Sollof - Barclays Capital, Research Division

Right.

Coleman N. Lannum

We're growing ahead of that.

Charles J. Dockendorff

Consistent with the comments that you are putting out there.

Daniel Sollof - Barclays Capital, Research Division

Okay. Well, I mean -- well, I guess the general question there was so -- that's fine.

Coleman N. Lannum

Okay. Let's just go over to number -- we will go with Rick and then we'll come back over to #1.

Frederick A. Wise - Leerink Swann LLC, Research Division

Rick Wise, Leerink Swann. Joe, you said right at the beginning of your comments this morning and you alluded to it again, I just to make sure I understood, "you're looking forward to more effective and productive R&D going forward." And you alluded to, again, some of the sharing facilities. Is there something really unusual happening and you're taking significant costs out? Or help us understand exactly what's going on.

José E. Almeida

It's more throughput. So if I'm putting $1 in and taking this output out, if I put $1 in, can I get more output out? So is -- can we shorten our time to market? We did significant improvements in time to market the last 3 years by cutting -- by 40%. Can we do better than that? Can we use facilities in other parts of the world to add resources to R&D at a reasonable cost that give us more throughput? Everything for us in R&D is we're still behind most people in spending, but we want to get there. But I want to get there in a different way. I don't want to get there on a more inefficient way. I want to get people with higher throughput every year, I want to be able to design product around-the-clock in the world. And it's not about cutting, it's by adding. But adding efficiently means adding more with the lower cost to add. There's no reduction in R&D, there's no cost reduction in R&D, it's efficiency.

Frederick A. Wise - Leerink Swann LLC, Research Division

Okay. And the second question is really just I'm curious to hear the thought process that you and Chuck, when you get in talking about numbers. I mean, clearly, as we see on each line, gross margins, SG&A, R&D, a lot of moving factors that get you to the operating leverage on the EBIT line. I mean is it reasonable for us to think that when you are thinking about it, that your goal is to create whatever the number is, 50 basis points or something of operating leverage per year as you look out over the next few years and that you would adjust spending or investment and manage each line, given the complexities of the external world to get there? Do you see what I'm trying to...

Charles J. Dockendorff

I think, Rick, because we have a lot of levers that we can pull. And there's a lot of dynamics that go on in the business. Our goal, though, is to get that double-digit earnings growth. We've achieved that. I think we have a good shot at getting it next year. This guidance range we gave, that's within that range, consensus is close to it. We still think that we can get to that level. But all of those components, if you think about gross margin, SG&A, we tried to leave R&D out of that. We want to continue to invest it on the right projects. But share repurchase, all of those things, tax rate, we're trying to drive these things to efficiency as we can. It becomes then a question of how much do you invest and how high do you drive that efficiency. And ultimately, we don't want to damage the long-term health of the business if something dramatic happens in currency or something like that, that we can't overcome. But certainly, we have enough levers within that P&L, and we try to set plans in place that maximize each of those every year. And we have targets set for each of them every year. We don't always achieve them, some we overachieve, some we underachieve. Gross margin has clearly exceeded our goals in this area over the last couple of years, and we've been able to use some of that excess to invest it in other areas. But it is the management of the whole process that Joe and I go through and sit down and talk about, and we look at it every month with every division. And so we're always trying to assess where we are in terms of those goals, and we have things that we can do to adjust.

Coleman N. Lannum

We'll then go to #1, but before we get there, I wanted to answer Frank's earlier question on dollar net income. On a non-GAAP basis for the full year 2010, we did $1.703 billion. Year-to-date for the 9 months of 2011, again, on a non-GAAP basis, we've done $1.442 billion. And here is Sara.

Sara Michelmore - Brean Murray, Carret & Co., LLC, Research Division

Yes, Sara Michelmore of Brean Murray, Carret. Just philosophically, obviously, the emerging markets is the single largest dollar incremental investment that you're making in the company right now from what you said. And in the situation where you were to come up at the top end of the sales guidance or have some upside on pricing or some other line, is that an area that we should think that you would potentially accelerate investment or accelerate the velocity of that investment if you were able to have some additional investment capacity in the P&L?

José E. Almeida

Sure. Actually, we did accelerate indeed this half of this year. As Brian was saying, we're hiring now the sales folks for 2012 in China. So as we have opportunity, we continue to leverage. Remember, we started restructuring programs and projects, offer very quick returns. Some are more longer time with long-term return, but we use as much as we can to be able to fill that because the productivity out of those folks, contrary to what I've seen from other companies, is being excellent. So it's a worthwhile investment. But we also, like Chuck said, we have the levers that we have at our disposal with restructuring and efficiency projects to be, to feel very comfortable with the consensuses out there. And with the comments, just to reaffirm the comments that he made.

