Vital Signs: Med Tech Investments Show State's Traditional Strengths

After playing the role of wallflower for a couple of years while venture capitalists and dot-coms danced, medical technology investments now appear to be helping Minnesota weather the worst of the post-party, Internet-led downturn in venture capital investing.

Four of the 12 Minnesota-based companies receiving venture capital in the first quarter were medical device and equipment firms, the largest number of deals of any industry category, according to the PricewaterhouseCoopers MoneyTree Survey in partnership with VentureOne. A fifth medical venture capital investment came in the small but fast-growing biopharmaceuticals sector.

"Two years ago we were saying we'd missed the Internet boat," said Jay Hare, a partner in PricewaterhouseCoopers' technology industry group. "Today we're thanking God we weren't on the boat, because it sank."

The drop in Internet-related investing led to a nearly 40-percent decline in venture-backed funding in the first quarter, the sharpest quarter-to-quarter d ecline since PricewaterhouseCoopers began the survey more than five years ago.

Nationwide investing in medical devices countered that trend, posting an 8 percent increase to $406.2 million in the first quarter, the survey said.

Together the state's four medical device deals accounted for $34.2 million, or 21.5 percent of the state's total venture-backed funding in the first quarter. Medical device investments -- traditionally a strong area in Minnesota -- had attracted around 25 percent of the state's venture capital dollars until 1999, but fell that year to 13.6 percent. They accounted for 13.8 percent in 2000.

Maple Grove-based Myocor Inc., which is developing a device to treat congestive heart failure, received $18.7 million, the largest amount in the quarter for a medical equipment company. Altiva Corp., an Edina-based dental implant firm, received $12 million in first-round financing; Disc Dynamics of Minnetonka, which makes polymers for resurfacing the spine, received $2.5 million, and Inlet Medical Inc. of Eden Prairie, which makes laproscopic instruments to treat women's health problems, received $1 million.

One-of-a-kind treatment

Inlet has been around since 1992 but is relatively new to the venture capital scene, having raised most of its early funding from angel investors, according to CEO Lee Jones. Despite the current difficult venture capital environment, the firm had little trouble getting attention from venture capitalists because it has a patented, FDA-approved, insurance-reimbursed product that about 130 doctors already are using, she said.

Inlet has developed an instrument set for minimally invasive surgery to treat women whose uteruses are retroverted, or tipped toward their spines. The condition, which can cause severe backaches, infertility, menstrual pain and pain during sexual intercourse, affects about one in five women ages 18 to 48.

Previously, the only treatment for a patient was to receive a hysterectomy, not an option for a woman who wanted to bear children. Even women willing to undergo a hysterectomy often went untreated, either because they were reluctant to tell their doctors about the problem or because their doctors didn't take their complaints seriously.

"For years, women were told to go home, have a glass of wine and stop being crazy," Jones said. "In a way, the biggest competition we have faced is a lack of awareness and doing nothing."

That situation is changing as women have become more aggressive in educating themselves about health problems and in talking to their doctors about them, Jones said.

It also may help that nowadays there is a greater chance that the person they consult is a woman -- either a nurse practitioner or a female obstetrician/gynecologist.

Jones, a former Medtronic Inc. executive before joining Inlet about three years ago, said the firm has developed a marketing program that in part is aimed directly at patients. For about two years, the company has had a Web site (http://www.tippeduterus.org or http://www.inletmedical.org ) where women can get general information on pelvic pain and problems related to having a tipped uterus. Jones said Inlet will use the venture capital funds to build a distribution system. She expects the company may seek about $2 million more in funding sometime in the next couple of years.

As for long-range plans, Jones said Inlet could remain independent but would listen to acquisition offers. She said she doesn't think the company eventually will go public.

Focus on women's health

Inlet, which expects to have sales of more than $1 million this year, projects revenue of more than $100 million for fiscal 2005 based on sales of its existing product and others in development.

That potential for growth made Inlet an attractive investment for Ascent Technology Medical Fund, a Minneapolis-based venture capital firm whose focus in part is on women's health care products, according to Sam Humphries, co-founder of the firm.

Ascent, formed about a year ago, also has investments in Plymouth-based Uromedica, which has developed a product for treating stress incontinence primarily in women; St. Paul-based Urometrics, whose products include a device for treating female sexual dysfunction, and LifeSpex, a Seattle company that has developed a procedure for detecting cervical cancer that it claims is superior to a pap smear. Like Inlet, these companies have huge potential for growth because they are developing products for what have largely been unmet needs, Humphries said.

Ascent has raised about $25 million of what it hopes eventually will be a $100 million fund, said Humphries, a former executive at Minnetonka-based American Medical Systems whose co-founders are Medtronic veteran Karl Groth and Peggy Farley, president of Ascent/Meredith Asset Management in New York City.

"A lot of VC firms have gotten so big that they are no longer making smaller investments," Humphries said. "We saw a real void ^{of investments} in the $500,000 to $2 million range."

Ascent joined with two other Twin Cities venture capital firms, L Frecon Enterprises and Space Center Ventures, for Inlet's funding. The three firms were among seven involved in funding Minnesota-based medical device firms in the first quarter.

Hare said that along with the overall increase in funding, he was encouraged by the heavy participation of area venture capitalists in the recent quarter's medical device deals.

"In recent years, we've been an exporter of VC partners," said Hare of the move or transfer of some offices to the West Coast. We've sometimes had situations where we've had deals but no VC partners," Hare said.

Twin Cities entrepreneur Robert Buuck, who was among the first to voice concern over the decline in med-tech investments a couple of years ago, said the recent increase in funding is a welcome development, although he'd be happier if there were more activity in the bio-tech field.

Buuck, who co-founded American Medical Systems and Iotek, a Minneapolis drug delivery firm, was so concerned that Minnesota was losing its role as a med-tech leader that in 1998 he and his wife, Gail, donated $2.5 million to the University of Minnesota's Carlson School of Management to expand its Center for Enterpreneurial Studies to help bring technologies to market.

"It's a modest movement in the right direction," said Buuck of the increase in med-tech venture capital funding. "Hopefully, it points to a real resurgence in med-tech in the Twin Cities area."

Susan Feyder is at sfeyder@startribune.com