The 2011 financial reports by Israel's life sciences companies draw the line between the successful and less successful companies, especially for medical devices companies. Some companies flourished, while others sank into financial difficulties from which they may not recover.
The difference between the two groups will likely widen in 2012, and "Globes" expects many of the waning companies will close down or change their business, while hoping that the successful companies will continue to thrive. Some medical devices companies may reach profitability and positive cash flows, which they are currently struggling to achieve.
There is no clear trend for the drug development companies on the TASE, as one clinical trial will decide each of their fates, and there is no correlation between the company and market conditions. In contrast, there is greater commonality between the TASE-listed medical devices companies - most were floated in 2006-07, just before or just after their initial sales, and have been in business for around five years.
These have been years of the great economic crisis, pressure on prices in the US, and tightening regulations. It has been one of the hardest periods for medical devices companies, and a company that has succeeded in overcoming the obstacles and achieving a few million dollars in sales is in a good position for what the future will bring, if it can obtain financing for marketing. A company that failed to build a multimillion dollar business during this period, and lacks investors with sufficient wherewithal, will struggle to establish a foundation for future operations by raising capital on the Israeli capital market, which is drying up. Regrettably, "Globes" sees little future for these companies.
Seven TASE-listed medical devices companies exceeded the NIS 10 million turnover threshold in 2011: Itamar Medical Ltd. (TASE:ITMR), Applisonix Ltd. (TASE:APLS), Exalenz Bioscience Ltd. (TASE:EXEN), BioView Ltd. (TASE:BIOV), Mazor Robotics Ltd. (TASE:MZOR), and MCS Medical Compression Systems (DBN) Ltd. (TASE:MDCL). In addition, Elbit Medical Technologies Ltd. (TASE:EMTC) subsidiary InSightec Image Guided Treatment Ltd. has also crossed this threshold, as well as TASE veteran Given Imaging Ltd. (Nasdaq: GIVN; TASE: GIVN) and holding company DNA Biomedical Solutions Ltd. (TASE: DNA) subsidiary BeamMed Ltd., with NIS 10.9 million revenue last year.
Despite optimistic sales figures, these seven companies are still struggling to establish themselves financially under their own power, partly due to soaring marketing costs, which exceed income above the $10 million sales threshold, and due to continuous investment in R&D. Of the seven, only BioView has operating and net profits.
Except for Exalenze reported gross profits in 2011. Several public and private Israeli medical devices companies with strong sales have gross profits, but subsidized their customers for years in the hopes of a technical or administrative breakthrough that would lower production costs.
Crop gene enhancement developer Evogene Ltd. (TASE:EVGN) and drug developer Kamada Ltd. (TASE: KMDA) are already living the dream. Evogene earned $14 million in payments from partners even without a single product yet on the market, and Kamada earned NIS 257 million from sales of its first product. Pillcam developer Given Imaging posted profits on NIS 679 million revenue in 2011, but this is not news, but a reminder of what a successful business can do.
30% of TASE-listed life sciences companies - 18 of 55 - had a going concern warning attached to their financial reports for 2011. In contrast to medical devices companies, a going concern warning is routine for drug development companies, because of the expense of clinical trials before they can begin sales. The funding cycle of drug development companies is two years, and a going concern warning is almost obligatory in the second year. So long as they have a committed and strong controlling shareholder, they can presumably raise capital. Examples of such controlling shareholders are Nochi Dankner's Clal Biotechnology Industries Ltd. (TASE: CBI) and Israel Makov's Bio-Light Israeli Life Sciences Investments Ltd. (TASE:BOLT). Drug development companies with the means to reach their next big milestone - a successful clinical trial - can probably raise more capital. An example is NasVax Ltd. (TASE: NSVX), which has a going concern warning, and is waiting for the results of a clinical trial.
Medical devices companies are in a different position. Some of them have strong backers, which give them the means to survive until achieving profits, and overcome temporary financial problems. An example is Exalenz, which has strong sales and recently received a NIS 25 million investment, despite the attachment of a going concern warning to its financial report for 2011.
Independent medical devices companies without a strong backer that commits to providing financing include ET View Medical Ltd. (TASE: ETVW), BSP - Biological Signal Processing Ltd. (TASE:BSP), InterCure Ltd. (TASE: INCR-L), InsuLine Medical Ltd. (TASE: INSL), Sialo Technology Israel Ltd. (TASE: SALO), and Flowsense Medical Ltd. (TASE: FLSN).
BSP recently announced restructuring and cost-cutting measures. Insuline, which does not yet have sales, is planning a secondary offering. Intecure and Sialo are on the TASE restricted list. Flowsense, with only NIS 20,000 in cash, announced talks on collaborations with foreign companies, but subsequently clarified that the talks were only preliminary.
Five Israeli life sciences companies gave up or reported serious liquidity problems in 2011: Ultrashape, which sold its activity to Syneron Medical Ltd. (Nasdaq: ELOS), leaving a stock market shell; Applisonix, after plunging sales, merged with Endymed Medical Ltd., which is now its main business; insulin pump developer D Medical Industries Ltd. (Nasdaq: DMED); TASE:DMED) has put itself up for sale after concluding it could not make a go of it indendently; and LifeWave Hi-Tech Medical Devices Ltd. (TASE:LIFE) and Real Imaging Ltd. (TASE:BCNT) have severe liquidity problems and are struggling to pay salaries and repay loans, although they have not yet surrendered.
The common denominator of these companies is a continuum of small offerings at deep discounts on the capital market, implying that they could not obtain other financing or were unable to raise large sums from the public.
Published by Globes [online], Israel business news - www.globes-online.com - on April 10, 2012
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