In November 1997 an unusual suit was filed in the Tel-Aviv District court by a group of American investors who had invested in Israeli start-up company Shiloov Medical Technologies.
The plaintiffs were the Kingdon investment company, and Travelers Insurance, which is one of the world’s largest insurance conglomerates, and controls the Smith Barney investment bank. The defendants were the inventor/general manager/chairman of the company, Dr. Tamar Yehuda-Cohen, her husband, Shlomo, and Shiloov itself.
The legal dispute ended two weeks ago with an out-of-court settlement, but it could have had a different conclusion. The fight for the control of the small Rehovot based company could have ended its career, and what is more, thrown down the drain an invention that could save lives and earn millions. Cohen, who invented and perfected the early detection of AIDS kit, a religious mother of seven, stood up against a group of experienced business people, and almost lost her invention, and the right to become a very rich lady.
The compromise involved bringing in a new group of investors, and the appointment of Prof. Benad Goldwasser as chairman of the board of Shiloov, in place of Tamar Yehuda-Cohen. Yehuda-Cohen declined to give an interview for this article, and her lawyer, Ron Bergman, in his first conversation with me, said: "I cannot, under any circumstances, let you speak to Tamar". Later on he changed his tone somewhat, and through the company’s spokesman, advised that Cohen was bound by the terms of the compromise agreement not to talk.
The plaintiffs, in their statement of claim, made a series of allegations concerning the way Dr. Tamar Yehuda-Cohen functioned as general manager and chairman of Shiloov, her alleged frequent absences from Israel, wastage of money, and her torpedoing of their attempts to appoint a new general manager. The defendants, incidentally, did not file a defense. The statement of claim further alleged that: "Cohen is emptying the company’s coffers, puts money into her own pocket without reporting to the company, and is leading the company to the brink of the abyss". It was further claimed that the Cohens abused their status as directors in order to advance their interests as shareholders, without taking the interests of the company into account.
Tamar Yehuda-Cohen, an immunologist, invented the technology on which Shiloov is based, and founded the company in 1994. The test enables early detection of viral infections in carriers of various viruses. The first product, Shiloovtube - HIV, was intended to detect the AIDS virus, and a US patent was taken out. The novelty of the invention was that it enabled a virus to be detected within a short period from the time infection occurred: only two weeks, instead of six months.
With some 200 million AIDS tests a year around the world, and with horrific memories of infection by infected blood supplies that occurred during the 80’s still fresh, there is no doubt that Yehuda-Cohen’s test is the closest thing to the goose that lays golden eggs. Potentially, at least. And that isn’t all. Shiloov has a similar test up its sleeve for hepatitis ‘C’. This is a quiet, cunning disease, without the fame of AIDS, yet with an economic importance nonetheless, as over 100 million tests are carried out every yeare to detect the disease. Later on the technology will be applied to early detection of cancers, (mainly leukemia, and breast and uterine cancers).
The target market for the test-tube is are not the general public, at least not at this stage. The diagnostic kit is designed for medical institutions and blood banks. At present, because of the long period of time that elapses before test results arrive, blood banks cannot use blood immediately it is donated. This means storage of huge quantities, at great expense.
From the time she developed the kit, and until she received the US patent last September, Yehuda-Cohen went through the usual heartaches common to every entrepreneur. With twenty years experience in clinical research and forty professional articles behind her, she went about raising investment funds. The promising technology caught the eye of a group of US investors, who, for 40% of the company’s shares, put down $5 million. The 60% balance remained in the hands of the Cohens. And so Shiloov Medical Technologies was born.
The plaintiffs viewed Yehuda-Cohen’s frequent trips abroad as a waste of money. According to their statement of claim: "Her wasteful trips characterize the manner she ran the company. During the year Cohen went all over the world to no purpose." The investors maintained that Cohen wasted $500,000 for no reason.
Adv. Bergman: "Tamar completely rejected all accusations that she wasted money unjustifiably, and made it clear that the company and its books were open for inspection by the US investors at any time, and that all the company’s expenses were approved by the board, on which the investors have veto powers. There was no transaction that was not approved by the board".
