On the face of it, Israel's biotech industry has never looked better. It is difficult to argue with the success of companies such as Omrix Biopharmaceuticals Ltd. (Nasdaq:OMRI), Colbar Life Science Ltd., and Quark Biotech, as well as the variety of new companies that have been sprouting up like mushrooms after rain, in complete disproportion to the size of Israel's population. Foreign funds are taking an interest, the local capital market has given the industry a boost of its own, several companies have reached the advanced stages of clinical trials, and it looks like one more small push is all it will take to build a fantastic industry here.
But on closer examination, it emerges that this industry stands on very shaky ground. This at least is the view of report submitted by investment group GlenRock Israel, controlled by Leon Recanati, to the Chief Scientist. "The biotech industry is stuck at the preclinical stage. There are 160 companies, but nearly all of them are very small. There is insufficient representation on Nasdaq, just six companies with a combined market cap of $1.4 billion only. For the sake of comparison, in San Diego there are 100 biotech companies, of which 30 are public with an aggregate market cap of $14 billion," say the report's authors, worryingly.
Among the contributors to the report, which was submitted to Chief Scientist Dr. Eli Opper and Dr. Ora Dar, head of life sciences and biotechnology division in the Office of the Chief Scientist, were Teva chairman Eli Hurvitz, Yozma group chair and managing partner Yigal Erlich, Weizmann Institute of Science president Prof. Ilan Chet, and Hadasit managing director Dr. Raphael Hofstein. During the course of its drafting, the report was also circulated to senior executives in the life science industry, who added their own remarks. It will be widely distributed at the Sixth Israel Life Science Industry Biomed Conference, due to open in Tel Aviv on June 5.
Companies will continue to head overseas
The report's key conclusion is that the main problem is the spread of too small an amount of money over too many companies, so that there is not enough to provide proper funding for each company individually. "A US company will receive $10 million in the first three years of its life. A company in the UK will receive $4 million, and an Israeli company will receive a mere $1-1.5 million. It is common knowledge that it takes several hundred million dollars in investment to bring a single drug to market, while the Israeli biotech industry as a whole has received just $100 million on average in investment in recent years. In this state of affairs, there is no chance of developing leading companies and a management and know-how infrastructure. At this rate, companies will continue to head overseas," the report finds.
Is there any way of reversing this, given that Israel has limited resources? "The task is possible," says the report. "A study conducted by Tel Aviv University reveals that five companies (Tadiran, ECI, Telrad, RAD and Comverse) built most of Israel's high-tech industry, through subsidiaries, investments, acquisitions, and former managers who initiated new companies." Teva's tremendous influence can clearly be seen in biotech, even though it is a generic drug company and not a biotech company. Glenrock is convinced that four or five medium to large companies could change the face of the industry. "The proportion of high-tech investment in the US versus Israel is $15 in the US for every dollar in Israel," says the report. "And in biotechnology it is $150 for every dollar in Israel." Is there a good reason for such a gap?
It is no coincidence that the conclusions reached by the authors of the Glenrock report are similar to those of previous reports such as, for example, the Monitor report, which was published in 2000 but which was only partially implemented. The difference this time round, is that Recanati and his advisory group have made detailed recommendations tailored to the conditions on the ground today, focusing on the capital market, private investors, specialist funds, ethical drug activity, Teva's investment activity, and the founding of a biotech incubator. The report's authors feel that all these are good, but not enough.
The most demanding recommendation of all in the report, in terms of the amount of money required, is the setting up of a government fund along the lines of "Yozma" or "Nitzanim" which were established to support the high-tech industry in the early days. This fund, says the report, would provide complementary financing to 10-15 specialist biomed companies. The budget for this fund is actually available - it could be provided from the $300 million fund to which the Minister of Industry Trade and Labor is already committed. "The government funds set up the high-tech industry here and the burgeoning venture capital industry that has grown up around it," says GlenRock Israel director of investments Ziv Kop. "There was no high-tech industry here 20 years ago. It's merely a matter of making the decision." The report was accompanied by a supporting study by Economic Models Israel CEO Dr. Yaakov Sheinin.
