Minnesota medical technology and life sciences companies are seeing a resurgence in investor interest, a reversal from just a few months ago when outside funding appeared to be slowing.
Vergent Bioscience has closed on a $21.5 million Series B financing round, the latest local example of investors backing emerging medical and health care firms in an otherwise choppy fundraising market.
A new report from Deloitte found that investment in medtech and biotech isn't far behind 2021's record pace. This year could end up matching 2020's solid fundraising levels — if market momentum holds.
"Unlike other sectors, life sciences expansion stage dealmaking has remained healthy in 2022's exceedingly volatile market environment," the report found.
At the outset of the year, medical startups anticipated a tougher road to fundraising. U.K.-based financial services firm Deloitte found deal-making was slower in the second quarter than in the first quarter, but overall bullish.
The health care industry — while not immune from macroeconomic pressures — does benefit from aging demographics and ongoing demand. Innovations in vaccines, gene editing and other new technologies create new markets. Plus, the U.S. spends heavily on health care. In 2019, health care expenditures accounted for 17.7% of the U.S. gross domestic product, according to the Centers for Disease Control and Prevention.
Deloitte tallied 461 expansion-stage deals, worth $12.9 billion, during the first half of the year in the U.S., which is more than 25% higher than the first six months of 2020. The report defines expansion-stage as private equity, corporate financing and late-stage venture capital. It does not include early-stage investments.
"There's a lot of money in private equity, there's a lot of money in corporate venture funds that are looking to invest in not just life sciences, but health care [and] health technology," said Katie Knudtson, Deloitte's Minneapolis audit leader.
Bloomington-based Vergent Bioscience is developing a biotechnology that helps surgeons see tumors that were previously undetected or hard to find. The drug is injected into a patient a few hours before surgery. With the use of a near infrared camera, surgeons can easily spot Vergent's drug, VGT-309, with its fluorescent agent that lights up the tumor tissue amid the surrounding healthy tissue.
The potentially wide-ranging applications are what drew investors, said John Santini, Vergent's chief executive.
"In a market where it's been challenging to raise capital, we've been successful in bringing a pretty diverse group of investors together," said Santini. "I think it says something about the need for improving visualization for surgeons."
Backers include local angel investors, venture capital firms, a large surgical robots company and the venture arms of two health care systems.
Vergent has now raised $34 million. It has done two clinical trials in Australia and currently has a Phase 2 trial at the University of Pennsylvania focused on the drug's potential use for lung cancer. The Series B funds will help the company expand the development of the drug for colorectal, gastrointestinal and breast cancers. The company will need to do separate clinical trials for each type of cancer.
In early September, Minnetonka-based Monteris Medical, which makes technology for minimally invasive brain surgery with laser ablation, closed a $35 million round of equity financing.
"The first half of this year was more challenging than the year before," said Jim Erickson, CFO for Monteris. "It took longer than we would have hoped."
Erickson said investors are being more selective but that the sector generally remains attractive.
"Life science is a pretty durable investment spot for people. Technology can continue to take that market to a lot of cool places," said Erickson.
St. Paul-based Grip Molecular, which is making an at-home diagnostic test to diagnose a range of pathogens, is riding the market ups and downs as it works to assemble financing.
"We're very much in the thick of it," said Edward Gillen, Grip's CEO.
Grip has raised $4.6 million from angel investors over the last three years and is now trying to pull together a Series A raise. At the beginning of the year, Grip had a potential lead investor pull out of a financing round.
"They pulled out because of the change in financial markets," Gillen said. But the company soon saw an uptick in interest from corporate venture capital funds that were less affected by market volatility.
The company is now in talks with venture capitalists and corporate venture investors for what the company hopes will be a $12 million financing round.
Bloomington-based Stimdia Medical, which is developing neurostimulation technology to strengthen the diaphragm in mechanically ventilated patients, announced raising $16 million in Series B financing in July.
Industry watchers note, however, that investors are conducting stringent due diligence before committing money.
"It's gotten harder. It hasn't fallen off a cliff," said Frank Jaskulke, vice president of intelligence for the Medical Alley trade group.
Health care is sometimes characterized as a "recession-proof" industry, Jaskulke said, which helps insulate it from macroeconomic trends.
"I'd probably say recession-resistant," said Jaskulke.