The company’s position concerning the trips was cited in the December issue of "Bio World International", close to the time the suit was filed. It stated, quoting a company source, that the trips were for the purpose of promoting the company’s business, especially in South and North America. The main object was to obtain patents in various countries for Shiloov's invention, as well as to conclude international marketing agreements. Yehuda-Cohen also went to Mexico and Brazil as part of an Israeli trade delegation, headed by Minister of Industry and Trade Natan Sharansky. As proof of her efforts, Yehuda-Cohen referred to the approval received from the Mexican government for the sale of the AIDS detection kit in Mexico.
The plaintiffs further claimed that, under the corrective agreement, it was decided that a new general manager would be appointed to replace Cohen. They said Yehuda-Cohen did "everything possible" to torpedo this changeover, and "after we arranged meetings with candidates, Cohen notified them that their position as general manager would be void of content, and that she would do whatever she saw fit by virtue of her position as chairman of the board".
Bergman rejects these accusations, responding to the allegation that Yehuda-Cohen was unfit to act as general manager: "Tamar was asked to be the general manager by the investors, and the board can always replace her". He said Dr. Yehuda-Cohen searched for new investors, but the US investors refused to allow new ones into the company, so as not to dilute their holding in Shiloov. "Every time a deal was about to be concluded, the investors would breakup the negotiations, and tried to make her accept funds from them at far below company value to dilute her holdings to an even lower level."
So what actually happened at the stormy board meetings in the company’s offices in Rehovot?
Bergman: "Yehuda-Cohen claimed that the US investors group was trying to dry up the company financially so they could gain control of it, and the technology. They used their financial strength to try and deprive her - the inventor, developer and patent holder - of any share in the company. Furthermore, her attempts to bring in other investors at a high company valuation were blocked by the US investors representatives". Bergman said Cohen viewed the claim against her as another attempt to break her fighting strength in order to take over her rights in the company. At the time, a company source said the plaintiffs, who are Americans, were really interested in taking over the company and transferring it, and its technology, to the US where they would be able to sell it to an US manufacturer.
The mutual recriminations between the parties, as well as the rift between them, threatened the company’s continued existence. Each side accused the other of mismanagement, and responsibility for the deadlock that ensued. This was what gave rise to the solution to buy out the US investors’ share, said Bergman.
Now, with $10.7 million of fresh money flowing in the company’s veins, the parties are trying to be as restrained as possible. Shiloov, and its thirty one employees, could not have hoped for a better solution. It wasn’t just any group of investors that came to her aid, but the royal family of local finance: Biomedical, Genesis, Evergreen and Shamir Insurance. Arison Investments is a partner in Biomedical Investments. Len Abramson of Teva (Abramson is Arison’s partner in control of Bank Hapoalim); The Genesis Partner venture capital fund is controlled by the Oppenheimer investment bank. This group has 53% of Shiloov's shares. The share of the American investors has been diluted to 11%, with no voting rights. The 36% balance remains in Tamar Yehuda-Cohen’s hands.
The compromise agreement called for the US group to sell their share to the Israeli investors for $1.5 million. Shiloov will also pay them $4.28 million, while the Israeli investors will put $6.5 million into the company. An agreement was also reached regarding the running of the company. Prof. Benad Goldwasser was appointed chairman of the board, instead of Tamar Yehuda-Cohen. Goldwasser is a founder of Medinol, a director of Biomedical, and a professor of surgery at Tel-Aviv University Medical School. Until recently he was head of the Tel-Hashomer urology department.
When will Shiloov’s technology be ready to go to market?
Adv. Bergman refuses to give a date. So far the kit has been authorized for sale in Mexico, and approvals are being processed in the US, Brazil, Israel, South Africa and Kenya. The company is negotiating with the US FDA and is about to start clinical trials. Bergman stressed that the approval procedure for the test kits is much shorter than for a new drug.
Shiloov is meanwhile manufacturing a small quantity of kits for trials in those countries where it requested marketing approval. The company plans to set up a manufacturing plant in Kiryat Gat, which will eventually employ some 200 people. The company says Shiloov will be using the new funds to complete approval procedures for its technology in various countries around the world.
Published by Israel's Business Arena February 18, 1998