When Don Brown came to Cleveland in 2004 as Arteriocyte’s first employee, people he knew questioned his logic. “I lived in Boston at the time and everyone I talked to said ‘why are you coming out there? This is a fly-over town,’” he recalls. “They said we can’t attract talent here. Everyone wanted to know if it doesn’t work out, who’s paying my way back to the coasts.”
By fly-over town, Brown is referring to investors from the east and west coasts passing over the Midwest in search of lucrative early-stage biomedical companies to invest in. Today, Brown has raised more than $60 million in capital for Arteriocyte, which develops cellular therapy products and medical devices to help patients heal faster. He has grown the initial team of six employees to 76 worldwide.
In the early years, Arteriocyte looked only to organizations such as the National Institutes of Health for investments in their Magellan platelet separator system. “Roll the tape forward to 2014 and a number of major investors and well-held companies reach out to us on a regular basis,” says Brown. “We’re working with investors from the coasts who are actually making investments.”
Arteriocyte is just one example of the upward trend in investments in Midwest biotech companies, including ones from Northeast Ohio. According to the BioEnterprise Midwest Healthcare Growth Capital Report, Midwest healthcare companies attracted $1.8 billion in new investments across 243 companies in 2014. Ohio was tops in the region, at $499.3 million in investments. Cleveland had $398 million in investments among 40 companies, ranking second in major Midwest cities behind Minneapolis, which had $402.7 million.
"Just to say we’re at that number is quite an accomplishment,” says BioEnterprise CEO Aram Nerpouni. “We have institutions like CWRU, University Hospitals, Summa in Akron, all with healthy commercialization; and we have a healthy entrepreneur environment with clinicians forming spinoff companies. We have great innovation, great entrepreneurs and great institutions with innovations coming out of our walls.”
Northeast Ohio biomedical companies have attracted more than $2 billion in growth funding during the past 13 years, according to BioEnterprise. Funding has come from local and national investors, strategic sources, state agencies such as the Ohio Third Frontier and federal programs. Over half of the $2 billion has been raised in the past five years.
In 2014, biopharmaceutical companies topped the growth with a 35 percent increase over last year with $629 million; followed by medical device companies with a 33 percent increase with $593 million; and healthcare IT and service companies at a 32 percent increase with $562 million.
A maturing industry
While the most recent BioEnterprise numbers reflect record growth, experts and investors in Northeast Ohio agree that the increase is in maturing, established companies in the biotech field, while investment in early-stage biotech companies has dwindled.
Steve Haynes, CEO of Cleveland-based Glengary LLC in Beachwood, which invested in many Cleveland bioscience companies, is concerned that although established companies are finding investors nationwide, early stage bioscience companies are struggling. The money for early-stage ventures was there in the early 2000s, whereas now there is not.
“In the early 2000s people were really supporting early stage companies, that’s when the critical mass got started,” explains Haynes, who is also President of Venture Ohio. “The early stage dollars that existed in 2005 to 2010 was much higher than it is today. The companies that got started 10 years ago, they’re progressing and need more capital. But we’re not seeing as many new companies get capital.”
One area that’s seen tremendous growth since 2013 is in healthcare IT, which saw a doubling of dollars raised from the previous year. The growth is so impressive that Nerpouni calls 2015 “the year of healthcare IT.”
“Investors are funding healthcare IT companies for several reasons,” Nerpouni explains. “Healthcare IT has no regulatory hurdles and the products are not burdened by the FDA process or reimbursement codes. Healthcare IT solutions that create efficiencies and help comply with the Affordable Care Act are in high demand as providers seek to cut costs and avoid Medicare payment penalties. Finally, healthcare IT companies require less capital, scale up quickly and generate revenue much faster than device or biotech companies.”
The companies that have grown and thrived since starting in the early 2000s are now gaining national attention. “It’s very simple,” says Wayne Wallace, co-founder and managing partner of Mutual Capital Partners Funds in Westlake. “When there is a city with a track record of solid exits that is going to drive more investment.” Wallace cites Medina-based OrthoHelix’s sale in 2012 to Tornier for $120 million as one example of local biotech companies that draw investor’s attention.
“Investors made six times their money,” says Wallace. “Situations where there’s an incredibly successful investment allows company like Mutual Capital Partners to continue going. We are starting to see successful exits that are starting to draw more capital to the region.”
Jeff Marshall, director of commercial transactions for Cleveland Clinic Innovations (CCI), sees the investment increase as a trickle-down cycle. CCI has turned out 74 companies since 2000. “There’s an overall strength and a lot of capital in the market right now,” he says. “Investors are looking beyond their own back yards for investment opportunities. With the biotech industry specifically, investors have to do a little more work.”
One of those CCI spinoff companies is Explorys, a cloud-based big data analytics solutions provider for the healthcare industry. Since its launch in 2009, the company has doubled in size and continued to secure investments nationwide. Originally self-funded by CEO Steve McHale and president and chief strategy officer Charlie Loughheed through their invention capital fund 23Bell, Explorys has a number of investors across the country in addition to CCI.
Aside from his personal initial investment, McHale sees Explorys’ investor success as following a formula. “We put our own capital at risk,” he explains. “Then we had one year of learning mode before raising additional capital. Once we got a toe-hold, we invited other investors in.”
Nerpouni sees the increase in investors from outside of Ohio as a sign of Cleveland’s track record in the biomedical space. “Investors are looking to Cleveland because of a developing reputation for having strong deal flow,” he says. “There’s good value coming out of the Midwest. With the diversity of the deal flow investors are getting better and better value in their investments because it’s Cleveland and not the coasts.”
Some of the biggest investment deals last year, according to BioEnterprise, went to companies like Athersys with $20 million and BioMotiv with $29 million in the biotech field; Bravo Wellness with $22 million and Envision Pharmaceuticals with $58 million in software and services sector. In fact, Envision Pharmaceuticals made a successful exit when it was acquired earlier this month by Rite Aid for $2 billion.
“At least three quarters of the dollars coming in are from outside of Ohio,” Nerpouni says. “We have the ability of attract capital. The challenge in that is we need more local capital.”
A struggle for early-stage companies
Haynes agrees that the lack of local capital is a concern. As companies established in the early 2000s take off, investors continue to support the companies as they grow. The problem is, state and federal funding are no longer available and investors are directing their money to the most established companies.
“Glengary and a number of other funds do not have capital to invest in any more new companies.” Haynes explains. “We have a little bit of capital left to invest in companies in which we are already invested, but no new ones. We are not the only venture fund in this position in the state. Other funds that were active in the 2005 to 2015 time period are also out of capital and are not in a position to raise another pool of capital to continue funding new companies.”
VentureOhio is currently leading a feasibility review, according to Haynes, “to determine if a state-focused fund-of-funds would, essentially, fill the huge void left by the Ohio Capital Fund.”
Nerpouni agrees that early-stage companies are finding it harder to attract investors. “There’s not a lot of venture capital in the $5 million to $15 million companies,” he says. “There’s already a lot of investment in the pharmaceutical and medical device industries.”
Marshall is optimistic that funding for early-stage companies will come full-circle. “Strength in the public markets for biotech, life sciences etc. historically has resulted in more available capital in the private market, which is what I think we are experiencing now.”
McHale says he sees Explorys' success as catalyst for other health IT companies to secure investments. “In the last 12 months, there have been 12 startups funded in the health IT space,” says McHale. “Our perception is that there’s a gold rush towards every little gadget around healthcare IT.”
McHale sees potential investors, particularly in healthcare IT, as just looking for the right opportunities. “There’s a lot of venture capital right now,” he says. “They’re trying to find a way to be in this space.”