The good news for healthcare startups in the Midwest is that they raked in 10 percent more venture capital dollars in 2011 than the prior year.

The bad news is that the 2011 total ($810 million) was still less than the amount raised in every year from 2007 to 2009. Venture fundraising by Midwest healthcare startups is down 34 percent from its 2007 peak of more than $1.2 billion, according to the latest annual venture report from Cleveland-based business development group BioEnterprise.

Minnesota ($223 million), Ohio ($178 million) and Missouri ($169 million) led midwestern states in attracting investment dollars in 2011.

In terms of the healthcare industry sector, investment dollars were spread out fairly evenly in the three major categories: medical devices (36 percent), health IT and services (32 percent), and biopharmaceuticals (31 percent).

Going forward, the outlook for healthcare startups in the Midwest seeking to raise venture funding looks shaky. Mark Heesen, president of the National Venture Capital Association, last week told Xconomy that he expects venture capital deals will continue to cluster along the East and West coasts, with a hole expanding in the Central U.S., where it is becoming increasingly difficult for technology and life sciences startups to attract venture investment.

Of particular alarm nationally is a big reduction in first-time funding deals for life sciences companies, which dropped to 153 last year, a 43 percent decline from 2006.

“Life sciences VCs are increasingly focusing on later-stage opportunities that carry less risk, from a clinical and regulatory perspective,” said Jonathan Leff, a managing director at the New York-based venture-capital firm Warburg Pincus, Bloomberg News reported. “This reflects a serious breakdown in the model that has fueled the U.S. leadership in life sciences innovation.”

Still, there are bright spots nationally that suggest that rumors of healthcare venture capital’s death have been greatly exaggerated. The sector closed out 2011 in strong fashion and posted a five-quarter high in funding and recorded solid deal activity, according to the latest quarterly report from venture capital database CB Insights.

In addition, healthcare (23 percent) grew as a percentage of all venture capital deals in the quarter after three consecutive quarters in decline, according to CB Insights.

But there are plenty of other federal funding opportunities out there for startups that know where to look.

The Department of Defense, in particular, can be a fruitful source of grant funding for biomedical firms in industry sectors such as telemedicine, infectious disease, chemical defense and environmental medicine, according to Liz Powell, founder of G2G Consulting, a Washington, D.C.-based government affairs group.

Here are five other quick tips Powell shared at a talk on nondilutive funding opportunities that was hosted by Cleveland-based nonprofit business development group BioEnterprise.

Answer the most important question: Is your company’s technology novel? You’d better hope so because it will greatly enhance your chances of obtaining funding. If it isn’t, you might be out of luck, so be prepared to explain exactly what’s novel about what you’re doing.

Join the army…: Of the service branches under the Department of the Defense’s auspices, the army is the one for biomedical startups to get to know. The army has the most money and is taking the lead in medical research, Powell said. To illustrate the point, she shared the following numbers: The army has 16 laboratories across the nation, with six that perform medical research. The Navy has 17 labs, but just one does medical research.

…But don’t limit yourself to DoD: The Department of Defense represents a life sciences company’s likeliest path to government funding, but there are plenty of other possibilities, too. For example, last year’s health reform law created a $10 billion Center for Medicare and Medicaid Innovation, which is doling out grants to projects that show promise in reducing health costs and improving quality.

Relationships are key: It’s easy to get tired of hearing it, but relationships matter — often more than nearly anything else. In that regard, the public sector is no different than the private. Cultivate relationships with key department leaders at government research centers. Invite public officials and elected leaders to tour your facility so you can demonstrate your technology to them.

Show job creation and economic growth: Admittedly, government researchers who control purse strings are generally less interested in creating jobs than they are in advancing technology. But in a bleak economy, they may be the only ones. If you’re looking to win over elected officials, in particular, be sure to provide credible (or at least seemingly credible) projections on the amount of jobs your company could eventually create, and detail each milestone that would to key hires.

Overall, investment in Midwestern healthcare startups was down 24 percent to $315 million, compared with the first half of last year, according to a report from Cleveland-based BioEnterprise, a nonprofit that helps biomedical companies with business development.

BioEnterprise president Baiju Shah attributed the declining investment dollars to an upsurge in mergers and acquisitions activity, meaning that more startups are being purchased by strategic acquirers rather than seeking investment financing.

Compared to the pre-recession days of 2007, the decline was even more stark: a drop of 58 percent from $742 million.

One bright spot for Midwestern healthcare startups, however, was an upswing in the number of deals — albeit obviously smaller deals. The 86 deals in the first half of this year represented a 15 percent increase from last year, as well a 34 percent rise from 2007.

Broken down by state, Minnesota attracted the most dollars with $88 million, followed by Ohio ($80 million) and Wisconsin ($49 million). In terms of number of deals, Ohio was first with 25, followed by Minnesota (13) and Pennsylvania (12).

The biggest Minnesota healthcare (pdf) deals in the first half of the year were health IT firm Ability Network ($20 million), managed-care provider SeeChange Health ($20 million) and the mysterious Rotation Medical ($10 million).

Top Ohio deals included a private placement to stem cell developer Athersys ($13 million), anti-anemia drug developer Akebia Therapeutics ($14 million), health IT company Explorys ($11.5 million) and genetic test maker AssureRx ($11 million).

Broken down by sector, Midwestern biopharmaceutical companies raised the most cash ($153 million), followed by medical device firms ($85 million) and health IT and services companies ($70 million).

Biopharmaceutical companies were the top recipients, with 49 percent of the total. Medical device companies raised 38 percent of the total, and health software and services companies collected 14 percent.

The $737 million was the lowest amount for Midwest healthcare startups since 2005, when the total was (pdf) $550 million. Those halcyon, pre-recession days of 2007 were the high point, with more than $1.2 billion raised by Midwestern venture capital startups.

The number of companies receiving funding last year, 159, was similar to the prior two years (156 in 2009, and 165 in 2008).

All told, the numbers aren’t bad considering the turmoil that’s engulfed the venture capital industry in the past few years. Ten-year venture capital returns have fallen in recent years as the once-lucrative IPO market has slowed and technology startups no longer need as much capital as they once did to get rolling. That’s led to much debate in recent years about the venture model being “broken,” as many notable VC firms ratchet down the size of their funds and angel investors become increasingly important sources of funding for young firms. Many insiders expect the ranks of venture capitalists to thin substantially in the coming years.

By state, Illinois led the way with $161 million, followed by Ohio ($147 million) and Minnesota ($139 million). The numbers were similar when broken down by region, with Chicago coming in at No. 1, followed by Minneapolis, then Cleveland.

“Overall, the past year was a difficult one for emerging healthcare ventures in the Midwest and nationally, though investment activity picked up towards the end of 2010,” said Baiju Shah, president of BioEnterprise.

BioEnterprise’s report is somewhat at odds with numbers from the National Venture Capital Association (NVCA), which showed that the amount of venture money invested in Midwestern startups grew 45 percent to $818 million through the first three quarters of last year. However, the NVCA’s numbers include all industries, whereas the BioEnterprise numbers are specific to healthcare.

The following were the biggest Midwest venture deals involving healthcare companies last year, according to data from BioEnterprise:

• $43 million to Chicago-based Neurotherapeutics Pharma;
• $40.6 million to Madison, Wisconsin-based Cellular Dynamics International;
• $40 million to Sagent Pharmaceuticals of Schaumburg, Illinois;
• $34 million to Precision Therapeutics of Pittsburgh;
• $27 million to Beachwood, Ohio-based Radisphere National Radiology Group.

But that won’t stop key interest groups from throughout Ohio’s healthcare community from pushing for (and against) prospective laws that they hold most (or least) dear.

With Republicans in control of the governorship and both houses — and most GOPers having never met a tax cut they didn’t like — it’s virtually certain the deficit will be tamed by deep spending cuts, rather than the addition of more revenues.

For the legislature, it seems that taking the axe to state spending on health and education is all but inevitable. Medicaid, the federal- and state-funded health insurance program for low-income people, represents the state’s largest and fastest-growing expenditure, so it seems like a rather obvious place to begin cutting — but doing so could exact a toll on hospitals and the doctors and nurses they employ.

