Are Covidien’s layoffs good for the medical device industry?

Market Realist

Covidien announces layoffs

Yesterday, September 19, 2013, Covidien (COV) announced that it will lay off a significant amount of employees as part of global restructuring efforts. The initiative aims to save the company up to $300 million a year by fiscal 2018. Covidien plans to focus its layoffs on its manufacturing and distribution operations.

(Read more: Medtronic purchases Cardiocom: Bad for medical device industry?)

Creating efficiencies

Covidien says the restructuring is part of an effort to drive efficiencies and improve the company’s cost structure, according to a regulatory filing. The document further states that the plan will create efficiencies by reducing corporate expense, outsourcing, shifting to lower-cost locations, consolidating manufacturing locations, and optimizing distribution. The plan will cost the company around $400 million by 2018, driven by termination, severance, and facility closing costs.

(Read more: Why shifts in Chinese regulation could benefit U.S. device makers)

Are these layoffs a positive?

Alongside this announcement, Covidien announced that it will boost its quarterly dividend from 26 cents to 32 cents per share (a 27% increase—the annual dividend will increase 23% to $1.28 per share). Covidien’s CEO, Jose Almeida, said that the company is committed to using cash flow to fund business expansion while returning at least 50% of cash flow to shareholders through dividends and share repurchases. It also plans to increase dividends over time.

(Read more: Why the medical device tax repeal bill shouldn’t pass anytime soon)

Covidien’s layoffs follow similar layoffs by competitors, including Medtronic (MDT) and Boston Scientific (BSX). These companies’ cost restructuring efforts suggest significant upcoming investment into business expansion. By restructuring, manufacturers are also able to reduce pricing ahead of stringent domestic reimbursement policy in the United States, making them more competitive in the market.

Look for device makers to continue restructuring and cost optimization efforts as they begin to expand their businesses (mostly into emerging markets) and prepare for pricing pressure. This trend hopefully signals higher profit margins and the accumulation of new revenue from new markets for the medical device industry.

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