UPDATE 3-Covidien profit rises; shares turn higher

* Profit before items of 73 cts/shr exceeds estimates

* Sales rise 12 pct to $2.6 bln on strong devices, drugs

* Lowers fiscal 2009 sales forecast to flat to up 3 pct

* Shares rebound, rise nearly 3 pct, after early dip (Adds executive and analyst comments, updates share activity)

By Susan Kelly

CHICAGO, Nov 17 (Reuters) - Covidien Ltd (COV.N) posted higher-than-expected quarterly earnings on Monday on strong sales of its medical devices, supplies and pharmaceuticals, but lowered its 2009 sales forecast due to the rising U.S. dollar.

Although favorable foreign exchange rates boosted sales growth in the fourth quarter, the recent strengthening of the dollar will have a significant negative impact on sales going forward, the company said.

The shares of Covidien, a leading maker of health care products, have lost about one-third of their value in recent weeks as investors anticipated the dollar's reversal would dampen sales going forward.

On Monday morning, the stock slipped another 3 percent in early trading on the New York Stock Exchange, approaching last week's year-low of $35.35, before rebounding to trade up nearly 3 percent to $39.19 in the afternoon.

"I think investors are saying, hopefully now we have the worst-case scenario on the table and likely dialed into the stock, and the company has the potential to do better," said Leerink Swann analyst Rick Wise, who rates the shares "outperform."

The company's products range from laparoscopic surgical devices and hernia repairing mesh to drugs including generic OxyContin and compounds used in medical imaging.

The recent slowdown in capital spending by hospitals has had no material impact on sales, company officials said, noting less than 5 percent of Covidien's products are considered capital purchases. Exposure to elective surgical procedures, which some patients are delaying due to deteriorating economic conditions, is relatively limited as well.

Covidien posted net profit of $409 million for the fiscal fourth quarter ended Sept. 26, up from $34 million a year earlier.

Profit before special items was 73 cents per share, compared with 62 cents the year before. Sales rose 12 percent to $2.6 billion.

Analysts on average were expecting earnings of 68 cents a share before special items on revenue of $2.54 billion, according to Reuters Estimates.

Medical device sales rose 10 percent to $1.7 billion in the fourth quarter, with medical products sales also up 10 percent to $245 million.

Pharmaceutical sales rose 37 percent due to the release of generic OxyContin extended-release tablets and TussiCaps cough medicine.

Sales in the imaging solutions division rose 3 percent to $300 million, less than projected due to price pressure on contrast solutions in the United States, the company said.

Hamilton, Bermuda-based Covidien, which was spun off from Tyco International (TYC.N) in mid-2007, expects sales in fiscal 2009 to be flat to up 3 percent due to the impact of the rapidly rising U.S. dollar. In September, Covidien forecast a rise of 5 percent to 8 percent for its 2009 sales.

"I was a little disappointed with their outlook," said Morningstar analyst Alex Morozov.

But the revised sales guidance was not a big surprise and the projected operating margin remains in the same range, he added.

More than half of the company's operating income and three- quarters of its manufacturing production come from outside the United States.

Wise estimated the currency impact could trim at least 10 cents to 15 cents a share from the analyst consensus estimate for Covidien's fiscal 2009 earnings, noting he is still reviewing the numbers.

Analysts on average were expecting per-share earnings of $3.01, before special items, in fiscal 2009, according to Reuters Estimates.

Charles Dockendorff, Covidien's chief financial officer, reassured analysts the company has a strong balance sheet and cash flow, access to the commercial paper market and a $1.4 billion credit facility, and no exposure to the subprime market or failed financial services companies.

"We believe we are in a good position as a result of the activities we have undertaken since separation" from Tyco, he said on a conference call.

Covidien Chairman and Chief Executive Richard Meelia said the company will continue to pursue acquisitions of new technologies that can help fill gaps in its product line.

Covidien shares were up $1.09, or 2.86 percent, at $39.19 in afternoon trading. (Reporting by Susan Kelly; editing by John Wallace)