Last year the first software product utilizing machine learning to screen for diabetic retinopathy received marketing approval from the FDA. The company behind that device, IDx, isn’t in California or Massachusetts: it’s in Iowa. It was founded by an ophthalmologist and a professor of ophthalmology at the University of Iowa Hospitals and Clinics. It’s a reflection of the growth of health tech and medtech sectors in the Midwest in recent years.
In 2018, investment in Midwest companies added up to $2.5 billion, according to a new report from BioEnterprise. Health IT and health IT service companies received the most investor dollars with $968.3 million, a 39 percent share of total capital. Biotech and pharma companies raised $780.4 million, a 31 percent share, while investment in medical device companies reached $750.3 million, a 30 percent share.
Aram Nerpouni, president and CEO of BioEnterprise, noted that investment in Midwest healthcare companies has soared 40 percent over the past five years. He will offer a deeper dive of the findings from the report at the MedCity INVEST conference in Chicago April 23-24.
“It’s evidence that investors are finding the Midwest an ideal location for startups to grow and thrive.”
Minnesota companies attracted the most investment in 2018 at $698.8 million across 108 deals led by health insurance startup Bright Health’s $200 million Series C round. Ohio dominated other Midwestern states by deal volume with 121 deals.
Other supersized deals last year included Chicago’s medical marijuana business Cresco Labs’s $100 million fundraise. Bind in Minneapolis raised $70 million for its on-demand support services for health insurance aimed at self-insured employers. Sollis Therapeutics in Columbus, Ohio raised $50 million to support its drug-device combination as an alternative to prescribing opioids for pain. Its regional backers include Ohio State University and Ohio Third Frontier. Indiana-based Outpost Medicine, which is developing treatments for overactive bladder and fecal incontinence and is led by former Eli Lilly executive Scott Byrd, raised $41 million last year. While the majority of funding trended towards later-stage companies, seed-stage companies accounted for more than half of the deals.
The Midwest has benefited from a couple of trends happening in healthcare. The need for data to deliver more meaningful insights for clinicians to improve outcomes for different patient populations coupled with the growth of machine learning applications has led to the greater use of software across the medical device and biopharma sectors. One example is the $225 million acquisition of Propeller Health, a ‘digital therapeutics’ company connecting inhalers via software to track medication usage and monitor symptoms, by ResMed, a medical device company in the respiratory market.
“Last year’s smaller, early stage investments in machine learning tools, whether used for the analysis of MR by Surgical Information Sciences in Minneapolis or pathology images by Spintellx in Pittsburgh, will lead to exits via larger imaging companies down the road,” noted Nerpouni.
Also, the rise and growing maturity of regional healthcare startup ecosystems involving universities, payers and providers, shared workspaces, incubators and increasingly diverse investment vehicles are also playing a part in developing a pipeline of healthcare startups that can obtain local early stage funding and have a pathway to validating their technology with healthcare organizations. That’s happened in cities such as Cleveland, Minneapolis, and Chicago, but also on a smaller scale in other regions as well.
“The shifts that are happening today are playing very much to the Midwest’s favor,” Nerpouni observed. They are evening up the playing field.”
There has also been a rise of corporate venture investors in healthcare. Although a Rock Health report on 2018 investment trends noted that technology venture capital accounted for the most deals, provider venture arms as well as payers came in second for funding the most deals.
Although the investment arm of the Ascension health system, Ascension Ventures, has been around since 2001, there are newer hospitals with venture arms coming onto the scene. This year, OSF Ventures, the corporate investment arm of Peoria, Illinois-based OSF HealthCare, became a limited partner in LRVHealth in Boston.
7wire Ventures in Chicago, led by Livongo executives Glen Tullman and Lee Shapiro, has eight healthcare organizations as investors in its $100 million fund including Allina Health in Minneapolis, Arkansas BlueCross BlueShield, Bon Secours Health System Inc., Cigna, Horizon Blue Cross Blue Shield of New Jersey, Memorial Hermann Health System, Rush University Medical Center in Chicago, and Spectrum Health.
Nerpouni observed that many of the new corporate venture groups from healthcare organizations are still exploring how to put internal capital to work. Strategic investments to access new technologies or working through beta site opportunities for young companies are ways for health systems to be more active players in creating their own value.
“They are acting as true investors. They are not just investing in internal technologies but also outside technologies that will generate financial and strategic returns on investment,” Nerpouni said.
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