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Cultivating Profits in the Midwest

Originally Published MDDI September 2001 SITE SELECTION Medical device firms searching for new areas to locate facilities are finding fertile ground in the Midwestern United States. Stacey L. Bell

Originally Published MDDI September 2001

SITE SELECTION

Medical device firms searching for new areas to locate facilities are finding fertile ground in the Midwestern United States.

Stacey L. Bell

In years past, when one thought of the Midwest, visions of sleepy towns probably came to mind. The Midwest of the new millennium is a far different place, however, and the states in this region— Ohio, Indiana, Kentucky, Illinois, Wisconsin, Michigan, Minnesota, North Dakota, and South Dakota—have been taking dramatic steps to lure the medical device industry and other high-tech industries to America's heartland.

"We're really seeing a change in how high-tech companies view the Midwest," reports Scott Fulford, manager of economic development marketing for the Cinergy Economic Development Network (Plainfield, IN). "Indiana has always been seen as a state that produced automotive parts, aircraft, and steel. Now we're working hard to develop a business climate that will attract medical device and other high-tech companies. Ten years from now, when you look at the demographics of Indiana, it will look like a totally different state."

The region has high hopes of attracting more high-tech businesses from the West Coast and East Coast because the cost of doing business—taxes, office and plant leases, and labor—in the Midwest is often less than half that paid by coast-based businesses. In addition, the nation's recent energy travails have resulted in skyrocketing energy costs and questionable reliability in California and New York, prompting Midwestern states to promote their own abundant, relatively inexpensive energy. Kentucky advises potential newcomers that its current electricity rates are 49% lower than the national average and are guaranteed through 2004. Minnesota's new advertising campaign touts "No Brownouts Here!"

SELLING POINTS

As attractive as low operating costs are, Nigel Gaymond, president of Gaymond International in Boston, notes, "The cost of business isn't everything. Companies like medical device firms that have a core R&D component need access to good minds for their workforce, networking opportunities, and research partnerships."

In 2000, Gaymond surveyed medical technology firms in Boston, San Diego, and Vancouver to learn what factors figured most prominently in allowing for a successful startup in a new location. Six attributes surfaced. Based on those findings, an appropriate location will offer high-quality examples of the following:

  • Research opportunities—academic and research institutions drive new ideas.
  • Venture capital, so that companies can access the resources they need to grow.
  • Infrastructure and distribution channels, so that companies can easily transport goods across the nation and around the world.
  • Pools of workers—companies need to fill jobs at all levels: professional, technical, manufacturing, and support.
  • Quality of life, because employees value a balance between their work and personal lives.
  • Connectivity with other firms in the area, so that industry professionals can network and share ideas, join forces to create a positive business environment for their industry, and partner on various research projects.

Based on his research, Gaymond believes several cities in the Midwest are especially suited to cater to medical device companies' needs. "Clearly, Minneapolis and Medical Alley, with their strong infrastructure and cluster of companies, are always frontrunners," he notes. Medical Alley is Minnesota's concentration of more than 8000 healthcare industry businesses; it stretches from Rochester through the Twin Cities to the northern part of the state. "Cleveland and Cincinnati with their access to Case Western Reserve University, the Cleveland Clinic, and other excellent research facilities are good choices, too," he adds. "And Chicago should not be overlooked—it has great research facilities and a technology-oriented workforce."

MD&DI spoke with economic analysts and medical technology executives in five Midwestern states (Minnesota, Kentucky, Indiana, Ohio, and South Dakota) where the medical device industry is growing at a rate higher than the national average or where new business conditions may increase the states' appeal to medical manufacturers. Following are their recommendations on the best locations to start or expand a medical device company.

THE MINNESOTA MYSTIQUE

Minnesota is a mecca for medical technology manufacturers, as evidenced by its skyrocketing growth. The state ranks second in the nation (behind California) in the number of people employed in the manufacturing of medical instruments and healthcare supplies. The more than 20,000 workers represent a concentration of medical technology employment that is greater than three times the national average.

