Venture Round: Covidien Ventures Out

The announcement that Covidien Ltd. launched a venture fund should come as no surprise to faithful IN VIVO readers. We reported on the groups's creation back in our May issue in a cover story on the company. Despite our prodding, the company opted not to provide details on the group until this week.

But the news still warrants review as this is a significant departure for Covidien, the former Tyco Healthcare. In its previous life, the group now known as Covidien had a dismal record when it came to investing in R&D and new technologies. (See chart, right.) In the late 1990s, Tyco grew its health care business through significant acquisitions of low margin hospital supplies and other mostly low-tech endeavors.

Trouble hit in 2002 when Tyco fell under the weight of its storied investigations. At the time, the company didn’t have the resources to commit to R&D even if it wanted to.

But all that is in the past. Covidien is a full year removed from its Tyco ties, and it’s working to restore its research and development capabilities.

The press release doesn’t give much information, but VentureWire Lifescience offers a bit more. Most interesting is the team Covidien assembled to make the investments (which will be $5 million on average in early stage companies.)

Covidien has built a team of three to manage its new venture wing. Daniel T. Sheehan, a former general partner at Affinity Capital Management, is heading the new operation as vice president of corporate venture capital. He is joined by Dave Neustaedter, former director of commercial strategy and advanced technologies at Stryker Development LLC, and Joseph Graham, who worked in strategic marketing for Covidien's patient care and safety business.

Covidien deserves credit for dipping into the venture business to find its new leader. Too often, corporations try to staff their venture groups from people within the organization. (Of course, it’s usually difficult to lure folks from the venture side back to the corporate venture side.) An experienced venture capitalist should come with the contacts to find deals that might not typically be shopped to corporate investors (i.e. VCs looking for some dumb corporate money.)

The additions of Neustaedter and Graham give the new group expertise both in corporate innovation as well as the ins and outs of Covidien itself, which is a far flung organization with businesses and divisions across the globe.

Covidien's move might be deemed a bit counter-culture as the number of corporate devices investors and acquirers is dwindling. But the company has been on a frenetic shopping spree over the past two years, buying eight companies over the past two years including some big-ticket buys like Vivant Medical and Confluent Surgical.

Still the company isn't taking big chances with its purchases. Instead, it's moving into opportunities that lie within or generously abut its current borders. "When you look at the acquisitions that we've done, they are focused and purpose-driven," Jose Almeida, head of Covidien's medical device segment, told us back in the spring. "They have niche specialties and market advantages, and they are synergized to our sales channels. They augment our technology base. They bring potential double-digit growth for the 10-year period that we analyze the sale."

We expect the venture group will take the same measured approach, but perhaps Covidien will let its hair fall down just a bit further.

Venture Round: An IPO To Do List

KPMG LLC released a survey this week declaring that a venture capitalist don't expect to see a "consistent flow" of IPOs until 2010.

Odd, dire predictions like that coming from an industry populated by eternal optimists. (We later learned the survey of 297 included venture capitalists, corporate buyers, bankers and entrepreneurs.)

Ah well, as we've discussed in the past, times are tough. However, our own private survey of a few investment bankers paints a slightly brighter picture for life sciences IPOs. But it's only slightly brighter.
However, as we noted in our upcoming IN VIVO magazine, predicting when the IPO window will open is not unlike trying to predict when the winter's snow will melt. Yes, it'll happen eventually, when the weather gets warmer, and if you project out far enough into the spring calendar you've got a greater chance of being correct.

But so many macro-economic factors must be taken into account when crystal balling the IPO market. Fortunately for us, investment bank Jefferies & Co. Inc. presented us with a clear road map of what must happen for medical device and biopharmaceutical IPOs to return.

(Jefferies also provided us with some fascinating data tracking IPO success with stage of company. The results will surprise. Check out the magazine.)

Bottom line, our gurus are hoping to see things coming around sometime next year. But so many balls still hang high in the air.

***

Not surprising but certainly worth noting: SR One Ltd., one of the more if not the most venerable of corporate venturing programs, has seen its last days as an independent entity. It's merging into the new GSK Ventures, according to this morning's VentureWire Lifescience.

We suggested this would happen when we broke the news on GSK Ventures back in May. True, SR One had staying power. The unit has existed since 1985 when Peter Sears started to invest on behalf of SmithKline Beckman.

But the group's West Conshohocken office must have been equipped with a revolving door to handle all the changes in management since Sears' retirement a decade ago. The units managers have swung in and out of the place leaving for opportunities in the venture world or back at Daddy corporate.

GSK Ventures new manager Russell Grieg, a direct report to Andrew Witty, the new GSK CEO, will work from the group's office in Pennsylvannia, according to the report. SR One's web says the group has moved to East, we presume, to Conshohocken.

***

Is the out of control locomotive starting beginning to slow? VentureWire reported this week that first half investments in healthcare companies dropped 30% compared to the same period last year. Overall venture capital dropped only 12.4%

The $1.97 billion Q2 total is off 22.1% from the $2.53 billion invested in the corresponding period in 2007, a year in which VCs funneled a record $10.17 billion into the sector. So far this year, firms have invested a total of $3.8 billion in health care, down from the $5.5 billion they had funneled into the sector by the end of June 2007.

[In the biopharma sectors VCs] invested $1.07 billion last quarter, down 15% from the $1.26 billion sunk into the sector in Q2 of 2007. This year's first-half biopharma total of $1.88 billion is down 41% from the $3.1 billion in the first half of 2007, and is the lowest since 2005, when firms had invested $1.73 billion into biopharmaceutical concerns through two quarters.

Medical-device funding is also down. Investors put $797.6 million into devices companies in the second quarter, down from $1.05 billion in second quarter of 2007. Device investing stands at $1.6 billion for first two quarters, down from $2.07 billion last year.

We generally agree with the VCs quoted in the artice. This seems like a healthy correction and a wise one given the current economic state. But we'll provide deeper analysis of our own fund-raising data in the September Start-Up.

***

VentureWire Lifescience also confirmed what we reported a few weeks ago. Foundation Medical Partners is raising a fund. VWLS puts the target at $150 million which sounds about right to us....VWLS also says that OrbiMed Advisors has hit the $150 million for its Pan-Asian health care fund, Caduceus Asia Partners LP. OrbiMed added to its Asia-based team with the hiring of Sunny Sharma, a private equity partner in Mumbai. Sharma joins managing directors Nancy Chang and Jonathan Wang. Sharma previously had been managing director of Easton Capital.

***

Remember the VC Comic? They brought a little bit of laughter to an otherwise dreary day of venture capital reporters who covered the stone-cold life sciences industry rather than the red hot Internet investments. Of course, we got the the most important laugh--the last one--a few years later. (Thanks to HEC Paris Private Equity and Venture Capital Club blog.)