Covidien's Wide-Moat Device Business Positioned Well for Long-Term Growth
R&D investments and a narrowed focus have widened the firm's competitive advantages.
With the spin-off of the no-moat pharmaceutical segment, Covidien's (COV) business is largely composed of products that garner strong competitive positioning in the marketplace. The company's device business has wide-moat attributes because of its strong intellectual property and significant switching costs, which imply high barriers to entry. Given Covidien's focus on products that deliver value to patients, providers, and payers, it is well positioned to prosper as more provisions of the U.S. Affordable Care Act take effect, while many of its peers will face significant regulatory and reimbursement pressures. The company's growth prospects are healthy, buoyed by a particularly productive pipeline. As a result, we continue to believe the firm deserves a valuation premium compared with some of its medical technology peers.
The device industry, in general, affords participants a number of moat attributes. Barriers to entry are typically fairly high, given the requirement for a sizable initial investment in infrastructure (manufacturing and distribution) as well as the research and development and intellectual property platforms. Having a sizable scale advantage gives larger entrenched players the ability to maintain pricing power and share in more commodified product lines. Switching costs also tend to be a deterrent, although this may be getting weaker in an environment where procurement decisions are gradually switching from the hands of practitioners to administrators. Most device subsegments operate in an oligopolistic fashion; the absence of irrational price competition and an evolutionary rather than revolutionary nature of innovation tend to lead to only marginal share shifts in the industry and strong excess returns. The device industry still has its share of companies whose moats have declined, however, because of chronic underinvestment in technology or overinvestment in areas where moats are more challenging to obtain.
Alex Morozov does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.