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Having Buoyed Healthcare Products and Services, MI Growth Group Eyes Med-Devices Incubator

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Enjoying growth in the state's human healthcare-products, -services, -and technologies businesses, a Michigan economic-development group is casting its attention on medical device makers.

The regional Southwest Michigan First is working to launch later this year an incubator focused on startup medical-device makers. The move comes one week after it wrapped up the completion of a $3.5 million addition to its healthcare products, services, and technologies.center.

The med-device incubator would open “by the fall of ’09,” Ronald Kitchens, CEO of the private nonprofit Southwest Michigan First, told BioRegion News last week.

“It will be summer before we finalize the details. We’ve got a needs-analysis going on to figure out how many square feet, what the services that need to be offered [are], and what the best practices are around the country,” Kitchens said.

The med-device incubator would be located “probably either adjacent to [Western Michigan University]’s engineering school, or in close proximity to the healthcare-technology company Stryker Corp., based in Kalamazoo, and known for its hospital beds, gurneys, and surgical tables,” Kitchens said.

It would not be combined with the nearby Southwest Michigan Innovation Center, he added, since the med-device startups he envisions as incubator tenants “tend to need more access to engineering and manufacturing assistance, so it really makes sense to get them closer to where those synergies are.”

And while it would be nice to receive state funding for the med-device facility, Michigan officials, like many of their counterparts in other states facing a cash drought and tightening budgets, are scrambling to plug some $2.5 billion in revenue shortfalls through the 2010 fiscal year being blamed on the ongoing economic turmoil.

“We’re proceeding as if we’re on our own." Kitchens said. "We’d certainly love to have the partnerships. But our go or no-go [decision] won’t be determined by the state’s ability to participate."

Monitoring Two Incubators

The med-device incubator is one of two incubators in planning stages at SMF. The other is a commercialization accelerator for Israeli-based life-sciences startups hoping to establish headquarters and other operations in the US [BRN, Dec. 8, 2008].

Kitchens said the group is in the process of performing due-diligence reviews on prospective tenants, with “at least two and maybe three” giving presentations to a scientific advisory board in May.

“Assuming that goes well, we certainly should see at least an investment or two by mid-summer,” Kitchens said last week.

Kitchens spoke with BRN March 4, one day before joining other SMF executives and local dignitaries in cutting a ceremonial ribbon marking completion of an 11,000-square-foot addition to the Southwest Michigan Innovation Center, located at 4717 Campus Drive, within WMU’s Business Technology and Research Park.

The addition will give the center more office space, allowing the center to convert in the original building some makeshift offices and even the roughly 150-seat conference center into its intended use of lab space. Up to nine new labs will be created, and a new multipurpose room built as a result of the expansion, which is projected to accommodate 40 additional employees in a facility where more than 200 people already work.

“When we originally built the innovation center, we didn’t really know what our needs would be in terms of lab space versus office space, and what that mix would be," Kitchen said. "We ended up with a number of companies that were operating offices within spaces that were built out to be labs” at one-quarter the $200 per square foot cost of lab construction.

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“We were at 100-percent occupancy, and were able to graduate a few companies, which gave us the flexibility to move some things around,” Kitchen added.

One such tenant is ProNAi, which uses DNA interference technology to develop new cancer therapies, Last week, Robert Forgey. ProNAi’s president and chief operating officer said his company has relocated offices that were previously housed within the innovation center’s lab space.

“Our offices will be used for the business- and clinical-development functions that are not lab-based,” Forgey told BRN via e-mail. “SMIC was the only functional business incubator in western Michigan with operational lab space appropriate for biotechnology lab work. As the number of companies has grown, and several have matured enough, alternative lab spaces have been developed. That said, SMIC is the only life-science incubator in Southwest Michigan.”

ProNAi last summer converted into series B preferred shares $3 million in funding from the Michigan Economic Development Corp., and more than $7 million in bridge funding raised between 2006 and 2008. Since then, ProNAi has raised another $500,000.

Forgey said the company is awaiting word from prospective investors on additional funding, proceeds of which will pay for clinical development of its lead drug candidate, PNT2258.

“We anticipate the close to be in 2Q ’09,” Forgey told BRN.

The office space addition has allowed contract research organization Proteos Inc. to grow into the innovation center’s first anchor tenant. Proteos, which provides custom peptides and proteins, grew to 10,000 square feet of lab space last November by converting former office space it no longer needed when the new space was built.