To get a feel for what’s at the top of their legislative agendas, MedCity News spoke with groups representing the state’s hospitals, nurses, doctors and biomedical companies.

Hospitals: The Ohio Hospital Association‘s (OHA) “main focus” this year will be the state budget, spokeswoman Tiffany Himmelreich said. OHA will work with lawmakers to offer ideas on how to perform the delicate act of balancing the budget while avoiding cuts to Medicaid reimbursement rates that would surely sting hospitals’ finances. OHA supports “systemic change” to the Medicaid program, such as employing the concept of medical homes and placing a greater emphasis on prevention and primary care, Himmelreich said.

Hospitals also are pushing for legislation that would make permanent a moratorium on most-favored-nation clauses between insurers and health providers. The clauses require health providers such as hospitals to charge a payer, such as an insurance company, the same rate they charge other comparable payers. The clauses discourage competition amongst insurers and restrict hospitals’ ability to contract freely with insurers, OHA said. A study commission headed by the Ohio Department of Insurance last year recommended (pdf) the state prohibit or restrict most-favored-nation clauses in healthcare contracts.

Nurses: For the Ohio Nurses Association (ONA), the No. 1 legislative objective is to ensure what it views as adequate nurse staffing levels. Specifically, ONA would like to strengthen a 2008 law that required hospitals to set up “hospital-wide nursing care committees” to provide input to hospital executives on nurse staffing levels. Half of each committee is required to consist of direct-care nurses, according to the law. However, the law imposes no penalties on hospitals that don’t follow it, so ONA is looking for ways to “add some teeth to it,” said Lisa Rankin, ONA’s deputy executive director.

ONA is also hoping to revive a law proposed last session that would increase the punishment for assaulting nurses in the workplace. The proposal never made it to a vote last time. Plus, the group is concerned about the effect of Medicaid cuts on its members.

“Any cuts to Medicaid filter down to health facilities and nursing facilities,” Rankin said.

Doctors: Like physicians everywhere, Ohio doctors consider tort reform a huge issue, according to a spokesman for the Ohio State Medical Association (OSMA), the trade group for doctors in the state. OSMA hopes to see the reintroduction of a bill from last session that would dramatically increase the legal standard to win a civil suit against a doctor working at an emergency department. Physicians would have qualified civil immunity while working in emergency rooms and be subject only to lawsuits if they showed “willful or wanton misconduct” — a high standard for liability usually reserved to determine punitive damages.

The bill is also a top priority for the Ohio Hospital Association. “Qualified immunity would allow hospitals to care for victims of a public crisis without the fear of litigation,” Himmelreich said.

In addition, OSMA would like to see an adjustment to the state’s statute of repose, which is similar to a statute of limitations, as it relates to physician liability. Essentially, OSMA wants the statute of repose — four years for adults — to apply to children as it applies to adults. Currently, children can bring legal claims against physicians up until they turn 19 — even if the procedure in question happened 10 years ago.

Biomedical: Ohio’s biomedical industry had its wishes come true last year when voters extended the state’s Third Frontier program, which provides grants aimed at job creation to high-tech companies. Still, anything that could disrupt funding to the program would be a huge concern to the industry, though there’s no reason — at least now — to think that’s going to happen. Plans by newly elected Gov. John Kasich to at least partially privatize the Ohio Department of Development, which administers Third Frontier, have created a little uncertainty, but not necessarily concern, for the industry. Leaders of two leading economic development groups — BioEnterprise Corp. in Cleveland and BioOhio in Columbus — say they generally support Kasich’s plan.

“With no specifics yet available, it is hard to comment on what we like or do not like about the implementation of the idea,” said Tony Dennis, BioOhio’s president.  “Based on the track record of other states’ privatization, it is a mixed bag of results for the bioscience industry.”

As for specific legislation, BioEnterprise President Baiju Shah is hoping for the revival of a bill from last session that would increase the dollar amount of tax credits the Ohio Venture Capital Authority (OVCA) can authorize.  The tax credits are used only to offset potential losses incurred by investors in the Ohio Capital Fund, a “fund of funds” that invests state money alongside private funds. Shah said the OVCA program makes it easier to recruit out-of-state venture firms to set up offices in Ohio.

Also in the interest of freeing up investment dollars, Dennis said BioOhio would push for a $100 million-plus venture capital fund that’d be structured as a partnership between the state’s public universities and private industry. Details of exactly how such a fund would work are sketchy, but the concept has a powerful backer in Ohio State University President Gordon Gee.

Kasich is expected to submit a budget proposal in March. The next budget would take effect on July 1, 2011.

Through the first three quarters of 2010, the amount of venture money invested in Midwestern startups grew 45 percent to $818 million, according to the National Venture Capital Association. That’s a higher amount than Midwestern venture investment in the full year of recession-plagued 2009.

By way of comparison, venture investing in Silicon Valley startups didn’t grow at as quick a pace through the first three quarters of last year. Venture investment in Silicon Valley companies grew 21 percent to $6.4 billion during the period.

The Midwest’s strength in high-growth sectors like biomedical and clean tech should ensure that the region stays an attractive place for investors, industry insiders predict.

Ray Leach, CEO of Cleveland economic development group JumpStart Inc., told peHUB that he believes the Midwest will emerge as the nation’s fastest-growing venture market in 2011. Leach attributed his prediction to the capital efficiency of Midwestern companies and a “thriving pipeline” of early stage companies that are ready for growth capital.

The Midwest’s status as a burgeoning hub of venture investment isn’t news to Baiju Shah, CEO of BioEnterprise, a nonprofit that assists Northeast Ohio healthcare companies with business development. Shah said venture investment in Midwestern companies has risen every year since his organization began tracking the numbers in 2005 — though Shah admits that his visibility is limited to healthcare companies.

Shah pointed to two primary reasons for the Midwest’s strength in recent years. First, thanks to groups like the Kansas Bioscience Authority and Indiana’s BioCrossroads, there’s infrastructure in place to help coastal VCs unfamiliar with the region quickly find the types of companies that they’re looking for. “We’ve lowered the barriers to investment,” Shah said.

Second, thanks to the rise of angel groups and state funding programs like Ohio’s Third Frontier, there are lots of sources of “on-the-ground partners” that will join with VCs in putting money into startups, Shah said.

So is there anything that could disrupt the Midwest’s transformation from Flyover Country to Must-Invest Territory?

The greatest threat lies in anything — like shifting political winds, for example — that could jeopardize sources of funding or reallocate resources to slower-growing industries, according to Shah.

“We’ve grown a lot, but our ecosystem is still in the developmental stage,” he said.

[Photo from flickr user NASA Goddard Photo and Video]

Related articles

• Illinois keeps lead among Midwestern states for healthcare VC (medcitynews.com)
• Wisconsin’s angel money powers it past Minnesota (medcitynews.com)

TiE (The International Entrepreneurs) Ohio’s competition, called TiEQuest, is open to current and aspiring entrepreneurs, according to a statement from the group. TiE Ohio will accept entries from Dec. 1 to Jan. 31.

Winners will have the opportunity to complete in TiE’s global competition, to be held in Toronto in April.

“The TiEQuest business plan competition supports entrepreneurs regionally and provides them a platform for visibility and support through TiE’s global network of successful entrepreneurs and investors,” said Baiju Shah, CEO of Cleveland economic development group BioEnterprise and co-chair of TiE Ohio.

Further details will be available at Tie Ohio’s website.

Some of the nation’s best and brightest are flocking to University Circle to be on the cutting edge of the biotech innovation. Channel 3′s Maureen Kyle continues our “Brain Gain” series with a look at how this could be the catalyst to change Cleveland forever.

“We are seen as a center for health care innovation among the leading clinicians that are here,” says BioEnterprise CEO Baiju Shah.

In between doctors and patient care is the medical innovation needed to save lives. And located between the Cleveland Clinic and University Hospitals sits BioEnterprise, an incubator for biotech startups.

“For every 10 ventures that is launched in the biomedical space, one of them will grow up to be the next ‘STERIS.’ Two of them will be successfully acquired by a larger company and then those entrepreneurs will start their next ventures.”

