There is more good news for the coverage of biotechnology in Israel. Ilanot Batucha has finally decided to seriously examine the field. From now on, pharmaceutical analyst Sophie Galper will issue a report on an Israeli company in this field every three weeks. She has only reviewed Pharmos (Nasdaq: PARS) so far, but XTL Biopharmaceutical (LSE: XTL), Compugen (Nasdaq: CGEN), and Bio-Technology General (Nasdaq: BTGC) are in the pipeline. Galper gave a general review of the field at the Ilanot Batucha biotechnology conference last week in Tel Aviv.
The first market trend spotted by Galper is a rise in the number of profitable companies in the field. 29 companies began to make a profit in 2001, and another 38 are expected to move into the black in the coming year. “Many companies have enough money to last them for the next five years; Pharmos is an example. It can easily complete independent development of a leading product without a partner,” she says.
Making a profit dovetails nicely with another trend – these companies have something to sell. 300 drugs reached phase 3 clinical trials during 2001, up 13% from the previous year. Galper estimates that the probability of obtaining US Food and Drug Administration (FDA) approval of these products is 82%, and it can therefore be predicted that within five years, there will be another 200 new drugs in the market, in addition to the 120 already there now.
Although the decline in company valuations was generally less than in the other high-tech fields, Galper says that it was more pronounced in companies directly linked to the genome field.
While valuations declined, growth continued. Galper believes the high pricing was retained mostly in the larger companies, which are trading almost three times higher than pharmaceutical companies, whose values are also very high. The average profit multiple in Big Pharma in 2001 was 36, while in Big Biotech it was 92. The reason, of course, was the high growth rate, and revenues continue to mount.
At any rate, the number of deals in 2001 fell, compared with 2000 (Galper: “2000 was a wonderful year for raising money”), but the value per deal rose. This happened because the companies achieved a better bargaining position, both against each other and against Big Pharma.
The advantages of a start-up
Most current research focuses on incurable diseases, perhaps because competition is vastly different in this area, as is the attitude of the FDA. “Most of the small companies are aiming at market segments in which there are no treatments that work, such as cancer, communicable diseases, and diseases of the central nervous system,” Galper notes. “It's clear that Big Pharma is also developing such products, but they have a disadvantage, somewhat reminiscent of high tech. The large companies have to acquire start-ups in order to make technological progress. Start-ups’ work is highly focused, without infighting, with a more focused and creative technology team. They therefore are more successful.”
For example, both Pfizer (NYSE: PFE) and Bayer developed products in Pharmos’s field of head trauma, and both failed. One showed no significant results in trials, while the trials for the other were disqualified. The major companies are trying to break their development activity into separate units, each of which focuses on a certain field. Since they have many projects, it is easy for them to halt a project, without their future depending on it. A small company must be completely confident in its project before burning millions on it.
In one of her forecasts, Galper predicts, “Most companies will probably survive.” This maxim is not based on the companies’ technologies, but on their cash reserves. According to the Ernst & Young Survival Index (cash reserves/burn rate), in 2000 42% of the companies in the sector had enough cash to last for the next five years. Another 11% had enough cash for three to five years. Galper says, “They will survive the crisis of 2001.”
”Globes”: On the other hand, companies that have not yet raised any money have a problem.
Galper: ”There's a real problem at the seed stage. On the one hand, the large funds recommend entering a company only at the first phase of clinical trials. On the other hand, who will help a company survive until then? The government in Israel is very involved, however; biotechnology has been declared a national project, and there's government support from the Chief Scientist for young companies. After all, trials in the early phases cost much less than real clinical trials."
”Furthermore, this sector has recently won the attention of the private investors. It's believed that the capital market will also be more involved. Before 1999, the main financing source in the sector was Big Pharma. Things changed afterwards; there was more financing from the capital market and venture capital. That’s still not enough, though."
”The funds have a problem investing in biotechnology, because development takes a long time. A fund has a life of seven years at the most, while developing a product takes an average of 10 years. Some formula must be found to enable the venture capital funds to be more active. The formula should enable the fund to exit in time through a public issue, rather than by selling a product. If the exits reach the IPO stage, there will be many companies that can be floated without a product on the market.”
Galper says that it all boils down to a search for companies to invest in information infrastructures – companies that have a proven technology platform that can spawn a large number of subsidiary technologies. Two other factors are whether the intellectual property rights are registered and whether growth in revenue and profits is stable.
Which companies meet these criteria? The reports on the specific companies are already on the way.
Published by Israel's Business Arena on January 21, 2002