Proteos was founded in 2003 by Bob Heinrikson and Clark Smith, two of six former Pharmacia employees who left the company shortly after its acquisition by Pfizer. To get started, the founders used a $200,000 state loan, a $225,000 revenue-sharing package from WMU's Biosciences Research and Commercialization Center, and $200,000 from individual investors that included some ex-Pfizer employees.

Though the fledgling Proteos successfully donated inexpensive lab equipment to WMU by Pfizer, Smith and Heinrikson went without salaries during the company’s first 18 months; while their staffers went for six months.

Including the addition, the innovation center is now about 80 percent occupied. “We’ll also be able to add three, or four, or maybe five new companies to the facility over the course of the next six months,” Kitchens said.

SMF won’t disclose the names of those companies since they are in talks to lease space at the innovation center. The tenant prospects would join the roster of 13 startup companies overseen by the center’s new CEO, Rob DeWit, who came on board nearly two months ago.

The 13 companies account for most of the 20 that have been nurtured at the center since it opened in 2003. Graduate companies that have moved into their own locations include AureoGen Biosciences, a developer of genetic engineering technologies for the discovery and production of cyclic peptide-based drugs; PharmOptima, a provider of drug discovery consulting and laboratory services; and Kalexsyn, an expansion-minded contract research organization serving smaller pharmaceutical companies [BRN, Dec. 8, 2008].

Many of the innovation center’s tenant companies rely on professionals and technologies from outside Michigan. One such company is Venomix, a developer of human-safe insecticides that use peptides from spiders, and are based on research from the University of Connecticut, whose Research & Development Corp. spun the company out. The first insecticides are set to reach the market in late 2011 or early 2012.

“The company has reached the point where we are preparing for our first season of field evaluations with our products,” and their effectiveness in keeping insects from destroying vegetable crops in California, the Northeast, and Florida, John McIntyre, president and CEO of Venomix, told BRN last week.

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“We have scaled up our production processes. We have a formulation in hand. We are really focused on getting out into the field the year to reproduce the reality of what we’ve seen in the laboratory into the real world," McIntyre said.

McIntyre, who previously ran Lansing, Mich.-based Emerald BioAgriculture Corp. as president and CEO, said his company hopes to close “between $6 million and $10 million” in series B financing in the third or fourth quarter of this year, “and we want that to take us up to the timing of our product launch,” McIntyre said.

Venomix has reached milestones set in return for previous financing of undisclosed sums announced last year by Open Prairie Ventures II LP, and two years earlier by the $50 million Southwest Michigan First Life Science Fund.

The innovation center’s expansion, McIntyre said, “probably fortuitously helps us,” given the conversion of office space used by other tenants into lab space, including space Venomix now maintains next to its research lab. “If push came to shove, and some time they forced us to move out, they wouldn’t have to do any upgrade or changes to move right back in and have an operating lab.”

For McIntyre and other tenants, one key attraction of the innovation center is its below-market monthly rent. The group starts tenants out at $7 per square foot triple net, a rate that rises over six years to $30 per square foot. Rents account for two-third of the innovation center’s revenues; the remainder, subsidies from SMF.

The Michigan Economic Development Corp. has approved $500,000 in funding for the incubator addition that was matched by SMF. The project will also receive $350,000 from Kalamazoo County, $250,000 from the city of Kalamazoo, and a low-interest loan from the Kalamazoo Community Foundation, which assists nonprofit organization and was founded by pharma pioneer W.E. Upjohn.

West Tech Design designrd and engineered the innovation center addition, for which Miller Davis served as general contractor.

The addition is SMF’s latest move toward building a life-sci cluster in and around Kalamazoo. Among out-of-town prospects the economic development group has recently attracted is Micronics, a Redmond, Wash., developers of point-of-care products for disease diagnosis, prognosis and treatment monitoring. Last year, Micronics won a combined $9 million that included series C financing from the SMF Life Science Fund as well as series B financing from undisclosed private investors.

“We’re building our production line in the Midwest, with the goal of ultimately building its warehousing, logistics, and centralized sales and marketing organization out of the Kalamazoo region,” Karen Hedine, Micronix’ president and CEO, told BRN. “Our building would be more of a manufacturing facility, so it’s unlikely it would be in the incubator per se.”

“First and foremost, however, we are focused on advancing our products, getting those out the door, and generating revenue from those,” Hedine added.

It will be up to other tenant companies, therefore, to drum up demand for space at the innovation center — a facility that Kitchens said SMF can expand again if that demand warrants it: “We could conceivably add about another 30,000 square feet, although certainly in the next few years, that’s not something we’re considering.”

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