"Our growth is due to our infrastructure," says Patricia Neuman, healthcare specialist for Minnesota's Department of Trade and Economic Development. "We call it the Minnesota Mystique. We have the lawyers, doctors, nurses, engineers, universities and research institutions, and the financial capital that any med tech or biotech company needs to start up or expand a business. We're not like some smaller states that say, 'here's $1 million to move here,' but then you arrive and find no support available. Chasing money is the biggest mistake a company could make. People make your business work. You need a trained, talented workforce and an infrastructure that understands how your business works. It's important to be near like-minded people."

Two Minnesota trade associations bring like-minded medical industry professionals together to network and learn about current industry issues. The Medical Alley trade organization, which has more than 230 medical product manufacturers, hospitals, and other healthcare organizations as members, offers monthly meetings on such topics as how to build an incubator facility and how to attract venture capital. MNBIO, formerly the Minnesota Biotechnology Association, links biotechnology firms with financial and academic partners with similar interests.

The state also offers a strong research and academic base. In 1996, the University of Minnesota ranked 12th among U.S. universities in number of patents awarded, and the state has led the way in numerous technological developments as well. The first open-heart surgery, bone marrow transplant, and use of artificial blood in a patient all occurred in Minnesota. Minnesota's 11 state universities work cooperatively with manufacturers to create customized training programs for employees. Undergraduates also feel the medical technology influence: five years ago several schools started training students in FDA guidelines and other areas specifically geared to a medical technology career.

The Minnesota business climate also favors medical technology companies, Neuman says. The state is home to numerous venture capital organizations, and in the first quarter of 2001, one-third of the 12 Minnesota-based companies receiving funding were medical device and equipment manufacturers. The Minnesota Investment Fund offers loans and grants of up to $500,000 to companies seeking to add jobs or invest in new equipment. And the new for-profit Biomedical Innovation and Commercialization Initiative seeks to match the state's medical research institutions and companies with investors to hasten the commercialization of new technologies.

Rochester is also an up-and-coming medical technology center in Minnesota, says Neuman, citing its "excellent airport" with easy access to the Mayo Clinic.

TRADING BOSTON FOR CORONARY VALLEY

In 1990, David Phelps, president and CEO of MedVenture Technology Corp., became fed up with the traffic snarls and high cost of doing business in Boston. He looked to the Midwest to improve his quality of life and found Louisville, KY, the perfect fit for his company, which designs and manufactures medical devices for other companies on an outsourcing basis.

President and CEO David Phelps and the executive team of MedVenture Technology Corp. take advantage of Louisville's skilled labor and location.

"I looked for three things," Phelps says. "People drive our business, so we needed a skilled labor workforce. Technicians and toolmakers were hard to find in the [Boston] area, but they're abundant here in Louisville. You can find greatly skilled people here who will work for $10 to $12 an hour with no benefits because they are also working at UPS [the United Parcel Service operates an international air hub out of Louisville] part time where they get full benefits. They're just looking for extra hours.

"Second, I wanted our company to be located close to our ultimate customers," Phelps continues. "Louisville has an excellent airport, highway system, ports, and railroad system—we're within 10 hours of two-thirds of the U.S. population. Plus, with the UPS hub here, if I get a call at 5 p.m. asking to have a prototype delivered by 8 a.m. the next day, we have time to build the prototype and get it to the hub before it closes at midnight.

"Third, we wanted to be close to other med tech companies and great medical centers," Phelps says. "We're now in the center of Coronary Valley—the University of Louisville's Medical School performs groundbreaking research in this area." Louisville is where the nation's first use of mammography as a diagnostic tool, the first hand transplant, and—this past July—the first implant of a self-contained artificial heart all took place.

KENTUCKY'S COMMITMENT

"Companies should ask three questions before deciding where to locate an office or plant," says Joe Reagan, executive vice president of economic development for Kentucky's Greater Louisville Inc., the Metro Chamber of Commerce. "First, does the area have a long-term commitment to supporting their industry and business segment? Second, what are the quality and quantity of the skilled workforce? Third, what is the relative cost of doing business in that area? The greater Louisville area, which includes 23 counties in Kentucky and Indiana, is strong in all of those areas and offers an often-overlooked advantage: collaborative relationships among med tech companies and universities, other device companies, the government, and other private-sector business that allow companies to grow faster."

Part of Louisville's "long-term commitment" to supporting the medical technology industry is its current construction of the Biomedical/iTRC Innovation Center. On June 7, the University of Louisville, the Louisville Medical Center Development Corp., and local and state government broke ground on the $10 million business incubator, which will accommodate up to 20 new bio-medical and information technology companies with as many as 250 total employees when it opens in March 2003. The incubator is already operating in temporary space at MedVenture Technology Corp.