Sara Michelmore - Brean Murray, Carret & Co., LLC, Research Division

Okay. And then just to follow up on the Pharmaceutical revenue guidance. I mean, in terms of the -- if you can drill down a level for us, obviously, a lot of moving parts in that business. But what's really the driver next year for that business in terms of the revenue growth?

Charles J. Dockendorff

I think the way I see it is, again, in 2011, we had a lot of headwind from the divestiture of the radiopharmacies business. And that was reflected in that negative sales growth. But we see positive growth in the Specialty business as we -- I think Matt alluded to it, doubling the rate of growth in EXALGO, continuing on with PENNSAID. We have launches that have been successful and we expect them to continue to grow in the patch, ACTIQ and those areas. And our Contrast business and nuclear business continues to grow reasonable. So I think all of those components are what drive it.

Coleman N. Lannum

And Sara, let me add one thing there because I think this is something that gets thrown out a lot by people. I want to make sure I clarify this. If you exclude the divestiture of that radiopharmacy business, if you pro forma'd for that, if you will, despite the fact that over the last 12 months in our pharma business, we lost branded protection on about 90% of our branded business. That all went to generic. Despite the fact that we had, as we talked about, competition on the pricing side, there was more than we expected in that specialty generics business. We still would have reported up revenues in 2011 versus 2010 if it were not for the divestiture of that radiopharmacy business. That was by far the biggest impact to that negative number that you're going to see on that pharma business this year in fiscal 2011.

Sara Michelmore - Brean Murray, Carret & Co., LLC, Research Division

So is this 2% to 5%, is that a similar rate of growth on an organic basis that you've seen in 9 months of fiscal '10 or...

Coleman N. Lannum

It's a little higher again because some of the negative events aren't happening this time. And we still have the growth of PENNSAID, EXALGO and the other specialties...

Sara Michelmore - Brean Murray, Carret & Co., LLC, Research Division

But it's -- what you're saying is it's not a significant acceleration.

Charles J. Dockendorff

No, it isn't.

Coleman N. Lannum

Not dramatically different. Okay. I want to see the hands again. I am going to go to an Internet question. And I got, Chuck, this is for you. And this is referring to the incremental share repurchase program that the board authorized a couple of weeks ago. The question is, what is the timetable for the incremental $2 billion share repurchase program?

Charles J. Dockendorff

I mean, there is really no time table on that. It's discretionary with us as to how we want to execute that. Again, a time table will be dictated by what we see as an opportunity in the marketplace, the amount of cash we have in the balance sheet. We don't really have any interest in hoarding cash. We have a certain targeted level we want to get to. Once we're on that, we would like to do acquisitions. If those aren't available, they will most likely be returned to shareholders.

Coleman N. Lannum

And go to #4 in the back and then #1. Go ahead.

Lawrence S. Keusch - Morgan Keegan & Company, Inc., Research Division

Larry Keusch. Chuck, just thinking about your capital structure, you guys have a unique position in the sense that because you're domiciled in Ireland, you can use your cash to repurchase stock in the U.S., et cetera. Why not continue to buy back stock, and as you think about acquisitions, utilize debt just given the low cost to borrowing?

Charles J. Dockendorff

We have looked at that. That certainly is intriguing and is something that's interesting to look at, especially with the low cost of debt right now today and our cash availability around the world. But I think that the future growth of Covidien doesn't come from buying back shares. It comes from investing in the business and that's where we'd like to put that money. We would like to do more acquisitions. we would like to invest for the long-term health of the business and do that as we go forward. As we look at our competition, we're more levered than anybody else we compete against. So we did take some leverage off in the ev3 acquisition and funded it with that. But today, we sit with more leverage, and actually, lower cash positions than our competition. So we need to -- we want to maintain some of that financial flexibility because these acquisitions are opportunistic. And as we do that, we want to be able to make sure we can move quickly on those transactions.

Lawrence S. Keusch - Morgan Keegan & Company, Inc., Research Division

Okay. And then just one other one. In Joe's comments, you talked about the expanded shares services, better utilization of corporate functions as a way to optimize your spending. Again, just want to understand what you're thinking about for those shares service, I guess, consolidation for better usage and the timelines around that to seeing some of those savings?