Shah started BioEnterprise in 2002 with 250 companies the incubator now has more than 600 and drawing in more.

“Went to the east coast, the west coast, someone convinced us to come to Cleveland, ” says Jake Orville, a New York native.

Orville could have taken his company anywhere and decided Cleveland was the best location.

“Having been here now for two years, I think that’s what’s unique with Cleveland. You have the combination of the technology and you have the combination of the physician care and the patient care and its the two of them that really helps breed companies like mine, Cleveland HeartLab.”

Cleveland HeartLab started with eight employees, now has 26 and is looking to add 10 more.

“Opportunity! Opportunity knocked,” says George Farr, vice president of biochemistry and biophysics at Cleveland startup Aeromics.

Farr was raised in Garfield Heights and moved to Connecticut to be a professor at Yale. He and a others moved back to work on protein advancement that will help stroke and brain trauma victims.

With their grant money they got a 16 hundred square foot lab in University Circle. “For that same amount of money back in New Haven, we would get basically just half of one of these benches. That’s it. No office space, no nothing.”

It’s these companies changing Cleveland’s reputation worldwide and will change the way we view successful local businesses. “They’re not the TRW’s. these are companies who have 10 to 50 employees that are working on very cool inventions that all of us are going to need.”

John Kasich

When it comes to keeping smiles on the faces of Ohio’s medical industry leaders, Governor-elect John Kasich’s predecessor did him a big favor.

Current (and soon-to-be former) Gov. Ted Strickland led a successful get-out-the-vote campaign that culminated in May with the renewal of the state’s Third Frontier program, a $1.35 billion, 10-year initiative intended to energize Ohio’s economy by investing in technologies in five industry clusters, including biomedical.

Third Frontier may well be the single-most-important state government-related issue to Ohio’s burgeoning biomedical industry.

Advocates credit Third Frontier with creating 55,000 jobs, and generating a $6.6 billion economic impact in the state since 2002. While it may be tough to verify those figures, it’s safe to say that without Third Frontier, the state’s biomedical industry wouldn’t be nearly as strong.

Thanks in part to Strickland’s efforts, voters passed a four-year, $700 million Third Frontier bond issue by a two-to-one margin. The vote extended the program until 2016. Kasich can do his part by extending Third Frontier even farther into the future, said Bob Schmidt, chairman of Cleveland Medical Devices Inc.

Kasich has said he supports Third Frontier, but he’d like to privatize oversight of the program. That’s fine with Schmidt, as long Third Frontier keeps pumping cash into Ohio companies.

“It’s so big that it really sets Ohio apart from other states,” Schmidt said. “This is what really helps small businesses.”

Tony Dennis, CEO of biomedical trade group BioOhio, said Third Frontier could be even more effective through a greater emphasis on innovation and commercialization. He also shared a few other tips on how he thinks Kasich’s administration could boost the industry.

“Removing growth barriers such as low amounts of later-stage private capital, the lagging pace of technology commercialization, and lack of a coordinated workforce and education strategy should be considered by the new administration,” Dennis said.

Baiju Shah, CEO of Cleveland biomedical economic development group BioEnterprise, agreed that continuing to support Third Frontier is a must for Kasich. Shah said he’s confident Kasich will do just that.

But Shah has another concern that involves the problem that’ll likely keep Kasich up late on many nights — Ohio’s impending budget deficit that’s estimated to run as high as $8 billion over the next two years. Shah fears that ripples from the deficit could disrupt into medical innovation that’s funded by the state’s largest hospitals and institutions.

Here’s how the thinking goes: Faced with such a large deficit, Kasich and his allies could look to cut healthcare or education spending — the budget’s two biggest line items. “It’s a matter of how you do it, rather than if you do it,” Shah said.

Slicing the healthcare portion of the state budget likely equates to cutting spending on Medicaid, the fastest-growing and largest portion of state expenditures. Those Medicaid cuts could hit hospitals’ revenues, forcing them to look for savings, and potentially diverting money from research and innovation, Shah warned.

Such cuts to hospitals’ research budgets are a possibility in the face of declining Medicaid reimbursements, but far from a certainty, said Tiffany Himmelreich, spokeswoman for the Ohio Hospital Association (OHA). She acknowledged that “Medicaid cuts are always a big concern for hospitals.”

“If Medicaid dollars were cut, that could impact a lot of different functions for hospitals,” she said. “One of the possible impacts could be research, but there are many variables at play, so it’s hard to say how that would play out.”

Himmelreich said Kasich has shown a willingness to meet with and listen to suggestions from hospital representatives throughout the state, for which the OHA is grateful.

That was the consensus among four industry panelists at an annual forum hosted Tuesday evening by BioEnterprise, the Cleveland nonprofit economic development group that focuses on growing the region’s biomedical industry.

A year ago, the U.S. economy was mired in a slump, credit markets were frozen to small businesses, and there was lots of industry uncertainty over what shape health reform would take — or if a federal healthcare overhaul would happen. Now, the economy’s started to improve a bit, credit markets have begun to thaw, and uncertainty over health reform’s shape has given way to uncertainty about the law’s impact once many of its provisions take effect in 2014.

Again, nobody said today’s investment climate is perfect, but most industry insiders probably are sleeping a little easier than last year.

For example, the economic downturn created a “pent-up” demand in private equity that has helped yield both a higher volume and better quality of deals, said Joseph Ibrahim, a principal with Cleveland-based Riverside Co.

Doug Schillinger, managing director of Utah-based DW Healthcare Partners, said he’s been surprised by how many high-quality potential deals come across his desk the year. More challenging than finding investment is finding solid senior management talent to substantially grow those companies, he said.

Despite the positive talk and general sense of optimism — which is no doubt a welcome change for most healthcare companies — the highlight of the program came from some brief introductory comments by Greg Gale, a lawyer with Cleveland law firm Squire, Sanders & Dempsey, one of the event’s sponsors.

After warning the crowd that he’s a terrible public speaker, Gale cast serious doubt on that claim by telling a joke: “Do you know the difference between a venture capitalist and a proctologist?

“Eventually, the proctologist takes his finger out.”

If Gale can deliver more biting humor, here’s hoping he moderates next year’s forum (not to disparage this year’s moderator, BioEnterprise President and CEO Baiju Shah, who came through with a customary solid performance).

This post is sponsored by the Ohio Venture Association.

Startup-friendly firms and venture capital combined to breathe life into the business of a local doctor who helps patients breathe. 

Dr. Raymond Onders will share a venture capital success story this week during his talk, “Helping Patients Breathe:  From Superman to Synapse Biomedical — How orphan diseases can lead to worldwide sales from Northeastern Ohio.”

Onders, Director of Minimally Invasive Surgery at Synapse Technology Corp., will speak at the Ohio Venture Association luncheon on Friday, Oct. 8 at The Union Club in Cleveland. The event begins with networking at 11:30 a.m. and ends at 1:30 p.m. Lunch will be served at noon.

A Cleveland native, Onders attended Kent State University and Northeastern Ohio Universities Colleges of Medicine, which recently honored him with the Distinguished Alumni Award–its highest award–for his work in helping advance medicine.

A former U.S. Air Force Major, Onders was the first Director of Minimally Invasive Surgery at CWRU School of Medicine. Over the last 12 years in Cleveland, Onders has focused his research on ways to help people breathe naturally using their own diaphragms. He has written more than 100 papers, book chapters and published abstracts. When Onders was researching how to help spinal cord injury patients breathe without a ventilator, one of his first research subjects was the late actor Christopher Reeve, who played Superman.

Onders’ research and work in helping patients has led to numerous honors, including: The Maurice Saltzman Award presented on behalf of the Mt. Sinai Health Care Foundation; Northern Ohio Live Award of Achievement in Science and Technology; Crain’s Cleveland Business 2008 Health Care Heroes for Advancement in Health; and the prestigious Margaret and Walter Remen Chair of Surgical Innovation at University Hospitals Case Medical Center and CWRU School of Medicine.
 
