The Little Biotech Company That Wasn't

Genomics Research as a Minnesota

Economic Engine?

Last night I saw upon the stair
A little man who wasn’t there
He wasn’t there again today
Oh, how I wish he’d go away

Added Later:

A commenter - see below - has informed me of the following important information:

...the original economic impact study for this biotech partnership was done by none other than Tripp Umbach, the firm which the University used for its most recent piece of propaganda.

State could gain 4,000 biotech jobs, report says

Star Tribune: Newspaper of the Twin Cities (Minneapolis, MN) - Wednesday, February 18, 2004 

Author: Mike Meyers ; Staff Writer 

Minnesota stands to gain 4,000 jobs by 2010 if the Legislature commits $70 million to fostering the biotechnology industry, according to a report prepared on behalf of two of the institutions that likely would receive some of that money.

Tripp Umbach Healthcare Consulting, a Pittsburgh-based firm specializing in economic impact studies for health care providers, prepared the report for the University of Minnesota and the Mayo Clinic.

[Graham Spanier] was the first, as far as I know, to use Tripp Umbach for propaganda purposes at Penn State, so I've been following this firm rather closely. Why they have any credibility left is beyond me.

From Massdevice.com - New England's One-stop Source for Medical Device News:

What's up with Minnesota's med-tech innovation scene?

Problems plague med-tech innovation in the North Star State.

What's going on in the North Star State?

A Minnesota incubator created to commercialize technology from Mayo Clinic and similar institutions is being dismantled less than two years after its launch.

The clinic also charges that its name was improperly leveraged for fundraising purposes, a charge confirmed by the spokesman of the incubator: Healthcare IP Partners [1].

And a Minnesota medical device trade group thought it was making the case to preserve state funding for a treasured genomics research collaboration when it told lawmakers the project help create a new company. The problem? No such company exists.

Healthcare IP Partners dissolves

Healthcare IP Partners was formed in December 2008. By May 2010 it had spent all of its estimated $8 million in funding to run five portfolio companies, four of which licensed technology from Mayo. The same management team also consumed $26 million running a separate start-up, Kardia Health Systems [2], which started in 2006 after getting an exclusive license for Mayo-created software to manage cardiac images like echocardiograms online.

An audit revealed only a bloated corporate structure at both Kardia and HIPP and no financial impropriety, said the incubator’s spokesman, Kevin Molloy. However, a former tenant company now talks about how it has severed all connections with the incubator and aims to be "squeaky clean."

Carl George, who, for a time, ran both HIPP and Kardia, said their troubles stem from the "great stresses" that "young companies undergo." He dismissed any suggestion of financial irresponsibility, blaming it on a bitter employee he fired for indecent exposure.

Healthcare IP Partners was a "great entrepreneurial undertaking," George said.
Kardia and HIPP were started by Gus Chafoulias [3], a commercial real estate developer in Mayo's hometown of Rochester, Minn. Chafoulias hired George, whose background is in software development and business investment, to be Kardia’s CEO in 2006. Two years later, the company hired George Danko [4], a former Best Buy executive specializing in venture capital, to lead the firm's acquisition strategy.

"The 'Mayo pixie dust effect' — that’s what Carl George always called it," said John Freeland, managing partner of Freeland Systems, which was acquired by Kardia but later sued the company over payments (the case was settled late last year). "You sprinkle Mayo pixie dust on things and everybody thinks it’s worthwhile and a valid thing."
George could not be reached recently for follow-up questions regarding Freeland’s characterization.

Mayo spokeswoman Kathy Anderson explained that Mayo has no financial agreements with HIPP but has an equity stake in Kardia. Anderson, while not naming anyone, said the Mayo Clinic name was "used in certain documents that were not reviewed or approved by Mayo prior to distribution" of shares. She added that Mayo took "immediate action to correct the matter" but declined to elaborate.

Molloy also confirmed Mayo’s name was improperly used by a "former administration," but similarly declined to provide additional details.