Charles J. Dockendorff

Yes. I think we're going to begin to see some of those savings come out in 2012. I think the way Joe framed it was around, if you can go to our manufacturing group, they just have a strong discipline of cost reduction throughout the entire organization. It's a discipline that we brought into each company that we acquired prior to this spin or even now as we bring them in today. We want to bring that same mentality into the SG&A component. The corporate functions, it's consolidating services which we're doing with back-office. Outsourcing, off-shoring, these are opportunities that we can do in our IS [Imaging Solutions] group and different areas to drive. And we've done it already in accounts payable and other areas, and we see savings from that. So we just would really like -- we've gone through a period here of significant investments in SG&A. And almost everything that people wanted to do, if it had a good return, we did it. And it's paid off. We've made Covidien stronger, the sales growth rate has improved. And so, what we're now focused on as a management team is that to continue those good investments, we really now need to look at that SG&A and the productivity around that, and drive that through. And we think there's some good opportunities on that.

Coleman N. Lannum

Larry, I want to add just one more thing on that question on borrowing to repurchase stock. Don't lose sight of the fact of the charts that Chuck put up earlier. We have put a lot of cash back in shareholders' hands, and we've been able to do it without borrowing. We don't have to. And I think it speaks to the strong free cash flow of the business. And as Chuck said, free cash flow is going to be even stronger next year. Now yes, you can say, well, you could have bought back even more had you borrowed money, you can always say that. But we're talking about having returned well in excess of $1 billion over the last 12 months. And we've done it without having to go to the markets and without having to borrow at all. And yes, rates are low, but they're still -- interest cost is still a cost. The great thing that we have is that we're generating so much cash, we can still give back a lot of shareholders without having to do that. Could we go to #1?

Unknown Analyst -

Separate question. If there's squeezing of funding by Medicare and Medicaid to doctors, surgeons and hospitals, and also if there's new competition, do you foresee in coming years, a squeeze in your profits and margins so that if the government tightens up, mainly?

José E. Almeida

It depends upon the level of the squeeze, right? But there is a -- the reason we are so focused in the productive programs, not only manufacturing but across the company, is to really make sure that we're prepared for things of this nature. I think we have budget 50 to 100 basis points a year in price erosion. If we see higher price erosion than that, we will probably accelerate our programs. The thing for us, we want to be ahead of major sea changes such as this.

Coleman N. Lannum

Okay, we're coming up past the top of the hour. I'm going to go #3 over here, then we're going to wrap things up. To those of you here in the audience, we still have an opportunity to grab everyone on an intimate one-on-one basis outside in the foyer afterwards. Let's go to #3.

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

Joanne Wuensch from BMO. It sounds like you're dialing a slightly worse pricing in the 2012 guidance. How are you thinking about volumes, hospital volumes, when you gave that guidance? And then we have a funky fourth quarter because of the extra week. Anything odd in the first 3 quarters that we should know about?

Charles J. Dockendorff

I think the pricing is a little bit worse than what we've experienced in the year, not much, but it's also within the realm of what we've experienced in past years. So that 50 to 100 is different as contracts get renewed and things like that. But certainly, in today's environment, we thought it will be more prudent to factor that in as we look forward. I think as far as the base business, it, Joe said, it's kind of the same assumptions that it will remain where it is from a while ago.

Coleman N. Lannum

And anything happening in the next 3 quarters that are funky?

Charles J. Dockendorff

It's interesting, as we go into the fourth quarter, the extra week, we have never been through this and we've anticipated what that impact is. We'll know, I think, a better, clearer picture once we finish the fourth quarter. But when you think about it, in some parts of our business, we don't think it's going to be that big of an impact of international distributors order twice a month. I don't think they're going to order more the second time in that month than they normally would. So I don't think there's going to be a big impact there. Some of our hospitals and distributors, which were on CRP programs, we have to replenish them every day in the U.S., there will be more of an impact there. And as far as you go down the expense line, some of these expenses are fixed by month and some are variables. So we've done our best guess at that, but I think we'll have a clearer picture as we finish the fourth quarter.

José E. Almeida

Just a point. In terms of pricing, we're still on the 50 to 100 basis points next year, so there's no change on that frame of mind. Maybe the mix is a little different, depends upon the business, but it's still a 50 to 100 basis points price erosion as we had forecasted and experienced in the last few years.

Coleman N. Lannum

And with that, Joe, Chuck, thank you very much. I want to thank everyone. For those of you here in the audience, again, please do join us outside for some cocktails and the opportunity to interact with folks once again. For everyone on the webcast, we thank you very much for joining us. Hopefully, we got some of your questions.

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Source: Covidien plc - Analyst/Investor Day
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