Advancements that Onders has made in the technology of pacing the diaphragm have led to patents and to the founding of Synapse Biomedical to bring this technology to patients. In 2003, Synapse Biomedical was the runner-up for TIIME, CWRU/Weatherhead Business School Business Launch Competition in the Bioscience Category and Best in Show in the 2003 Cleveland Growth Association/COSE Business Plan Challenge.

Through the work and help of JumpStart, BioEnterprise and many other local entities, and with venture capital investments from California, Synapse Biomedical continues to grow. Sales are expanding worldwide. Future pipeline products will help patients with Amyotrophic Lateral Sclerosis (ALS or Lou Gehrig’s disease) and any patient on a ventilator in the case of a pandemic.

Members may attend the luncheon for $25 with a reservation or $35 without a reservation. For non-members, the cost is $45 with a reservation or $55 without a reservation. To register, go to www.ohioventure.org.

Rick Arlow and partner Zachary Bloom, a recent Lehigh University graduate in healthcare economics, started LifeServe Innovations to capitalize on a market opportunity Arlow found while talking to paramedics and emergency physicians about the challenges they face on their jobs.

Arlow, a 23-year-old former volunteer emergency medical technician, discovered that many medical workers aren’t happy with the tools available to them for emergency airway access procedures. In cases of severe trauma when a paramedic can’t access an airway by conventional means, the only choice is to cut open a patient’s throat and insert an air tube to deliver life-saving oxygen.

Arlow and Brown started LifeServe with the aim of giving emergency workers better tools to do that. During the product development process, LifeServe was inspired by the way snakes bite their prey, designing its devices to mimic snakes’ fangs. The result was two devices that still are in preclinical testing — the Cobra Tracheostomy and the Viper Cric — each designed to perform a different airway-access procedure.

Though LifeServe still is squarely in its early stages, and its devices are being tested on only cadavers, the company has made impressive progress. In May, it was awarded $25,000 in grant money and services after winning an entrepreneurship award from LaunchTown, an Akron-based program that recognizes students who come up with strong ideas for businesses.

That triumph brought LifeServe to the attention of BioEnterprise, a Cleveland nonprofit that helps local healthcare companies with business development. For the last few months, BioEnterprise has helped LifeServe identify potential sources of grants and conduct market research, said Chris Sklarin, a director of business development for the organization. So far, Sklarin likes what he’s seen of LifeServe and Arlow, calling him “an interesting and thoughtful person,” though stressing the company is still in its very early stages.

LifeServe hasn’t done enough research to determine whether its potential market is large enough to support a company, or if  its products would more appropriately be sold into a larger company’s portfolio, according to Sklarin. But there is a market need for the airway access devices the company is pursuing, he said.

The devices are likely to be of interest to the military if LifeServe can prove they’re better than what’s currently on the market.

In the meantime, Arlow plans to continue gathering preclinical data, seeking sources of investment and finding partners to help test the device when (and if) it’s cleared for use in humans. And, there’s that little matter of completing med school, too.

The slight uptick, to $412 million from $403 million, can be attributed in part to increased seed and angel activity, according to (pdf) a statement from Cleveland-based nonprofit BioEnterprise, which tracks the data. The $412 million was spread over 75 deals, making the average deal amount about $5.5 million

Biopharmaceutical companies attracted 70 percent of the dollars ($289 million), with the rest going to device companies ($96 million) and software and service companies ($26 million).

While any sort of fundraising increase is certainly welcome news in a jobs-starved economy, the dollars were way down from the prerecession, halcyon days of 2007 when Midwestern healthcare startups banked $742 million in 64 deals.

The smaller per-deal amounts reflect the growing trend of downsizing in the venture industry. Ten-year venture capital returns have fallen in recent years as the once-lucrative IPO market has slowed and technology startups no longer need as much capital as they once did to get rolling. That’s led to much debate in recent years about the venture model being “broken,” as many notable VC firms ratchet down the size of their funds and angel investors become increasingly important sources of funding for young firms.

Still, drug and device startups nearly always need lots of cash to fund the expensive clinical trials that are necessary to gain regulatory approval to get their products on the market. So as long as venture firms raise cash from their limited partners, they’re unlikely to run out of startups in search of a boost.

By state, Illinois led in investments received, with $123 million. Much of that came from two bid deals — $43 million to Chicago-based Neurotherapeutics Pharma and $40 million to Schaumburg-based Sagent Pharmaceuticals. The investment in Neurotherapeutics was (pdf) the largest that any Midwestern health company received in the first half of the year.

Fundraising by Ohio and Minnesota companies dropped precipitously compared to the first half of last year. Ohio startups pulled in $47 million, a drop of  46 percent, while Minnesota companies suffered a 64 percent decline to $43 million.

Brian Duncan

Dr. Brian Duncan caught the business bug as the only clinician on a team of Cleveland Clinic researchers who set out in 2004 to develop a heart-assist pump for infants with heart failure.

The Clinic wooed Duncan, a pediatric heart surgeon, and his cardiac anesthesiologist wife to Cleveland in 2001. A few years later, the National Heart, Lung and Blood Institute said it wanted to split $20 million among five teams to design pediatric heart pumps. As is the case for many technologies, the market for the pediatric devices was too small to justify commercial development.

“We were using 30-year-old technology” to keep infants alive long enough to receive heart transplants, Duncan said of extracorporeal membrane oxygenation technology, better known as ECMO. So Duncan, the primary investigator on the Clinic team, and his teammates used their $4.2 million National Institutes of Health (NIH) grant to design PediPump (pdf) — a tiny pump that can go inside or outside the heart to help the ventricles pump blood.

As administrator of the grant budget, Duncan began to think about business school. “I had never taken a business class. Not one,” Duncan said. He completed an MBA at the University of Michigan in 2008 — while doing most of the pediatric heart transplants at the Clinic. “I identified a whole new set of challenges, a whole new set of endeavors to get rolling with. It was very invigorating,” he said.

Duncan did a couple of projects with David Strand, who arrived at the Clinic in July 2007 as its chief emerging businesses officer responsible for developing new revenue streams in areas outside the institution’s core focuses of medicine and medical research. “He figured I could add value by becoming the medical director of emerging businesses,” Duncan said. Strand departed last year.

Last August, Duncan started working with Arboretum Ventures, an Ann Arbor, Michigan, venture capital firm that invests in early stage healthcare companies, as an entrepreneur in residence. In March, Duncan left the Clinic to become Ohio venture partner for Arboretum Ventures and vice president of business development for BioEnterprise, the bioscience company developer in Northeast Ohio. “In the back of my mind, I thought that being a venture investor was where I would ultimately go with my career,” said Duncan who sat down with MedCity News to talk about his dual role.

Q. So you’re both a business developer and a venture capitalist? How does that work?

A. The two roles are incredibly complementary. At BioEnterprise, we see companies in the earliest development stages. You can help them focus on the creation of value that some day the market will find agreeable. With my clinical background, I can reality-test their medical devices and technologies for potential clinical impact and define hurdles to adoption. On the Arboretum side, some of these same companies may be investment opportunities.

BioEnterprise also gives me immediate access to this great ecosystem. The ecosystem starts with angel investors and venture developers like North Coast Angels and JumpStart, and early stage investing firms like Early Stage Partners and Arboretum. All aspects are here. And it’s an accessible community. BioEnterprise and its leader, Baiju Shah, have put a lot of the pieces together.

Q. How is your job different as venture partner for Arboretum from when you were an entrepreneur-in-residence?

A. I was strictly on the due diligence side as an entrepreneur-in-residence. Because of my background, that’s where I provide the most value. Now, I’m also figuring out how structure deals for companies. One area I hadn’t done before is overseeing companies as a director. Now, have an observer board role with Accord Biomaterials. This observation is a vital function for a venture capital firm.

Q. What do you think about Arboretum?

A. Being part of Arboretum has been wonderful for me. Jan Garfinkle, the founder, is a great investor, great operational leader. And Tim Petersen is the same. They have complementary skill sets. It’s one of the most effective partnerships I’ve ever observed.

Q. What’s it like working with Bio Enterprise?

A. Every day, I’m amazed at the level of involvement that ultimately translates into economic development for Northeast Ohio. It’s exciting stuff. It’s great for the entrepreneurs.

