Medical Device Daily Washington Editor

The American Midwest is no longer a place just for corn and cattle. If current trends hold, what some observers see as a technologically undervalued region is likely to find itself the object of much more interest by investors over the next few years.

According to a report just released by BioEnterprise (Cleveland), start-up companies in the healthcare industry in the Midwest drew in roughly $287 million in the first half of 2006, a 10% boost from the same period last year. Most of that increase came in the second quarter, when investments leapfrogged 2Q05 numbers by 36%.

BioEnterprise's research pulled in totals from 10 Mid-western states and western Pennsylvania.

Illinois led the pack at more than $101 million for the six-month period, “which is more than that state recorded in 2003, 2004 and 2005 combined,” the report noted. The 2006 Illinois total financed operations for eight firms vs. the five firms that received $12.5 million in the first half of 2005.

The 2006 Illinois numbers were skewed by a bolus of financing obtained by Nanosphere (Northbrook), a diagnostics manufacturer that snared $57 million in Series D financing from Bain Capital (Boston). According to the company's web site, Bain is “one of the world's leading private investment firms with over $27 billion in assets under management,” including private and public equity, venture capital leveraged debt assets.

Placing second in the Midwestern start-up financing sweepstakes was Minnesota, which collected $61 million in funding for seven entities, though that state's numbers are down from the same-period totals for 2005, when 14 firms shared a financing pie of more than $85 million.

Minnesota was easily the leading state last year, with Ohio placing a distant second at $72.2 million in the first half of last year for just six companies. The Buckeye State's financing fell to just under $48 million in the first half of 2006, a sum shared by 14 enterprises.

Biopharmaceuticals took in 54% of the 2006 total of $287 million ($154 million) for 17 operations, whereas 19 medical device makers raised $87 million. The balance of $46 million was spread across 12 firms in the software and services sectors.

Baiju Shah, BioEnterprise's president, said in a summary of the report that while “the Midwest is recognized for its strong medical device flow,” investor interest is piqued by a greater biopharma presence. He said that the proportion of these two sectors in the Midwest “is now the same as the national allocation.”

Among those who did well in financing in the device sector are two firms located in Minnesota.

CVRX (Maple Grove) reported a $30 million deal with several capital sources, including New Enterprise Associates (Baltimore), which has participated in earlier rounds of financing for CVRX. The device maker is currently conducting clinical trials for the Rheos, a device that tackles hypertension by electrically stimulating the carotid arteries in the neck, thus triggering a reaction in the brain that results in dilation of a number of the body's major blood vessels.

The other Minnesota-based device maker, Enteromedics (St. Paul), is targeting the nation's obesity epidemic with devices that stimulate the vagus nerves, which run from the gastrointestinal tract to the brain stem.

The company's Maestro obesity management system requires the implantation of leads that deliver a low-intensity, high-frequency signal to suppress vagal nerve conduction, intended to suppress appetite. The leads will be implanted by means of laparoscopy, a much less daunting prospect than gastric bypass.

Founded in 2002, Enteromedics obtained $45 million in financing with the help of a number of financiers, including InterWest Partners (Menlo Park, California). The Maestro has not yet been FDA-approved.

Biopharmaceutical operations reported at BioEnterprise's web site include BioSante Pharmaceuticals (Lincolnshire, Illinois), which took in $7.6 million in financing to expand its pipeline of hormone therapy products for both sexes. Financing was provided by four firms, including Hunt Bioventures (Dallas). Cleveland Biolabs (Cleveland), a spin-off from the Cleveland Clinic, took the stock-ticker plunge with a July 20 initial public offering managed by Sunrise Securities (New York). Priced at $6 a share, the IPO of 1.77 million shares generated more than $10 million for the biodefense and cancer treatment developer.

Shah told Medical Device Daily that “[t]he thing that surprised us is the significant biotech presence in the Midwest, but I would be surprised if we didn't see more device deals in the second half of '06, especially the fourth quarter.”

He also remarked that the current development in the Midwest is starting to spur interest on the part of coastal and strategic investors. Up to now, interest “has not been at a level that reflects the potential for growth” in this region.

Shah also noted that a substantial portion of NIH-funded research goes on in the Midwest, an amount that is proportionally greater than funding for start-ups in the nation's center.

The Midwest was not the only region to see a boost in both biotech bucks and overall investment dollars.

The National Venture Capital Association (NVCA; Arlington, Virginia) and PriceWaterhouseCoopers (PWC; New York) reported that in 2Q06, “venture investing grew to $6.3 billion in 856 deals, representing a 2% increase in dollars and a 5% increase in deals from the prior quarter.” This figure is for all sectors of the economy.

Mark Heesen, NVCA's president, said in the MoneyTree Report that he was encouraged by the increasing investment levels by VC firms “for the first time in four years.” And he said that the diversity of this investment is also a cause for optimism.

“Rather than pouring a lot of money into 'me-too' deals, venture capitalists are finding unique opportunities in emerging industries that allow industry to scale up responsibly,” Heesen said.

The MoneyTree report said that biotechnology and the devices and diagnostics industries jointly accounted for $1.8 billion in financing for 185 agreements in the first quarter of this year, a figure exceeded by second-quarter totals by 34%.

However, device makers nationally fell short of their first-quarter numbers by 22%, to $549 million, a figure that the report said is “well within the investment range of the past 12 months.”