In other efforts to encourage businesses to move to the area, the state instituted a Bucks for Brains program in 1998 that has since invested more than $200 million statewide to help endow university-based research positions. "In one example of this program's success, the University of Louisville was able to recruit one of medical science's foremost bone marrow transplant investigators, Dr. Suzanne Ildstad, and her team of 40 researchers," says Reagan. Spin-off companies are likely to occur in the future as a result.

The state and local governments are adding incentives also. "Kentucky offers two very powerful tax credit programs that allow companies expanding or relocating here to keep a portion of the taxes that they generate," explains Reagan. "The Kentucky Jobs Development Act allows technology projects to recover half of all start-up or relocation costs and half of annual occupancy costs of the facility for up to 10 years. (The exact percentage depends on the number of jobs created.) The Kentucky Industrial Development Act is geared toward manufacturing projects and allows companies to recover a significant portion of the cost of new equipment and a new building." On the local level, the municipal and county governments in Louisville are merging, which means less paperwork and lower fees for commercial ventures there.

Louisville's workforce has a strong manufacturing history, and unemployment hovered around 3% throughout 2000. Greater Louisville is home to more than 2000 healthcare industry companies that employ 72,000 people.

These numbers are expected to rise in coming months since "our cost of doing business and tax structure are favorable," says Reagan. According to Economy.com, for every $100 most U.S. companies spend on labor, energy, tax, office rent, and other business costs, Louisville companies spend approximately $87.60.

"Communities of comparable size generally offer the same basic infrastructure," says Reagan. "It's important to consider a community's willingness to do business a bit differently and the commitment from the top community leaders to help businesses grow."

PRODUCTIVITY IN INDIANA

When Bill Cook, founder and CEO of The Cook Group Inc., was looking for a place to site his company in 1963, quality of life was the number one consideration. "He had sold his business in Chicago, and we wanted to locate a business in an area that had a high quality of life—open spaces, little traffic, little crime," says Steve Ferguson, executive vice president of regulatory and legislative affairs. "Plus, the area had to have a workforce with wonderful hand-eye skills because we were going to produce medical devices. The people in Bloomington, IN, were stone carvers and furniture makers; they had transferable skills."

Cook Group executive Steve Ferguson credits the high quality of life in Bloomington, IN, and the advanced skills of the workforce for the success of the company.

An unexpected bonus has been the high levels of productivity the Cook Group's Bloomington plant continually achieves. "We have 5000 employees worldwide and 3000 located in Bloomington. By all of the measures we use to determine productivity—including units produced and dollar output per employee—our Bloomington plant far outperforms our other plants throughout the world," says Ferguson.

Ferguson adds that Indiana's strong schools, including Purdue and Indiana universities and Rose-Hulman Institute of Technology, give the company access to some of the best chemists and biomedical engineers in the country. "Whether it's hiring graduates or working with the universities for technical assistance with animal and lab work, our proximity to these institutions is a significant benefit."

INDIANA'S CROSSROADS

Nicknamed the Crossroads of America for its proximity to the rest of the nation (more than 60% of the population is located within a day's drive), Indiana now faces another crossroads: how to implement its desire to become a leading force in the medical device industry.

"As the economy has shifted from old-line manufacturing to a new economy focus, Indiana has tried to focus its efforts more on attracting and retaining life sciences to the state," says Wade Lange, president and CEO of the Indiana Health Industry Forum (IHIF).

Since 1997, the medical instrument industry has grown at an annual rate of 3% nationally and 5% in Indiana. Medical device firms employ one in eight Indiana workers. The industry is most concentrated in Indianapolis (with 40 companies), Warsaw (with 22), and Fort Wayne (with 11).

Skilled labor in Warsaw, IN, was the draw for Medtronic Sofamor Danek.

Among the state's draws for manufacturers are low wages and competitive taxes. "Wages are very reasonable here," reports Cinergy's Scott Fulford. "Manufacturing jobs that pay from $10 to $14 an hour will get more applicants than can be hired. Our taxes are very competitive, too. In fact, the inventory tax is being phased out." On average, Indiana state business taxes are 23 to 44% lower than those of surrounding states, according to the Indiana Department of Commerce.