Q. What’s the hallmark of investing in the Midwest?

A. Entrepreneurs get a lot of attention here. They have a lot of resources to optimize their chances of success. Ohio, for one, has stepped up with the Third Frontier program. Its billions of dollars of grant money is absolutely critical to emerging biomedical companies. I don’t think companies or entrepreneurs have access to all these resources in every environment. Either it’s super competitive, like on the East or West coasts, or it doesn’t exist.

Q. How do entrepreneurs find out whether their new technologies pass the commercial “sniff test?”

A. We’ve got these incredible clinical and research powerhouses. If you wonder whether you’ve got a clinically relevant technology, talking to the folks at any of these hospitals will answer that question. These are folks who are end-users in a big way. If you can address their pain points, you probably have a broadly applicable technology.

Q. So you’re getting to know Ohio health companies that might make good investments?

A. Absolutely. There are a lot of pieces here. You jump in and get as much information as you can. Then, you jump to something else and repeat the process. You do it again and again. Eventually, it sticks. Also, there are lots of relationships to nurture in the local investment community.

Not a bad problem to have, until you start turning away promising young tenants for lack of space. And consider this: Northeast Ohio, which had about 250 biomedical companies in 2003, now has more than 600. So the space problem is probably getting worse.

In the mid-2000s, Case Western Reserve University and real estate developer Forest City Enterprises Inc. tried to strike a contract for West Quad — a proposed $125 million biotechnology campus to be built on a 14-acre site near the university that once was home to Mt. Sinai Medical Center.

Cleveland, Ohio-based Forest City built University Park in Cambridge, Massachusetts — the 2.3 million-square-foot science and technology campus at Massachusetts Institute of Technology –  in 1999. But budget problems and new leadership at Case Western Reserve stalled the Cleveland plan.

Now, several organizations — from biomedical company developer BioEnterprise to real estate developer MidTown Cleveland Inc. to University Hospitals to governments Cleveland and Cuyahoga County — have feasibility studies in-hand and are beginning to put their resources together to create the Health-Tech Corridor in Cleveland.

The corridor starts at East 22nd street and extends east, roughly following Euclid Avenue, to University Circle — near the main campuses of the Cleveland Clinic and University Hospitals. The corridor includes seven institutions, seven incubators for young companies, and more than 75 biomedical and 45 technology companies.

The goal is to attract more biomedical, healthcare services and technology companies to build on nearly $3 billion in investments already made in the corridor — from a new heart hospital at the Cleveland Clinic, to a new cancer hospital being built at University Hospitals, to several Ohio Third Frontier-funded research centers, including the Global Cardiovascular Innovation Center and Center for Stem Cell & Regenerative Medicine.

The plan is to recycle old buildings and build new ones; provide property management, financing, industry and start-up help to companies; and offer service providers access to four hospital systems — the Clinic, UH, St. Vincent Medical Center and the Louis Stokes Cleveland Veterans Affairs Medical Center — which have goals for doing a certain amount of their business in the city. A $200 million rapid transportation project — the RTA HealthLine — runs the length of the corridor.

MidTown Cleveland is heading up the real estate development and management operations. BioEnterprise is contributing industry professionals, as well as those who can walk prospective tenants through the tax, financing and incentive options available in the corridor. Both supported feasibility studies by AngelouEconomics, as did the Cleveland Foundation, Greater Cleveland Partnership and Team NEO.

AngelouEconomics, an economic analysis firm in Austin, Texas, found some common characteristics among successful bio-corridors, such as Research Triangle Park, North Carolina:

• Engaged research institutions with active leadership — Cleveland’s got that.
• Available capital covering all stages of the business cycle — After years of want, Northeast Ohio and Ohio have developed formidable seed and early stage capital resources. Though some see a looming need for growth capital, the state — and Northeast Ohio, in particular — has been attracting healthcare venture capital firms with its Third Frontier program.
• Workforce and talent pool on which to build and sustain efforts — Check.
• Stable and supportive business, tax and regulatory policies — Hmmm, the city and county are trying to be more friendly, but small business owners will tell you they still have a way to go.
• Access to facilities and equipment — A lot of the facilities exist; the corridor project proposes to renovate or build others, as needed; Cleveland research institutions are well-equipped and willing to share.
• Master plan — That’s in the making.
• Marketing — BioEnterprise, the Greater Cleveland Partnership and TeamNEO are covering that, along with business and workforce development.
• Partnerships — The corridor is a public-private partnership; there’s a rising spirit of collaboration — even among competing hospital systems and researchers — who see that as the only avenue to prosperity.

Jim Haviland, MidTown Cleveland’s executive director, said land-banking in the city has been speculative in the past. But planning and collaboration is giving the corridor a market focus, he said.

“What’s nice about that, when you have your governmental sector — the municipal, county and the state — aligned behind this initiative, that bring to bear tremendous resources that are needed to tackle traditional urban problems with contamination or land assembly,” Haviland said. “Now, you’ve got the ability to get these properties, whether they are vacant or underutilized buildings, back into productive use.”

In addition, foundations, like the Cleveland Foundation, “bring a different layer of subsidy to this,” he said. “We’ve never had everybody coming together like this.”

Putting together entrepreneurs and healthcare institutions in one corridor also could foster business.

“We’ve got a unique system here in Northeast Ohio for accelerating biomedical businesses,” said Baiju Shah, president and CEO of BioEnterprise. “The network of venture development partners — it’s a powerful platform for any entrepreneur to launch a business.

“The addition of this corridor is geography in which you are one of many,” Shah said. “So you have the sense of vibrancy, of like-minded souls. And you’ve got an opportunity to interact more closely with the institutions that are part of the corridor.”

Cuyahoga County and Cleveland have designated the corridor as an innovation zone, which means the corridor is eligible for small development grants. But it also might mean resident companies could get special benefits. “What that means is still being shaped,” Shah said. “I would hope that by the end of the summer that becomes clear, then we’ll have the full offering.”

Both nonprofits work in Northeast Ohio and sometimes they bump against each other or duplicate efforts, said Annette Ballou, director of strategic marketing and communications for BioEnterprise. So the two organizations developed a strategic plan to jointly attract companies in these four industries.

“We’re going to be the front-runners,” Ballou said. “We’ll do the cold calls, the meet-and-greets” with out-of-region companies. “We’ll pull Team NEO in when we find a company that’s interested in moving here. BioEnterprise is the industry expert in these areas. We’re not the relocation expert.”

But Team NEO is. “This was the natural progression between two partners that have different areas of expertise but a common goal–to advance the region’s economy,” said Carin Rockind, vice president of marketing and communications for Team NEO.

“Collectively, we’ve been able to do a lot together,” Rockind said. Now, it’s time to take the relationship another step. ”Let’s have joint metrics and leverage both of our skills … to increase the number of leads from medical device companies, converting those leads into new company attractions and new job creation,” she said.

Founded in 2002 by the Cleveland Clinic, University Hospitals, Case Western Reserve University and Summa Health System, BioEnterprise forms, develops and recruits bioscience companies. The organization that now includes the Austen BioInnovation Institute in Akron also helps organizations commercialize their bioscience technologies. Its president and chief executive, Baiju Shah, is known for his tireless networking with venture capitalists worldwide to bring them together with local companies.

Team NEO, which also goes by the name Cleveland Plus Business, especially outside the region, markets Northeast Ohio and attracts companies here. Started in 2005, the organization uses its economic research to market the region to site selectors, real estate consultants and companies. It also connects relocating companies with state and local incentives, such as tax credits for creating jobs.

In recent years, Team NEO has concentrated on building research in industrial sectors, such as biomedical. The organization also has developed a working relationship with the Global Cardiovascular Innovation Center (GCIC), the state’s only Wright Mega-Center of Innovation that is funded by the Ohio Third Frontier project and led by the Cleveland Clinic. Team NEO’s Tom Sudow is the vice president of attraction who works solely on behalf of the cardiovascular innovation center.

BioEnterprise is involved with the GCIC, too. But while the bio organization might contribute academic, clinical, technology transfer and venture funding expertise to companies launching in the center, Team NEO would supply the site selection, tax incentive, supply chain and workforce talent.

