GREENWICH, Conn. – Throughout its 14-year history TullisDickerson & Co. has committed itself to finding and nurturing the next big thing in health care. While other firms’ interest in the space has fluctuated depending on what sectors seemed hot at a given moment, Tullis-Dickerson has never considered backing away from health care.
“Even when a lot of firms ran from health care two or three years ago, we decided to stay the course,” said Jim Tullis, a co-founder of the firm. “We think there are compelling reasons to stay focused on health care.” One of those compelling reasons is the industry’s stability. During a “go-go” market, health care may not grow as fast as other areas, but the sector never stops growing the way some other areas of investment do in down times, Tullis said.
“No matter how bad the general economic climate is, the health-care industry continues to grow,” he added. “There has been a steady increase in the number of older people in the population, an increase in the quality of care and an increase in the demand for quality care…The kind of care people may want could change, but we see a continued willingness on the part of consumers to spend on health care.”
Firms that pursue a come-and-go strategy toward investing in health-care simply when it’s the hot place to be face a number of challenges, Tullis said. “Health care is a very specialized field dealing with so many unseen variables, including scientific questions, FDA approval, meeting good manufacturing practices guidelines and government reimbursement questions, as well as patent issues that, when you put all this together, having experience in this area is not a trivial thing,” he said. “Firms that add a Ph.D. expert to their team when they come into the market end up with someone that usually has to pick up VC skills, which can’t be learned overnight, as well as facing the challenge of integrating that person into their firm.”
Founded in 1987, the firm initially decided to focus on health-care deals because of its two founding principals’ backgrounds, he said. Prior to founding the private equity firm, Tullis worked in the health-care investment banking groups of Morgan Stanley and E.F. Hutton & Co. Inc. As a senior health-care analyst at Morgan Stanley, Tullis wrote what he believes was the financial community’s first report on the biotech sector in the late 70s. Tom Dickerson also worked on Wall Street, as an executive in Lehman Brothers’ health-care investment banking practice, as well as at E.F. Hutton.
Tullis-Dickerson invests in the wide-spectrum of health-care deals with the exception of real estate related plays or physician practices, Tullis said. “We have never believed that you can own a physician’s practice, and in real estate deals – like buying a hospital – the market shifts can be dynamic and rapid, leaving investors caught with high capital costs,” he explained.
Now that cost-cutting pressure from the government and HMOs has relaxed slightly, Tullis-Dickerson is excited about opportunities in the medical services sector, Tullis said. One example of a services company already in the firm’s portfolio is Los Angeles-based LivHOME Inc., which provides in-home care to senior citizens so they can stay in their own homes instead of moving into nursing homes.
The firm also believes there should be an increasing number of attractive plays in the medical information technology space, Tullis added. “Medical IT companies got cremated in 1999 and 2000 because of Y2K concerns and cost-cutting concerns, so now there is pent-up demand for new ideas in this area,” he said.
Tullis-Dickerson engages primarily in early-stage venture capital deals, including a number of seed-stage opportunities in the life sciences, Tullis said, noting the firm believes there is tremendous opportunity in getting into a deal early. “We put in enough capital so a company can prove out their idea and get to their next round,” he said, adding “then in the next round we bring in one or two more investors and do a serious round of funding, which we hope is a company’s last round of venture funding.” The firm’s average initial investment is about $2 million to $3 million, although TullisDickerson will invest as little as $1 million in a seed-stage deal, he noted. The firm’s maximum investment in any one deal is $20 million.
The firm is the lead investor in nearly two-thirds of its deals, Tullis said. “We have a lot of confidence in our ability to work with companies through crisis times, and we are used to being active board members,” he added, noting the firm is also very comfortable working with its partners. When the firm does not take a board seat it nearly always takes board observation rights, he noted.
The firm pursues deals nationwide through its hub-and-spoke structure, which features a main office in Greenwich and regional offices in Birmingham, Ala.; Santa Fe, N.M.; and Ann Arbor, Mich. “We believe that a presence in both regional and established coastal markets allows the firm better breadth and depth in three key functions: intelligence gathering with regard to science and health-care industry trends; deal flow; and awareness of pricing and opportunities for successful price arbitrage,” Tullis explained. The firm plans on opening its fourth regional office in San Diego by the end of this year, he noted.
To date, TullisDickerson has raised three funds. TullisDickerson Capital Focus LP closed on $43 million in 1988. The $31 million Javelin Capital Fund closed in 1994, while TullisDickerson Capital Focus II LP closed on $195 million in 1999. Fund II is almost fully committed to 21 companies.