Joy McCarthy-Sessing, CEO and executive director of Kosciusko County Development Inc., says the skilled labor force was the overriding reason why Medtronic Sofamor Danek chose to expand into a 150,000-sq-ft plant in Warsaw last year rather than expand its facilities in Memphis or Minneapolis. "But," she says, for other businesses, "all other things being equal, incentives may tip the scale." Indiana has put together a package of incentives to lure medical technology business to the state. The 21st Century Research & Technology Fund, which is funded by the state with $50 million biennially, finances projects that have commercial promise and are led by university–private company partnerships. Fifty-five percent of the projects funded and 65% of the monies awarded have gone to medical projects, says Lange.

"The biggest incentive the state commerce department offers is the EDGE [Economic Development for a Growing Economy] Tax Credit Program," says Kevin Waltman, spokesperson for the Indiana Department of Commerce. "The credit is calculated based on the number of new jobs and payroll generated by a company's expansion or location. Local tax credits and abatement also are offered on R&D equipment."

Lange points to two other attractions for medical device companies. "Indiana is home to a large number of chemicals, plastics, wire, and metal manufacturers, so a supply chain is already established," notes Lange. "We also have two strong industry trade associations—IHIF and the Indiana Medical Manufacturers Council—that help businesses get started and offer regulatory guidance and training programs. There's a built-in network waiting."

CLEVELAND'S STRENGTHS

One of the biggest changes Jim Kovach, executive vice president and COO of Athersys Inc., noticed between Cleveland and his former home in Palo Alto, CA, was the lack of bicycle racks outside the office.

Jim Kovach, executive vice president and COO of Athersys Inc., doesn't regret the move he made from California to Cleveland.

"But there's something to be said for gray winters," laughs Kovach, adding that "Cleveland has a lot to offer. It's harder to convince candidates to come to Cleveland than it was to come to the beach, but once they come, they stay. You can't find a 15-minute commute or a $135,000, four-bedroom home in Silicon Valley. This is a good place to raise a family as well as meet your professional goals."

Athersys, which created the world's first synthetic human chromosome, was founded in December 1995 and has since raised more than $85 million in capital and has grown to more than 130 employees. Athersys president and CEO Gil Van Bokkelen, who was a student of Huntington F. Willard, PhD, when he was at Stanford, followed his former mentor to Cleveland when Willard was asked to start the genetics department at Case Western Reserve University. Willard remembered Van Bokkelen's doctoral thesis on synthetic human chromosomes and encouraged him to start a commercial venture in Cleveland.

"Some of Cleveland's greatest strengths are the great institutions with a long heritage in performing world-class medical research," says Kovach. "Our biggest challenge is a lack of venture capital firms within the state and helping to transition what has historically been a manufacturing-based region into a high-tech, intellectual property–based region. Often you need a breakout company—like a Genentech or Hewlett-Packard—to put a place on the map. Athersys has the chance to be that breakthrough company."

BIOTECH IN OHIO

Like Indiana, Ohio is seeking to diversify its economy with a larger focus on the life sciences. "We're the seventh-largest labor market in the United States, but we're primarily an industrial economy," says Paul Nickels, director of public affairs for the Edison Biotechnology Center in Cleveland. "During the past few years, Ohio has scrambled to make the state more hospitable to the life sciences industry. Cleveland, Columbus, and Cincinnati are current med tech strongholds."

Incubator space in all three metropolitan areas is currently expanding. Cleveland's BioEnterprise, Columbus's Business Technology Center, and Cincinnati's Bio/Start provide funding and technical assistance to the more than 350 biotechnology companies located in Ohio.

In 1999, Ohio established the Technology Action Fund. Ohio companies may apply for grants from $250,000 to several million dollars to fund research or engage in other projects that further Ohio's technological growth. Nickels says about 60% of the annual $14 million allocation goes to medical technology companies.

A key change in Ohio over the past few years has been the approach universities take to working with the private sector. "There has been a 180-degree turn in the amount of interest researchers at our universities have in working with the private sector," Nickels says. "The schools finally have realized that technology can make them millions of dollars in licensing fees, so they're now aggressively seeking partnerships with businesses to launch new technologies. Our schools also have been successful in winning research grants. Case Western Reserve University's medical school placed 11th in NIH funding last year." The Cleveland Clinic, Ohio State University, and the University of Cincinnati also have been active in forming relationships with private companies.