Late last year, the organizations quietly launched a Web page that reflects their joint biomedical company recruitment effort. “We’re looking at this being a model” for partnerships in other industries, Rockind said.

CLEVELAND, Ohio — Tim Moran remembers hearing his prematurely born daughter scream in pain when the only available, excessively large airway mask was strapped to her head.

Years later, Moran, a medical device inventor who has helped commercialize and raise money for others’ devices, has started PediaWorks, a not-for-profit organization that will work with medical professionals to develop pediatric medical devices, spinning off for-profit companies to commercialize those devices.

“This is something that’s geared to the common good of pediatrics,” Moran said. “It’s a great mission that I’d like to see everybody in the medical device community get involved in.”

In this age of technological plenty, health care still needs pediatric medical devices in multiple specialties. Lacking devices made just for children, doctors modify adult devices, sometimes causing their tiny patients discomfort, pain or injury. Other times, the modified devices–most often used “off label” or for uses unapproved by regulators–fail to work properly. Some patients must wait for procedures or treatments until they have grown big enough to accept them.

Most for-profit corporations are unwilling to invest in developing pediatric devices because they see small market potential, insufficient insurance reimbursement, difficulties in getting clinical data for U.S. Food and Drug Administration approval and looming legal liabilities, said Steve Girouard, senior director of emerging technologies for Johnson & Johnson who also worked for Guidant and Cleveland Clinic.

“It’s doable,” Girouard said of PediaWorks. “The hardest part is getting the capitalistic forces, and the philanthropic and altruistic forces behind it. But I think there’s a path here.”

Moran formed PediaWorks late last year as a nonprofit organization so it could accept philanthropic money from big medical device makers and foundations. He plans to use the organization to gather ideas and develop devices, then create small, for-profit businesses to commercialize the devices. The small businesses would have access to federal Small Business Innovation Research (SBIR) grants.

So far, though, the organization is short on cash–it’s raised just $30,000 through a grant from Cleveland’s Civic Innovation Lab, as well as support through the local trade group BioEnterprise. Instead, it’s relying on an extensive network of pediatric surgeons and specialists to supply the ideas, professionals at large device manufacturers who might allow their adult-sized products to be re-engineered for kids and engineering professionals to redesign the products or come up with new ones.

Moran is the only employee of PediaWorks, but Bob Johnson, leader of the medical devices team at BioEnterprise, and Dr. Fahd Khan, a senior neurosurgery resident at Case Western Reserve University and University Hospitals Case Medical Center, as well as a biomedical innovation fellow at the Case Department of Biomedical Engineering, also lend a hand.

Moran has tapped into the Congenital Cardiovascular Interventional Study Consortium (CCISC), a group of international cardiologists who are sharing information about pediatric products, procedures and outcomes. He’s also working with UH Rainbow Babies & Children’s Hospital in Cleveland, Cleveland Clinic Children’s Hospital and Lucile Packard Children’s Hospital at Stanford to identify unmet device needs. He works with the University of California, San Francisco and Stanford Research Institute to design, engineer and prototype the devices.

PediaWorks and its collaborators are working on four products:

1. A series of cardiac catheters that are designed for the size and anatomy of the pediatric heart (CCISC and the Clinic Children’s Hospital);
   
2. A simple device that would reduce the time it takes to remove a pediatric brain tumor to less than five minutes from 30 minutes, while also dramatically reducing brain trauma (UH Rainbow);
   
3. A portable, low-cost way to ensure clinicians can place endotracheal tubes as quickly and safely as possible (Case biomedical engineering students);
   
4. A method and device to verify central vein catheter placement without the need for X-rays (UH Rainbow).

The Center for Clinical Research and Technology at University Hospitals Case Medical Center is “very much behind the effort,” said Stephen Behm, the research center’s director of technology management. The center is providing access to UH clinicians and is working with PediaWorks to identify marketplace needs, Behm said.

In the future, the center expects to help PediaWorks design and conduct clinical trials, and help commercialize its products, he said.

Moran already is talking with contract manufacturers who could make the devices.  “My goal for the organization is not to do any direct manufacturing,” he said, but to build a large enough product design portfolio and sales and marketing operation to make the organization and its spin-off companies sustainable.

Moran picked up the pediatric medical device thread more than a year ago. Previously, he founded, managed and raised a round of venture financing for CSF Therapeutics, a developer of devices to treat neurodegenerative diseases and a spin-off company from the Cleveland Clinic.

He also managed a financing round for Intelect Medical, another Clinic spin-off, and guided the market launch of Minimally Invasive Devices in Columbus. He’s also a co-inventor of PCT/US2008/012355–a device for increasing blood flow to the brain.

PediaWorks is one of a few recent efforts to fill the need for children’s medical devices. Acknowledging the problem, the FDA in 2007 announced a $2 million annual grant program to stimulate the development and marketing of medical devices for children. Late last year, the regulator made its first grants to pediatric medical device consortia in Ann Arbor, Mich., Boston and San Francisco.

Mechanical engineer Brad Slaker started DesignWise Medical in Minneapolis around the same time to do similar things using mostly volunteer medical and industrial professionals, and college students.

In 2007, the Institute for Pediatric Innovation in Cambridge, Mass., formed as a nonprofit to focus on improving health care for children. The institute soon put together a consortium of pediatric hospitals, including UH Rainbow, to help with its mission.

Girouard said the nonprofit aspect of PediaWorks invites product collaboration by big device makers. “I think there is potentially a willingness among the big medical device companies to provide access to technology and freedom to operate if there’s not a competitive threat.”

Products designed for pediatric markets eventually could cross over to minimally invasive surgery markets for adults. “If you design for pediatrics, you are inherently making smaller devices,” which could be used in adult microsurgery, Moran said. There’s a “sizable market share there.”

Ohio already has some natural synergies to help grow a pediatrics medical device practice. Well regarded hospitals including Akron Children’s Hospital Medical Center, Cincinnati Children’s Hospital Medical Center, Nationwide Children’s Hospital in Columbus,  as well as Rainbow and Cleveland Clinic, all could contribute to such an effort. Plus, Cleveland has increasingly strong ties to OrthoPediatrics, an Indiana company that develops implants and therapies for children.

Girouard also said Cleveland is as likely a place as Minneapolis, a medical device powerhouse, to make devices for children or adults. “I think it may be a way that we can distinguish [Cleveland], grow a budding little device manufacturing core,” he said.

Chris Seper contributed to this report.

CLEVELAND, Ohio — Midwest health care start-ups attracted $780 million in investments in 2009, according to the BioEnterprise Midwest Health Care Venture Investment Report.

While the number of companies winning investments last year — 156 — was about the same as in 2008, the dollar volume of the investments dropped 26 percent from the prior year.

“This was a difficult year for emerging health care ventures in the Midwest and nationally,” said Baiju R. Shah, president and chief executive of BioEnterprise, the biomedical venture developer in Northeast Ohio, in a written statement. “The global recession combined with the industry uncertainties related to U.S. health care reform dampened investment.”

Across the board, U.S. venture investments declined in 2009 to $17.7 billion — the lowest level in more than a decade, according to the National Venture Capital Association and PricewaterhouseCoopers. While biotechnology investing fell 19 percent to $3.5 billion last year, the sector attracted more investment dollars than any other. Medical device sector investments fell 27 percent to $2.5 billion.

Venture capitalists are “cautiously optimistic” that they will see gradual increases in investments and exits this year, but they also are realistic, acknowledging  that their asset class will continue to shrink over the next five years, according to a survey of National Venture Capital Association members.

Reflecting the national trend, Midwestern biopharmaceutical companies attracted the biggest chunk of investments in the region last year — $378 million, or 48 percent of investor health care dollars, followed by medical device companies, which won $264 million, or 34 percent, according to BioEnterprise. Health care software and service companies brought home $139 million, or 18 percent.

As is often the case, Minnesota led Midwest health care investing with the most dollars raised — $199 million by 23 companies — followed by Ohio, with $105.4 million invested in 40 companies. Michigan was No. 3, raising $102.2 million for 14 companies, said BioEnterprise, which reports quarterly and annually on investments in health care start-ups in 10 Midwestern states and Western Pennsylvania.