The firm kicked off fund-raising efforts for its latest vehicle, TullisDickerson Capital Focus III LP in the first quarter of this year, Tullis said, adding a first close was slated to occur by the end of last month. Tullis declined to reveal the target size of the new fund, beyond saying it will be larger than Fund II. The vehicle will back 20 to 25 companies with an average investment size larger than the Fund II’s roughly $10 million average investment.
So far response to the new vehicle has been strong, as the first close consisted almost entirely of existing investors returning at higher commitment levels, Tullis said. The firm’s LPs are a mix of state and corporate pension funds, foundations, university endowments, corporations and high-net-worth indviduals, he said.
The firm’s investment team currently consists of six principals and one associate, who happens to be a Kauffman Fellow. The firm plans on adding a principal in its new San Diego office when it opens, as well as a seventh principal to its Greenwich office by year-end, Tullis said. “We wanted to add to our size to help manage the new fund efficiently, and we also believe in building for the future,” Tullis noted. The firm will increase its capacity further with the creation of a more formal advisory board than it has previously had, he added. “The board will consist of four people we know who can add value to our portfolio companies on a less than full-time basis,” he said. “They will take board seats and work with companies to supplement our views and perspectives.”
As for exit strategies, both initial public offerings and mergers have pluses and minuses, Tullis said. “True liquidity is done earlier with acquisitions, but the maximum gain is achieved through going public and distributing shares or doing a merger then,” he said. “But not every company can go public,” he continued. “We take exit strategies into consideration right away, but things evolve and follow different courses than you may have expected.”
Following are some of Tullis-Dickerson & Co. portfolio companies:
AmericasDoctor Inc. (Gurnee, Ill.) is a pharmaceutical services company that combines physician researchers, strategic marketing and consumer outreach, hospitals and Internet resources to assist the pharmaceutical industry in developing its products.
Co-investors included GE Capital, Claneil Enterprises and Galen Partners.
AviGenics Inc. (Athens, Ga.) focuses on the development and commercialization of pharmaceuticals using transgenic poultry.
Co-investors included Cordova Ventures and Kitty Hawk Capital.
Epicyte Pharmaceutical Inc. (San Diego) is developing products for the treatment and prevention of specific epithelial diseases.
Co-investors included Johnson & Johnson Development Corp. and Dow Chemical Co.
Genoptix Inc. (San Diego) will develop and continue to acquire proprietary technology for cell separation and analysis utilizing biophotonics and bio-optics.
Enterprise Partners was a co-investor.
Integrated Biosystems Inc. (Benicia, Calif.) develops and markets proprietary, high-margin manufacturing technology and tools to pharmaceutical and biotechnology companies.
Charter Venture Capital was a co-investor.
LivHOME Inc. (Los Angeles) provides personalized elder care services that focus on the physical, emotional and social needs of older adults.
Bank of America Ventures was a co-investor.
LumiCyte Inc. (Fremont, Calif.) is the leading provider of service products that aggregate, analyze, and disseminate comprehensive molecular protein information from human plasma, saliva or urine.
Co-investors included Redleaf Group Inc. and Caduceus Capital.
Quorex Pharmaceuticals Inc. (Carlsbad, Calif.) is developing a new class of broad-spectrum antibiotics for the effective treatment of serious bacterial infections including those that are resistant to presently available drugs
Co-investors included Johnson & Johnson Development Corp., Prism Venture Partners and the China Development Industrial Bank.
Replicon Technologies Inc. (Birmingham, Ala.) is a biopharmaceutical company focused on the use of replicons (viral capsids containing self-amplifying RNA) for targeted delivery of therapeutic genes, and for treatment of a broad range of cancers by direct oncolysis of tumors.
There were no co-investors.
Scimagix Inc. (Redwood Shores, Calif.) is a provider of image informatics solutions for the pharmaceutical and biotechnology industries.
Co-investors included Dresdner Kleinwort Wasserstein and EuclidSR Partners.
Transmolecular Inc. (Birmingham, Ala.) is a neuroscience biotechnology company organized to develop and to commercialize products to treat disorders of the central nervous system having inadequate pharmaceutical alternatives.
TVM Techno Venture Management was a co-investor.
ViaCell Inc. (Worcester, Mass.) is a cellular medicine company focused on building a pharmaceutical company providing products and services for the treatment of diseases using stem cells.
Co-investors included MPM Capital, Nomura Securities, Deutsche Bank.
TullisDickerson & Co. main office is located at One Greenwich Plaza, Greenwich, Conn., 06830. Tel: (203) 629-8700, Fax: (203) 629-9293. The firm’s Web site is http://www.tullisdickerson.com/.