Hospitals

Mayo Clinic’s magic misused. And a Minnesota incubator crumbles

Investing in healthcare is harder than it seems, even when you have the Mayo Clinic name behind you. Minnesota incubator Health IP Partners was created to commercialize technology from Mayo Clinic and similar institutions. But it is shutting down after less than two years. The organization, among other things, improperly leveraged Mayo’s name for fundraising purposes.

By Arundhati Parmar on March 02, 2011

A Minnesota incubator created to commercialize technology from Mayo Clinic and similar institutions is being dismantled less than two years after its launch.

Plus, Mayo charges that its name was improperly leveraged for fundraising purposes, a charge confirmed by the spokesman of the incubator: Healthcare IP Partners.

Healthcare IP Partners was formed in December 2008. By May 2010 it had spent all of its estimated $8 million in funding to run five portfolio companies, four of which licensed technology from Mayo. The same management team also consumed $26 million running a separate startup, Kardia Health Systems, which started in 2006 after getting an exclusive license for Mayo-created software to manage cardiac images like echocardiograms online.

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An audit revealed only a bloated corporate structure at both Kardia and HIPP and no financial impropriety, said the incubator’s spokesman, Kevin Molloy. However, a former tenant company now talks about how it has severed all connections with the incubator and aims to be “squeaky clean.”

Carl George, who, for a time, ran both HIPP and Kardia, said their troubles stem from the “great stresses” that “young companies undergo.” He dismissed any suggestion of financial irresponsibility, blaming it on a bitter employee he fired for indecent exposure.

Healthcare IP Partners was a “great entrepreneurial undertaking,” George said.

Kardia and HIPP were started by Gus Chafoulias, a commercial real estate developer in Mayo’s hometown of Rochester, Minnesota. Chafoulias hired George, whose background is in software development and business investment, to be Kardia’s CEO in 2006. Two years later, the company hired George Danko, a former Best Buy executive specializing in venture capital, to lead the firm’s acquisition strategy.

In December 2008, Chafoulias named George chairman of HIPP. The incubator nurtured five companies, four of which licensed Mayo technology. One is Triprima, which leverages Mayo data storage technology. Another, OnPoint Medical Diagnostics, commercialized Mayo software that automates a mandatory accreditation process required of hospitals and imaging centers to get federal reimbursement for MRI scans. Other Mayo-based startups focused on cancer therapy and accounting software. A fifth business, unrelated to Mayo, developed software to remotely monitor medical exams.

George, who likes to talk about Mayo, said he raised $8 million for HIPP and $26 million for Kardia.

“The Mayo pixie dust effect — that’s what Carl George always called it,” said John Freeland, managing partner of Freeland Systems, which was acquired by Kardia but later sued the company over payments (the case was settled late last year). “You sprinkle Mayo pixie dust on things and everybody thinks it’s worthwhile and a valid thing.”

George could not be reached recently for follow-up questions regarding Freeland’s characterization.

Mayo spokeswoman Kathy Anderson explained that Mayo has no financial agreements with HIPP but has an equity stake in Kardia. Anderson, while not naming anyone, said the Mayo Clinic name was “used in certain documents that were not reviewed or approved by Mayo prior to distribution” of shares. She added that Mayo took “immediate action to correct the matter” but declined to elaborate.

Molloy also confirmed Mayo’s name was improperly used by a “former administration,” but similarly declined to provide additional details.

Molloy described Mayo as a “Mecca of millions with regard to medical care” and a name that “undoubtedly helps capital raises.” He demonstrated a keen desire to guard the Mayo brand. “The name ‘Mayo’ is something that we have to protect and make sure that it is used properly in the public arena with regard to company development,” he said.

Troubles for Kardia and HIPP were financial and, in the case of Kardia, legal. Along with the suit by Freeland, Kardia was sued by a former president over a compensation dispute. Under the terms of the settlement, Sam Ashkar, the former president, declined comment.

After money for both Kardia and HIPP ran out, George resigned in July and Chafoulias ordered an audit. George called the audit standard, while Molloy said the situation “required an intensive audit” to “ensure that the money was used for the purpose that it was intended.”

The audit revealed no malfeasance, Molloy said. Instead, the companies were “overloaded with a corporate structure that (they) could not sustain,” he said.

“Staffing levels were allowed to get too high (at both Kardia and HIPP), and that caused the biggest drain on our resources,” Molloy said.

At their peaks, Kardia had 50 employees and HIPP had 20, Molloy said. Now Kardia, which used to have offices in the Minnesota BioBusiness Center in downtown Rochester, is a virtual company with four employees and two pending hires, Molloy said. HIPP, which is being wound down, has three employees. Molloy included Danko as one of the three employees. However, Danko said he isn’t an employee and hasn’t been paid since April.

Kardia and HIPP appear to be Chafoulias’ first foray into technology commercialization. Chafoulias made his fortunes in building hotels and commercial buildings, one of which is rented mainly by Mayo in Rochester, Molloy said.

Molloy did not make Chafoulias available for an interview and appeared to take offense when asked if Chafoulias’ move to develop winning technologies was a departure from his core expertise in real estate.

“I don’t consider that any of your affair,” Molloy said.

However, an expert in entrepreneurial finance and a former faculty member at the Carlson School of Management said commercializing technologies is tough.

“It’s one of those sexy kinds of things that everyone hopes that ‘Gee, we can take all these technologies developed at some global institution and popularize it and commercialize it and all the rest of it’ ” said Dileep Rao, president of Golden Valley-based InterFinance Corp. and a former senior lecturer at the University of Minnesota’s Carlson School of Management. “The odds unfortunately are not all that favorable.”

Now, HIPP’s website has been taken down and the investors are being offered shared in HIPP’s portfolio companies as part of a restructuring.

OnPoint Medical Diagnostics plans to go public through a reverse merger with a public shell at the end of March, said William Cavanaugh, its president, in a recent interview.  He described OnPoint as a “good story” among the unfortunate events that have transpired at HIPP.  The company currently has $1.3 million in the bank and hopes to raise another $5 million through a private investment in a public entity.

Cavanaugh added that he is confident investors will see a healthy return and projected revenue of $60 million in five years. He repeatedly stressed the company has severed all connections with HIPP and aims to be “squeaky clean.”

Triprima, the data storage company, will be separately launched soon and is “building revenue,” Molloy said.

But the future of three other companies is murky at best. They don’t have any revenue, Molloy said, and it’s unclear whether the other Mayo startups will retain their licenses. Rainwater Healthcare, which was developed in-house, “is something we put aside for the time being,” Molloy said.

HIPP had informally changed names to Strategic Medical Innovation Partners following the discovery that the money was spent. But now Molloy said neither of the names is being used.

It’s not clear whether Chafoulias intends to continue incubating technologies under a new company.

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