Why hasn't the Weizman Institute done as much for biotech as the Technion did for the Israeli electronic and software industries? Why hasn't the country ever found a way to make use of the proportionately larger amount of students and graduates who specialized in life science? Why are most venture capitalists scared stiff of biotech?
Yuval Binur of Medica is one of the very few venture capitalists who is not scared of biotech. In fact, 10 out of 11 investments made by his fund were in this field. The lack of the specialized capital with its associated management skills and customer networking is one of the main reasons Israeli biotech has never really taken off, but that's a kind of chicken and egg statement that just begs the question.
Some definition of terms is necessary in the Israeli context, because the term biotech is used, incorrectly, both for medical instruments and agritechnology. Both fields are doing quite well, unlike the torturous industry of developing biological agents for therapeutic purposes, used inside the human body.
Despite capable and even visionary pioneers like Yoram Karmon from Peptor of Haim Aviv from Pharmos, very generous government R&D grants and a great but unfocused interest from the business community, Israeli biotech has never crossed the Rubicon of an industry that makes enough money to attract more entrepreneurs and capital. Potential is usually most interesting when it's matched with experience.
One of the main reasons for the problem is the lack of enough solid proven business models, the sort of road maps that you can either use or discard. Entrepreneurs in electronics and software have a wealth of models to choose from: they can try for the Zisapel model of technology leadership in niches tight enough to command cheaper marketing by distributors. They can go for the BRM-Checkpoint model in which American subsidiaries are just as strong as the Israeli developers back home. There are dozens of other models, companies to copy, people to consult, and friends to help - a whole pool of knowledge and a network that is an integral part of the industry.
This is one reason why Binur's fund is interesting. It's small, with only $15 million, though Binur says he is now raising a second fund, but its real importance may not be in the companies that emerge from the fund, but in the models to commercialize biotech skills. So far, Binur has developed three distinctly different models that have worked well enough for him to consider a second fund.
The first model is based on the common characteristics of the biotech entrepreneur. Biotech entrepreneurs are usually older than people with the itch for electronics and software, because it takes such a long time to learn the various scientific disciplines and develop them to a point in which the scientist can offer something that is both new and useful.
With this in mind, Binur picks up what he calls "projects" from the academic world, funds them and then forms a company around the expertise. Binur neither seeks management nor market skills from entrepreneurs, but needs an eyeball-to-eyeball gut feeling that the scientist is committed to commercializing his knowledge. Then, a manager, invariably from the US is planted in the company to develop its commercial thrust. A prime example of this model is Collguard, which developed a series of unique therapies with applications for cardiology, cancer and dermatology based on the properties of collagen. Collgard has just completed an apparently successful second round of financing and is one of Binur's hotter companies.
Binur says of this model: "We could fund the first work for, say, $1 million, but then would own 100% of the company." In other words, the venture capital formula is taken to the extreme by assuming all the risk and taking all the potential upside, should the project succeed to attract another round of financing.
The second model is mergers. Medica became involved in Orgenics, a company that had reached sales of $10 million for diagnostic kits it developed - but then it stopped growing. Medica arranged a merger with Selfcare, an American company, to what Binur describes as to the great benefit of both companies. This model might be especially useful for those Israeli biotech companies which attracted financing, completed their development, but lacked the various resources needed to introduce the product into the market.
The third model turns the usual Israeli venture assumptions upside down. Medica bought into Neoprobe - an American company that was hamstrung by the requirements of the American Environmental Protection Agency (EPA), and brought it to Israel. Neoprobe had developed what Binur describes as "brilliant technology" to help surgeons during operations to remove cancerous growths. The company developed radioactive markers that latch onto specific monoclonal antibodies. Each antibody is associated with a particular kind of cancer. When injected into the body prior to surgery, the surgeon can check thoroughly if he managed to remove every tiniest part of the cancerous growth using a tiny Geiger counter, the size of a pencil, says Binur.
Neoprobe could not manufacture its products because of extremely stringent safety measures imposed by the EPA. The same safety measures were in place at the nuclear reactor in Dimona. Medica, working with the Astra fund, brought the company to Dimona. It succeeded, and the company went public two years ago.
The models are interesting because they are so difficult. Great ingenuity is needed to overcome some of the most basic problems that biotech presents. The first is well known: the much longer time taken to develop the technology. Afterwards it must win regulatory approval, first in the US. Only giant companies have the resources to bring new pharmaceuticals based on biotech through Phase III clinical trials -- exhaustive tests on enormous numbers of people. These companies have become the portal for biotech companies to reach the world because they realized they could not develop all the technology they need.
This inherently different relationship between the start-up and the market calls for completely different strategies by the venture capitalist. Both the financial, management and marketing strategies have to fit into a pattern in which the technology itself is usually the product, and the market is not users or consumers, but companies with the ability to commercialize the technology.
The entrepreneurs are also different. Binur's first requirement from the entrepreneur is not the intimate knowledge of the market required in other fields.
"I won't turn down a biotech entrepreneur for lack of management skills. I will turn down an entrepreneur who lacks deep scientific knowledge of his field," he says.
Unless proved otherwise, he assumes he will have to graft management, usually American, onto the new company. Another basic assumption runs contrary to the current trend among many venture funds. Medica has to diversify its investments between very early stage "projects" and late-stage restructuring or recasting of established companies because of the long development cycle of biotech products. In other words, focusing just on the early stage would require more money, time and risk than most investors are willing to stomach.
A biotech venture capitalist is also different from his colleagues in other fields because of the tremendous amount of background knowledge needed to weigh investments. "I spend endless hours just reading," says Binur. Apart from basic knowledge of the molecular and biological process, the biotech venture capitalist must keep on top of vast amounts of research just to understand what ideas might work a few years ahead.
The few Israeli venture capitalists who will undertake biotech investments usually diversify this risk with more conventional high tech ventures. Medica turns this model on its head because the knowledge element is so specific to the industry. If the models developed at Medica are good enough to be digested, copied and altered, it could be a good beginning towards making the potential a little less theoretical.
Published by Israel's Business Arena August 18, 1998.