The biggest deals of the year in Minnesota were: Aritech Inc., developer of interventional cardiovascular devices in Plymouth, which raised $30 million in March, and Entellus Medical, developer of devices to treat sinus problems in Maple Grove, which raised $30 million in November. CoAxia, the Maple Grove company developing blood flow-restoring therapies for stroke victims, raised $21.5  million in June.

In Ohio, the biggest deals were: Akebia Therapeutics, the Cincinnati developer of small-molecule drugs for anemia and vascular disorders, which raised $16 million in July, followed by Franklin & Seidelmann, the subspecialty teleradiology firm in Beachwood, which raised $12.5 million in August. In April, Laboratory Partners Inc., the medical and lab service provider in Cincinnati, raised $8 million.

As for Midwestern cities, Minneapolis led with all of the $199 million raised in Minnesota last year, followed by Cincinnati with $121.2 million and Detroit/Ann Arbor, Mich., with $68.8 million. Cleveland, a perennial leader, was fourth with $66.3 million.

Midwest health care startups reported $593.2 million in investments across 140 companies through the first three quarters of 2009, according to the BioEnterprise Midwest Health Care Venture Investment Report.  In terms of dollars, that was down 34 percent from $896.7 million in 2008 and 41 percent lower than $1 billion in 2007.

But as for companies receiving investments, that was up 24 percent from 113 at the same point in 2008 and up 35 percent from 104 in 2007.

This year, investors are putting less money in health care companies in the region and nationwide as the investors try to deal with global financial crises and health care reform in the United States. Surprisingly, the number of Midwest companies receiving investments is on pace to set a record this year, BioEnterprise said in a written statement (pdf). So investors may be investing fewer dollars, but they’re spreading those dollars around more Midwest health care companies.

“Funding for health care is reduced due to the recession and concerns surrounding the impact of health care reform on innovation,” said Baiju R. Shah, president and CEO of BioEnterprise, the health care company developer in Northeast Ohio. ”Given the broader environment, it is encouraging to see so many Midwest health care companies attracting capital.”

By sector, biopharmaceutical companies have received $295 million so far this year, medical device companies, $173 million, and health care software and service companies, $125 million, BioEnterprise reported.

Ohio leads the pack this year with $136.7 million going to 45 companies during the first nine months. Minnesota is next with $134 million to 16 companies. Last year at this time, Minnesota was leading with $289.9 million and 20 companies to Ohio’s $178 million and 37 companies. Ohio and Minnesota regularly trade this lead.

In the 10 Midwestern states and one region surveyed by BioEnterprise, Minneapolis, Minn., led the first nine months of the year with investments of $133.3 million in 15 companies. Detroit/Ann Arbor, Mich., was next with $70.8 million invested in eight companies, followed by Cincinnati, Ohio, with $69.4 million invested in seven companies.

At this time last year, Minneapolis also led with $289.9 million and 20 companies, followed by Cleveland (including Akron, Ohio) with investments of  $152.4 million in 26 companies, and Pittsburgh, Pa., with $101.1 million invested in 12 companies.

Source: Business Facilities Magazine, 2009

COLUMBUS, Ohio — Ohio kept its No. 4 ranking for the strength of its biotechnology industry in Business Facilities magazine’s annual list, partly because of continued investments by Ohio Third Frontier, according to BioOhio, the state’s bioscience development organization.

The biotech sector has cemented its status as a crucial building block for future growth, so it is being protected in most states from budget cuts, according to Business Facilities. Products produced by the sector — from genetically tailored drugs that “deliver” themselves, to sophisticated defenses against bioterror — rapidly are moving from laboratories to the commercial sector, the magazine said.

“That is certainly true in the State of Ohio,” said Tony Dennis, president and chief executive of Ohio’s develoment organization, in a written statement. ”Third Frontier Project investments in innovation and technology, especially in the biosciences, really have catalyzed growth in both public and private sectors of our state’s emerging industries.”

Ohio Third Frontier is the $1.6 billion, 10-year effort to develop the state’s economy by investing in the developers of technologies and the companies that make them. Last month, an independent study of Third Frontier in its first seven years concluded the project has had an economic impact of $6.6 billion on the state, creating 41,300 jobs. Third Frontier sunsets in 2012. Taxpayers are expected to be asked to renew the project with a bond issue in the May 2010 election.

Ohio ascended to No. 4 last year after Business Facilities overhauled its ranking methodology to assign states proper credit for its biotech development initiatives. ”We identified more than 20 key criteria that have been applied to rank overall biotechnology strength,” according to the magazine. Those criteria include the amount of state research and development funding and venture capital investments; biotech job concentrations; biotech tax exemptions; number of biotech facilities; biotech patents generated; university grant funding; and bioscience higher education degrees, among other factors.

Biotechnology is growing in Ohio. The most recent Ohio Bioscience Growth Report, published last winter by BioOhio, cites more than 1,100 bioscience-related organizations operating in the state, Dennis said. From 2004 to 2008, an average of 70 new bioscience companies began operations in the satate each year. In connection with the Global Cardiovascular Innovation Centerin Cleveland, BioOhio last month published an updated industry directoryof more than 2,600 locations that are part of the bioscience supply chain in the state, with 1,900 different companies in that chain.

Ohio biotech companies also have been attracting their share of venture capital. In the first half of 2009, BioEnterprise, the Northeast Ohio affiliate of BioOhio, reported that Ohio received the second-largest amount of venture capital investing — $86.9 million (pdf) — among 10 Midwestern states and one region. In May, the Biotechnology Industry Organization and Battelle (pdf) placed Ohio among the top eight states in middle and high school bioscience education quality.

The $5 million Medical Growth Fund gathers some of the region’s well-known health-care entrepreneurs who want to make seed-level investments in start-up companies that are close to profitability. It will focus on medical device, health IT, and health-care services businesses and provide an initial investment of up to $500,000. Each portfolio company will also get a “champion” to actively advise the company.

The group expects to do six to eight deals with its current fund and has a pair of deals in the pipeline.

“We’re a hybrid between an angel fund and a venture capital fund,” said Ray Dalton, chief executive at the medical equipment supplier PartsSource, who is chairman of the growth fund. He’s joined by the likes of Geoff Thrope, whose company NDI Medical last year sold a medical device to Medtronic for $42 million. BioEnterprise, the Cleveland-area biotech trade organization, will help by reviewing potential investments.

“Individually it’s hard to make a difference but with the golden rolodexes most of us have we could make the right introductions, help refine a product, get them access to capital and make a decision whether to accelerate a business,” Dalton said.

It’s a timely manuever. Seed-level investors are becoming more critical as venture funds wilt. Smaller funding organizations like the grant-making Great Lakes Innovation and Development Enterprise, (GLIDE) and the early-stage JumpStart fund have already started to favor medical-industry enterprises. For example, a $100,000 GLIDE grant in June lured the Louisiana drug startup Theravasc into the region.

Yet industry-specific funds like the Medical Growth Fund are rare, rewarding and challenging. They borrow a focused formula that works for venture capitalists, which often pick from a broader geographic area than angel investors. But when done properly the returns from focused early-stage funds are usually higher than typical angel organizations, said Allan May, chairman of Silicon Valley’s Life Science Angels, which focuses solely on biotech and medical devices, who is also on the board of the Kauffman Foundation’s Angel Capital Education Foundation.

They key for greater returns is having investors who are from the industry, which is this case with Cleveland’s fund. But the fund will also need to shift somewhat away from the sentimentality of only supporting companies from the Cleveland area. May’s group, for example, has made the bulk of its 26 investments in dealflow-rich California. But it’s also invested in companies located in Massachusetts, Utah, Virginia and Washington.

“Either you’re an economic development fund, in which case you want to support Ohio technologies and entrepreneurs, or you’re an angel group in which case you want to get rich,” said May, who stressed the economic-development funds also see good returns. May thinks a combination of the Cleveland and Pittsburgh areas would be a perfect combination to support a focused fund.

