Covidien Ltd.COV

Covidien holds a leading position in bariatric surgical instruments. As obesity-related health problems escalate and MIS technology continues to advance, the prevalence of bariatric surgeries should expand dramatically. Covidien estimates that 1.5 million of bariatric surgeries will be performed annually by 2020, up from 300,000 in 2009.

Covidien's pharmaceutical segment enjoys sizable barriers to entry. As a manufacturer of controlled substances, such as morphine and codeine, the firm is regulated by the Food and Drug Administration and the Drug Enforcement Administration and has a record of and expertise in dealing with both, a massive hurdle to overcome for a new entrant.

Covidien combined its imaging and pharmaceutical segments, which should allow it to eliminate duplicate back-office functions, boosting the segment's profitability.

Covidien is launching a study to determine the clinical efficacy of bariatric procedures in treating Type 2 diabetes in patients with a body mass index less than 35. If these studies produce positive results, the potential patient pool could increase by about 5 million people.

Exalgo--extended-release hydromorphone--has a scheduled Prescription Drug User Fee Act date in February. If approved, Covidien would receive rights to the only approved hydromorphone ER in the U.S. Read more 

Covidien is the second-largest distributor of medical isotopes used in imaging procedures, but its sole supply source, the Petten nuclear reactor in the Netherlands, is scheduled to be shut down for maintenance in early 2010. Any delays in bringing reactor online or unexpected problems similar to those at Canada's Chalk River facility could hurt Covidien's imaging business.

Group purchasing organizations are becoming increasingly powerful as the list of clients they represent expands. Such clout allows GPOs to maintain an upper hand in contract negotiations and squeeze device manufacturers' profits.

The market for safety syringes and needles is becoming saturated, particularly in the U.S. and Western Europe. As these products offer very little differentiation, the company will be increasingly forced to compete on price. Covidien recently exited the European sharp safety business, as its chief rival in sharps, Becton, Dickinson BDX, has a massive manufacturing infrastructure in Europe, affording it a scale advantage.

Covidien is a party to numerous lawsuits related to product liability, patent infringements, antitrust violations, and environmental compliance. While we don't anticipate these issues will have a material adverse impact on Covidien, the company could face significant business disruptions or fines if found liable.

The company's respiratory business is struggling and could be on the firing line if its performance doesn't improve over the next 12-24 months. Read more