Medical software is an emerging niche
Susan Feyder
Star Tribune
Published 08/27/01
As young medical technology firms attract more venture
capital investments, so too do businesses that aim to help
med-tech companies do their work better.
These are medical software firms, an emerging niche of
companies whose products and services are used by medical
device and drug companies to manage and analyze research
and other data. The medical software category didn't suffer the
downturn in the late 1990s that hit the med-tech industry,
when venture capitalists' interest in the Internet first heated
up.
The number of venture-backed deals in medical devices
plunged from 153 in 1996 to 68 in 1997 and 83 in 1998 before
rebounding to 191 in 1999 and 187 last year. At the same time,
venture-backed deals for medical software companies grew
steadily from 44 in 1995 to 189 worth $2.3 billion last year,
according to the PricewaterhouseCoopers Money Tree Survey,
done in partnership with VentureOne.
Now, as medical device and biopharmaceutical businesses
attract more attention from venture capitalists, medical
software firms are in a good position for more growth in
venture-backed funding. That includes an expanding number
of medical information service companies in Minnesota, some
of which have ties to established med-tech firms in the state.
'We have a strong legacy here in medical devices and a good
base in software,' said Jay Hare, a partner in
PricewaterhouseCoopers' technology industry group. 'Medical
information services is a convergence of the two.'
Three Minnesota-based medical information services
businesses attracted $13.1 million in funding in the second
quarter, the largest quarterly amount in the six-year history of
the survey. The three deals accounted for 10 percent of those in
that category funded nationwide.
Minnesota's share of funding received by medical software
companies was 4.6 percent, the sixth-highest in the country.
That's significantly better than the state's share of funding for
non-medical software firms, which at 1.3 percent falls in line
with its overall share of the total national venture capital pot.
'The reality is that health care is the single largest service
category in the country, and it's under pressure to attain
efficiencies in the way it operates,' Hare said. 'That's a definite
market opportunity [for medical information services].'
An example is Plymouth-based Acumen Healthcare Solutions,
which raised $525,000 in seed financing in the second quarter.
CEO Bill Kobi worked at SciMed Life Systems (now Boston
Scientific SciMed) from 1976 to 1988 in a variety of executive
roles, including vice president of worldwide sales for its
cardiovascular division. He now serves on the board of
Bio-Vascular Inc., a St. Paul company that make devices used
in surgery.
Acumen's roots
Kobi's involvement in Acumen goes back to 1997, when he was
contacted by Paul Grady, a former officer of Summit Medical
Systems, and Michael Kaye, a thoracic surgeon who had
worked at the Mayo Clinic and managed the Heart and Lung
Institute at the University of Minnesota.
At the time, Kobi was living in Walker, Minn., helping to run a
wood sculpture and log-home supply business he had founded
with his son.
Kaye and Grady were looking for another partner for a
business they hoped to establish to make one of two products:
an optical card that would hold vast quantities of medical
information and could be carried by patients as a portable
health record, or an electronic system for accumulating and
transmitting the data that is compiled when a drug or medical
device goes through clinical trials. The three founded Acumen,
deciding to focus on developing the second product.
Acumen's system, launched in 1998, allows data from clinical
trial sites anywhere in the world to be electronically recorded,
where the information can be retrieved and transmitted via
the Internet to the companies whose medical products are
being tested. The system eliminates the need for filling out and
mailing paper forms. Besides being faster and reducing labor
costs, Kobi said, the system reduces the chances of companies
getting forms with handwriting they can't read and, therefore,
passing incorrect data on to regulatory agencies such as the
Food and Drug Administration.
Helping drug and medical device companies in the clinical trial
side of the business is 'the right industry at the right time,' Kobi
said. The company's market research indicates that 95 percent
of the clinical trials currently underway use paper forms.
Another market driver: The FDA recently established a new
goal of accepting only electronic data after 2003.
Acumen's customers include Twin Cities medical device
makers St. Jude Medical Inc. and Sulzer InterTherapeutics.
Annual revenue now is just under $500,000, but the company's
long-term goal is to increase sales to about $100 million a year,
Kobi said.
Acumen expects to get a significant boost through a
distribution agreement it signed late last year with Data
Communique, a U.S. subsidiary of a French advertising firm
and a major supplier of paper case-report forms to
pharmaceutical companies. The agreement positions Data
Communique to be the only company in the world that can
offer both paper and electronic forms to its customers. Kobi
said Acumen hopes to eventually expand beyond drug and
medical device companies to the food and cosmetics industries.
Private money grew scarce
Acumen initially funded its operations through a $380,000
private placement in 1997. The company decided to seek
financing from venture capital firms after seeing the market
for funding from individual 'angel' investors tighten up, Kobi
said.
'During 2000, the net worth of those individuals declined
because [the value of] their own stock portfolios went down.
Not only that, they are getting inundated with requests from all
kind of little companies in town.'
Steve Mercil, CEO of Minnesota Investment Network, said
Kobi's credentials at SciMed and the potential for Acumen's
product to serve a largely unmet need in the med-tech
marketplace were the main reason his firm decided to invest in
the company.
It also helped that Kobi was living in Walker -- Mercil's firm,
which manages an equity portfolio capitalized at $11 million,
tries to focus on entrepreneurs primarily in outstate Minnesota.
Mercil and Ed Spencer Jr., a managing partner of Affinity
Capital Management, agree that given Minnesota's history in
med-tech and software, there's no reason the state can't
maintain a strong presence in the medical information services
market. Affinity was an investor in an $8.6 million round of
financing for cMore Medical Solutions in the second quarter.
The Minneapolis company has developed software that enables
doctors to create instant procedure reports using images and
other medical information.
'The health care industry has been a slow adopter of
technology to make itself more efficient,' Spencer said.
'There's a very strong need.'
-- Susan Feyder is at sfeyder@startribune.com .
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