Dalton said the fund will look at deals from outside the region, but it’s primary focus will be Northeast Ohio, which he thinks has enough dealflow to support the fund. Baiju Shah, president of BioEnterprise, said his group reviews about 170 opportunities annually. Shah hopes the fund could also attract outside companies into the region to receive the investment dollars.

Dalton said: “When we first started started talking about this, we asked: ‘Is it pure economic development project and we don’t care if we make money?’ The answer was no. It’s an investment and we have to make money. It’s a kind of venture fund that’s doing economic stimulus at the same time. We have to keep an eye on the dollars.”

[Photo courtesy of Flickr user AMagill]

CLEVELAND, Ohio — Investments in Midwest health care start-ups fell 9 percent to $402 million in the first half of the year from a year ago, according to the latest BioEnterprise Midwest Health Care Venture Investment Report.

Health care investments in 10 Midwestern states and one region fell even more – 46 percent — in the first half of the year from a record-setting pace in 2007, BioEnterprise said in its report.

“While Midwest health care venture investment is down from 2008, the region’s companies are currently faring better than their national peers,” Baiju  Shah, president and CEO of BioEnterprise, said in a written statement. ”However, the venture funding environment remains very challenging for Midwest health care start-ups.”

As usual, Minnesota led the way in financings during the first six months of the year, attracting $118 million for a dozen biopharmaceutical, medical device and health care information technology companies, BioEnterprise said. Ohio followed, raising $87 milion for 33 companies. Michigan came in third, with $65 million for five companies.

Nationwide, venture investments in biotechnology, health care services, and medical device and equipment companies were down 37 percent to $2.6 billion in the first half of the year from a year ago, according to the National Venture Capital Association and its MoneyTree Report collaborator, PricewaterhouseCoopers, which released their data last week. 

Second-quarter venture capital investing did rebound 15 percent to $3.7 billion from the first quarter, including all types of companies, according to MoneyTree. Investments in medical and health care companies rebounded 44 percent to $1.5 billion from the first quarter.

Meanwhile in the second quarter, “investments in life sciences companies represented the highest percentage (pdf) of total venture capital investments (42 percent) since the inception of the MoneyTree Report,” said Tracy Lefteroff, global managing partner of the venture capital practice of PricewaterhouseCoopers, in a written statement. MoneyTree counts biotechnology, and medical device and equipment companies in the life sciences category.

But the folks at the technology transfer office at Case Western Reserve University will tell you the opposite is true. The office set a record for new licensing revenues during the fiscal year ended June 30 — $16.3 million.

“That’s our record by a lot,” said Joe Jankowski, associate vice president of technology management. Last year, the tech transfer office brought in $13.2 million in new licensing agreements – and that was a record.

One of the reasons for its robust pipeline of invention disclosures that led to licensing and other money-generating agreements is the maturity of the tech transfer program at Case. “What’s nice about that is, we’re long enough along (that) we’re in the steady state of that pipeline,” Jankowski said.

Leaders in Jankowski’s office have been doing their thing in a bigger way since 2001 when Mark Coticchia, vice president of the university’s Office of Research and Technology Management, arrived from a Pittsburgh early stage venture fund. Coticchia expanded and organized the office, connecting it with independent economic development groups, and making it more prominent on and off campus.

The office’s licensing deals also are maturing. It can take several years to clear the intellectual property pathway to licensing an idea discovered by a faculty member or graduate student. And the licensing agreements usually take years to produce income, Jankowski said.

Coticchia judges the success of his office more by the steady increase of licensing deals since 2001 rather than one year’s worth of deals. “If you take a look at what has been accomplished … over the last eight years, it truly has been dramatic,” said Coticchia, who has been on loan to the Ohio Board of Regents for a year defining how higher education contributes to the state’s economic development.

“Having the right kind of people and the right kind of approach — focusing on marketing versus managing intellectual property – which is the early stage venture model is the most appropriate way to maximize commercialization opportunities at a major research institution,” Coticchia said.

So how is the tech transfer office at Case affecting the Northeast Ohio economy? That’s a tough question to answer. “What is the return to society for investments in research and technology?” Jankowski asked. It’s ”always hard to find objective measures” to answer that question, he said.

One measure might be jobs created or retained in the region, he said. Another might be new investor money drawn to the region by promising companies and technologies.

BioEnterprise, the organization that develops biomedical and health care companies in Northeast Ohio, keeps track of investments made in these types of companies in the region, Ohio and Midwest. In the first quarter, $14.4 million was invested in Northeast Ohio companies, compared with more than twice that — $34.8 million — in the year-ago quarter, thanks to a poor economy and skittish investors.

First-quarter investing also fell in Ohio by 68 percent to $16.8 million from a year ago. However, Midwest investments rose 14 percent to $155.6 million from the year-ago quarter, thanks to a few big deals in Missouri and Minnesota, according to BioEnterprise (pdf).

Yet another measure of economic success could be the number of companies created by the technology transfer program. Last year, the Case office helped create five companies — AVN Medical, Cardialen LLC (St. Louis), Haric LLC, Invenio Therapeutics Inc. and Neuros Medical. That’s another record. Of the group, only Haric is not a biomedical company.

“It’s nice to see that in this economy,” Jankowski said.

Altogether, there are easily $50 million in health-related federal earmarks from Ohio legislators that could fund projects from the James Cancer Hospital at Ohio State University to a company researching cell therapy for battlefield wounds. Votes in Senate and House committees are expected this month to determine whether the institutions would get some, all, or any of their requests.

The James has one of the larger requests: a $5 million earmark that would continue to develop gene therapy drugs in the center’s neuroscience clinical gene therapy center. The hospital received funding for the project last year. Now, it wants to use $5 million to work with Nationwide Children’s Hospital to produce gene therapy drugs, said Jen Carlson, governmental relations director at the Columbus cancer hospital.

MetroHealth Medical Center in Cleveland is lobbying for $2 million to cover part of the $28 million to $30 million it cost to buy three new helicopters. The money would be used for medical equipment for Metro Life Flight, said Eileen Korey, MetroHealth’s vice president for communications.

Additional earmarks under consideration include:

• At least $3.5 million to Syncro Medical Innovations for further testing and improvements on the Gabriel Feeding Tube, which is used with battlefield trauma patients.
• At least $3.5 million to Arteriocyte in Cleveland to study and develop a cellular therapy that would cut down on infection, costs and recovery time from battlefield wounds.
• $1 million to the Cleveland Clinic to fund a clinical trial that tests neuroimaging techniques in post-traumatic stress disorder.  The money would complement work the Clinic is already doing on PTSD with the Department of Defense.
• A $2.3 million to upgrade information technology at St. Vincent Charity Hospital in Cleveland that would include electronic medical records.
• $2 million for the BioInnovation Institute of Akron to enhance its orthopedic research and development program.
• At least $500,000 to BioEnterprise, to continue its work screening and finding potential of bioscience businesses that could move to the area.

Ohio’s Steris Corp. is getting a boost from outside the state. A Missouri legislator has requested the company get $5.3 million to work on a decontamination system there.

A May 7 forum in Cleveland will offer a lesson in what is required to enter the medical supply chain. Scheduled panelists include Baiju Shah, president and CEO of BioEnterprise; Kevin Webb, business development specialist at Sparton Medical Systems; Tina Sherrets, supplier quality manager at STERIS Corporation; and Robert Schmidt, chairman and founder of Cleveland Medical Devices.

The forum, “Manufacturing for the Medical Market: Requirements for Supply Chain Entry,” will be presented by MAGNET, the Manufacturing Advocacy and Growth Network; BioEnterprise; WIRE-Net; and CIRI, the Cleveland Industrial Retention Initiative.

Ohio is second in the Midwest for companies registered with the Food and Drug Administration for medical manufacturing, according to a report last year by BioEnterprise. More than half of the 625 Ohio manufacturing companies registered with the FDA are in the Cleveland area.

Illinois has 966 registered companies, Minnesota has 577, Michigan has 448 and Indiana 359, according to the report.

The event will take place from 3:30 to 6 p.m. at the Hilton Garden Inn, 1100 Carnegie Ave. The cost is $30. To register, call 216-432-5159.