Another recommendation familiar from previous reports is for the government to offer incentives to leading biotech companies in an attempt to encourage them to come to Israel, just as Intel was brought here. Aware of the difficulty such a move would entail, the report has suggested an alternative - bringing instead a leading research entity, such as the Scripps Research Institute, on the basis of economic incentives and an appreciation of Israeli science. "If we become the third country in which the Scripps Institute is active, it will upgrade our status significantly," says Kop.
The Monitor Report called for changes in the incubator plan. The GlenRock report has now taken this one step further and has proposed follow-on financing for the third and fourth year for all incubator companies in the biotech sector, with a larger scale of investment, on condition that matching finance is obtained. "The incubators could, perhaps, be more stringent in their screening of projects and invest higher sums in each project that they choose," suggests Kop. "Today incubators give less than $500,000 to each project. It's not worth going to all the trouble of setting them up for a sum like this."
Parallel to this, the report's authors have also called on the Industry and Trade Ministry to set up a special track to support advanced companies, that is to say companies that have reached Phase II or Phase III clinical trials. "Today, the Chief Scientist supports large mature companies, while demanding investment in plant and equipment, something which is totally unsuitable for biomed companies," explains Kop. The report also calls for the building of an infrastructure that will serve all advanced companies. "There is a severe shortage in Israel of animal centers and student laboratories that operate in compliance with US Food and Drug Administration - approved standards and methods. Physical infrastructures that meet international Good Laboratory Practice Standards could be set up in hospitals with a small investment," Kop adds.
Another infrastructure in need of strengthening is manpower. The report supports the building of academic programs for the training of doctors, biologists, and chemists for management roles, with the emphasis on biotechnology company management. The first buds of such a program are already growing at Tel Aviv University. And what about designated funds? "They don't have enough money to set up serious biotech companies. Neither does Glenrock," says Kop. "It's a good job we have great private investors, who are the best thing that has happened to the industry, such as Leon Recanati, Morris Kahn, Murray Arkin, and the Pontifax group, which is actually a group of private investors. However, they can't carry the entire industry on their backs. They can give $20-40 million a year, a sum that is negligible compared with the requirements."
Could the Tel Aviv Stock Exchange cover part of this shortfall? According to the report, the importance of this tool should not be underestimated, although it is still not clear whether the raising of finance for life science sectors is merely a passing fad. Neither is it clear whether an early offering is conducive to proper management strategies.
Globes: The mission looks possible, but would an expense of this size be worthwhile for the state?
Kop: "It's not an expense but an investment. It goes towards employees' salaries, and they are the people around which an entire service industry has been built that provides services to biomed companies, which in turn create many more jobs. So where's the dilemma?
"Who knows if we'll have further opportunities to be among the leaders of a growing industry, such as those we have in the biotech industry. Both classic and high-tech industries are under threat from the East; the water industry is still not yet mature, and whether or not there will be a venture capital industry in this field at all, is still unclear. The biotech industry is already known. We know that with proper management, we can become a serious player in this field. Besides which - what could be better for the State of Israel than being a light unto the nations when it comes to saving lives?"
Glenrock: Recanatis' holdings arm for young companies
Glenrock, founded in 2003, is an investment company owned by Leon Recanati, which specializes in venture capital investment in early stage and life science companies. The company is managed by chairman and CEO Recanati, and managing partners Ziv Kop (formerly CEO of consulting company POC), and Dr. Shula Recanati.
Recanati founded Glenrock, following the sale of IDB, as an investment company focusing on early stage companies primarily in life science. He had previous experience in early stage investments with Clal Biotechnology Industries Ltd. and Elron Electronic Industries Ltd. (Nasdaq: ELRN; TASE: ELRN), now one of the successful holding companies in the field. Glenrock currently has investments in 40 companies some of which are strategic investments and some of them financial. Among the life science companies it has invested in are Kamada Ltd. (TASE: KMDA), Rosetta Genomics Ltd. (Nasdaq:ROSG), Vascular Biogenics (VBL) Ltd. EvoGene Ltd., BrainsGate Ltd., and Roei Medical Ltd..
Published by Globes [online], Israel business news - www.globes.co.il - on May 13, 2007
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