Covidien CEO: It's about how, not how much, you spend on R&D

Covidien CEO José Almeida

Covidien ($COV) has never been big on bankrolling R&D, coming in well below its competitors in terms of revenue spent on research. That's no accident, CEO José Almeida said, as the Irish-headquartered company takes pains to invest only in high-yield technologies, not costly red herrings.

In an interview with NYSE Magazine, Almeida said Covidien hasn't been shy about spending to develop market-disrupting technologies--citing OneShot, the company's renal denervation device--but it's not in Covidien's DNA to take expensive risks. The company devotes about 4.9% of its sales to R&D, well below the industry-average 8%, but that doesn't mean it's lacking novel technologies, Almeida said.

"Innovation is not about how much money you spend, but how you prioritize the allocation of your R&D dollars based on the potential of your portfolio," he told the magazine. "If we spent twice as much on R&D, I guarantee we wouldn't have twice as much output."

For Covidien, that prioritization means spending in emerging markets. Over the past two years, Covidien has set out millions to stand up R&D hubs around the world, in August opening a $21 million facility in South Korea to augment its $45 million research operation in China.

Those investments reflect a lesson Covidien has long since learned, Almeida said: What works for the U.S. doesn't necessarily work for emerging markets, and success abroad requires flexibility.

"We must adapt the technology to the needs of the country," he said. "These products aren't necessarily cheaper--they contain a lot of technology--but they are simpler to operate."

Just months removed from spinning out its pharma business into Mallinckrodt ($MNK), Covidien has plans to pare itself down as it braces for a device-only future. Last month, the company revealed a plot to save up to $300 million a year by slashing jobs, closing plants and relying more heavily on outsourcing.

- read the interview

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