In addition to assisting companies with research, Ohio's schools are striving to keep the state's workers up to date with current technology. The recently formed EnterpriseOhio Network strives to link technical and community colleges and universities with businesses to create customized training programs. "Because there aren't thousands of medical device and biotech companies in Ohio, you can be a big fish in a small pond," says Nickels.

Nickels adds that Ohio's tax climate is favorable as well. "There is no inventory tax; there's a sales tax exemption on the purchase of R&D equipment and on the purchase of warehouse machinery (if the product is distributed outside of Ohio); and in community reinvestment areas, 100% of the improved real-estate property tax is exempted for up to 15 years," he notes.

SUCCESS IN SIOUX FALLS

Thomas C. White, MD, started Tamcenan Corp., a manufacturer of implantable glaucoma pump shunts, in Sioux Falls, SD, in 1988. At that time the city hadn't yet been promoted for its shining business climate, but White knew a good thing when he saw it.

"The biggest factor was the conscientiousness and reliability of the workers," says White. "People here always show up for work, and if they have planned a vacation, but you need them to stay to help with an urgent project, they'll rebook their trip. Sure, that probably happens elsewhere, but it's the norm here. In communities that hover between 100,000 and 200,000 in population [Sioux Falls has 107,505 residents], you find more of a family feeling among employees and higher loyalty.

"I also liked the location," continues White. "We're in the middle of the country, so it's easy to reach both coasts, and we have an excellent airport close by. Finally, it's a very comfortable place for folks to live. The tax burden is so light in this state, it makes living easy for both employees and companies," he concludes.

Outside sources concur. This year Forbes magazine named Sioux Falls ninth in the category of best small places for business and careers, and Economy.com ranked Sioux Falls first in business cost review (lowest-cost metro areas for doing business).

TAX RELIEF IN SOUTH DAKOTA

"Companies often consider the workforce and their business costs when determining a new location for a facility, but they often overlook productivity. South Dakota gives them the best of all worlds," says Chris Braendlin, commissioner in the Governor's Office of Economic Development in South Dakota.

"Everyone says they have a great workforce, but productivity figures back up that statement," continues Braendlin. "We've surveyed companies that have moved to South Dakota, and they say their productivity has jumped at least 10%, and in many cases as much as 25%."

South Dakota also scores high on low business costs. "We have no corporate income tax, no personal income tax, no inventory tax, no personal property tax," says Braendlin. "Companies come here, and they don't leave, because they make a lot of money, save a lot of money, and get to keep the money they earn."

Workers' compensation rates also fall far below the national average. In 2000, the national average for manufacturing workers' compensation per $100 of payroll was $3.21 compared with $2.42 for South Dakota.

Sioux Falls, Rapid City, and the Black Hills region are the fastest-growing areas for medical technology companies in the state due to their proximity to research centers at the University of South Dakota and the South Dakota School of Mines & Technology, a computer science and engineering institution. "These cities have all of the support structures and services in place that a med tech company needs to set up a facility—the financial, research, manufacturing, and labor resources are there," says Braendlin.

Because "South Dakota is still growing, and we're hungry for med tech companies," according to Braendlin, it isn't surprising that the state will customize a package offering incentives for land, buildings, employee training, and equipment geared to a company's specific needs. "We can provide very-low-interest loans, training grants to train employees, lease-back options on buildings [South Dakota will build the facility for a company, then lease it back], and in some cases, free land," continues Braendlin. "Today you don't have to be located in New York, Los Angeles, or Chicago to get work done. It makes sense to locate your business where costs are reasonable."

CONCLUSION

When deciding where to locate a facility, it's important to weigh the availability of local research and educational centers, venture and human capital, tax and business incentives, and myriad other factors, but too many companies forget to talk with the locals. "To get a true perspective on a city's work ethic, culture, and way of doing business and living, there's no substitute for going there and talking with the residents," says Joy McCarthy-Sessing. "The greatest research facilities and lowest cost of doing business won't mean much if employees hate their new home."

Copyright ©2001 Medical Device & Diagnostic Industry

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