Molloy described Mayo as a "Mecca of millions with regard to medical care" and a name that "undoubtedly helps capital raises." He demonstrated a keen desire to guard the Mayo brand. "The name 'Mayo' is something that we have to protect and make sure that it is used properly in the public arena with regard to company development," he said.

Troubles for Kardia and HIPP were financial and, in the case of Kardia, legal. Along with the suit by Freeland, Kardia was sued by a former president over a compensation dispute. Under the terms of the settlement, Sam Ashkar, the former president, declined comment.

After money for both Kardia and HIPP ran out, George resigned in July and Chafoulias ordered an audit. George called the audit standard, while Molloy said the situation "required an intensive audit" to "ensure that the money was used for the purpose that it was intended."

The audit revealed no malfeasance, Molloy said. Instead, the companies were "overloaded with a corporate structure that [they] could not sustain," he said.
"Staffing levels were allowed to get too high [at both Kardia and HIPP], and that caused the biggest drain on our resources," Molloy said.

Kardia and HIPP appear to be Chafoulias' first foray into technology commercialization. Chafoulias made his fortunes in building hotels and commercial buildings, one of which is rented mainly by Mayo in Rochester, Molloy said.

Molloy did not make Chafoulias available for an interview and appeared to take offense when asked if Chafoulias’ move to develop winning technologies was a departure from his core expertise in real estate.

"I don’t consider that any of your affair," Molloy said.

However, an expert in entrepreneurial finance and a former faculty member at the University of Minnesota’s Carlson School of Management said commercializing technologies is tough.

"It’s one of those sexy kinds of things that everyone hopes that, 'Gee, we can take all these technologies developed at some global institution and popularize it and commercialize it and all the rest of it,'" said Dileep Rao, president of Golden Valley-based InterFinance Corp. and a former senior lecturer at Carlson. "The odds, unfortunately, are not all that favorable."

It’s not clear whether Chafoulias intends to continue incubating technologies under a new company.

The LifeScience Alley company that wasn't

Minnesota’s medical device trade group thought it was making the case to preserve state funding for a treasured genomics research collaboration when it told lawmakers the project help create a new company.

The problem? No such company exists.

"It was a miscommunication on [LifeScience Alley's] part and we apologize for any confusion it may have caused," Ryan Baird, the association’s spokesman, said of the claim made in its 2011 Legislative Agenda [7], a lobbying document circulated among state legislators with whom LifeScience Alley has worked in the past.

LifeScience Alley and many others in the Minnesota medical industry would like to keep $8 million in the state budget for the Minnesota Partnership for Bioscience and Medical Genomics [8], which is a collaboration between the University of Minnesota and the Mayo Clinic. The trade group’s legislative agenda simply stated: "The first company has already been licensed out of these research efforts."

But the statement referred to a license that was pending and no longer exists, said Robert Nellis, a partnership spokesman from the Mayo Clinic. No entities have any licenses with the partnership, although many different organizations have had temporarily licenses in the past, Nellis explained.

The gaffe comes at an inopportune time. The state has invested more than $80 million to date since early in the last decade. But it cut $1.2 million out of $8 million in partnership state funding last year, and Minnesota’s governor suggests he wants an additional $838,000 cut more over two years.

The Partnership awards two-year grants to researchers and that is leveraged to win longer NIH and other grants, Nellis said. And he contended it is incorrect to assume the goal of the Partnership is to create companies and license products.

But politicians have from the start expected the project to serve as an economic engine that would create hundreds of jobs in the state.

"This partnership will create hundreds of new highly-skilled research positions in Minnesota, significant advances in healthcare and the birth of a major new industry creating thousands of quality jobs and positioning Minnesota as a world center in this field," then-Gov. Tim Pawlenty said in 2003.

The genomics company that wasn’t may only reinforce some politicians’ thoughts about the project’s shortcomings.

"I don’t see that they have created any jobs other than R&D jobs at the U and Mayo" said state Rep. Tim Mahoney (D-St. Paul), who co-authored the historic angel investment tax credit bill that passed last year in Minnesota. "If these institutions continue to ask for state support, then we have to ask what’s the return of investment for the state of Minnesota."