A recent unofficial survey asked experienced capital market players, those who have been around long enough to remember the Wall Street IPOs by Israeli companies in the 1990s, what they thought the market cap of Medis Technologies (Nasdaq: MDTL) was. The answers ranged from, “What, the company is still listed?” to $5-20 million. Hard bargaining with one brave soul extracted an answer of $40 million.
No one believed that Medis, a veteran dream company with a long record of losses and no current revenue, had climbed to an almost inconceivable market cap of $430 million. Yes, that’s not a mistake - $430 million almost NIS 2 billion.
”If we were traded solely according to the company’s potential, the value would be much higher,” Medis director and VP business development Jacob Weiss states unhesitatingly. “The current market cap reflects the capital market’s trust in us, and the belief that the solutions that we’re working on answer a real need. Our investors didn’t put their money on us in order to lose it; they’re very hopeful. What I think pulls the value down is the downside of our potential the risk, and the fact that we still haven’t reached the market with products.”
Medis reached its incredible $430 million market cap after skyrocketing 90% since August, and 400%, compared with its price in early 2003. This huge value reflects investors’ many hopes in a company that is still a dream company today, a dozen years after its founding. The dream has never been realized, but the company hopes that it is closer than ever, and that it will become a reality. That is what they have been aiming at in recent years.
It is a safe assumption that Medis is not regularly featured in the portfolios of people overseas who follow Israeli shares. It does not create media hoopla. Its average daily trading volume is just 50,000 shares, and investors have undoubtedly forgotten its youthful promise. In cases where an overseas investor does include the share in some kind of tracking portfolio, some of the other shares on the list will look much less glittering in comparison.
Medis is not a new company in the Israeli capital market, and is certainly not a young start-up, so it sounds somewhat bizarre, but the company is traded at exactly same market cap as Elron Electronic Industries (Nasdaq: ELRN; TASE: ELRN), and at 50% more than the market cap of Aladdin Knowledge Systems (Nasdaq: ALDN) and Radvision (Nasdaq: RVSN; TASE: RVSN), all growing companies that make profits. Medis is traded at double the market value of Mordechai (Motti) Zisser’s Elbit Medical Imaging (Nasdaq: EMITF; TASE: EMIT), within $100 million of Ormat Industries (TASE: ORMT), and within $50 million of Ness Technologies (Nasdaq: NSTC). A slight jump will bring the company to the market cap of Radware (Nasdaq: RDWR; TASE:RDWR) and NICE Systems (Nasdaq: NICE; TASE: NICE). A further 20% rise will make Medis the equal in value of Zoran Microelectronics (Nasdaq: ZRAN). Retalix (Nasdaq: RTLX; TASE: RTLX) will have to rise 20% to equal Medis. How did this happen?
”I’m sure that investors know how to distinguish between Medis before the advent of its promising fuel cell technology, and today’s Medis, which is the one now standing before them,” Weiss says. “What we have achieved in technology in this field in the past four years is almost a miracle.” Fuel cells are a kind of power supply device for mobile electronic devices that does not depend on an external power source. It is based on a special fuel developed by Medis, which is kept in a separate container. The fuel cell contains an electrolytic fluid, and requires no support system of any kind.
Medis was founded in 1992 under the name Medis-El as a joint venture of Israel Aircraft Industries (IAI) and a pair of American-Jewish investors: Robert K. Lifton, 77, who is currently chairman of Medis, and Howard Weingrow, 81, company president. “The two partners have been working together for 50 years without a contract,” Weiss says.
Lifton, a former chairman of the American Jewish Congress, is also a member of Bank Leumi’s investment committee in the US, and is involved in various pro-Israel groups and health organizations, including public committees, in the US. Weingrow has founded a number of research funds, mostly for children’s diseases. In the 1970s, he was treasurer of the Democratic Party. Lifton and Weingrow are also Medis’s strategic spearheads, thanks to their widespread capital market, political, and business market connections.
Lifton no longer visits Israel as frequently as in the past, but he was here the other week for a ceremony marking the opening of Medis’s new offices and laboratories in Global Park in Lod, to which the company moved from Yehud. As befits Lifton’s stature, President Moshe Katsav and his wife, Gila, attended the ceremony. A company announcement following the ceremony noted that Katsav had remarked how important contributions of technologically innovative companies like Medis were to the expansion of business and employment in Israel.
Also present at the ceremony was IAI CEO Moshe Keret. IAI currently owns 21.3% of Medis, Lifton 15.7%, Weingrow 12.7%, CVF 12.7%, and Medis executive VP Zvi Rehavi 2.1%. The figures include immediately exercisable options.
In 1992, the main company, Medis El Ltd., was involved in developing and commercializing CellScan technology, a biomedical system owned by IAI - TAMAM Optronics and Navigation, and based on an electro-optical laser. It was decided to spin off this activity, and Lifton and Weingrow entered as partners. “Lifton always says that he wanted at the time to invest in an Israeli company in order leave after him something close to his heart health. He wasn’t interested in a communications device,” Weiss says.
The medical device was designed for research into cancer cells. The hope was that the first application would a way to diagnose breast cancer through a simple blood test. Capital market veterans remember an impressive presentation by the company in a prestigious Tel Aviv hotel, with graphs showing enormous potential and astounding profit and revenue forecasts. The presentation helped the company obtain $70 million in a share issue.
Medis El took its first steps on Wall Street in 1993, raising $8 million at $8 a share. The company then lost 95% of its value, following poor reports, and picked up a going concern warning along the way. It has since raised $60 million more, with the controlling shareholders taking part, and currently has cash reserves of $14 million. The most recent round, early in 2004, was a private placement, in which $14.5 million was raised.
To this day, Medis has not managed to commercialize the legendary CellScan. “There were positive indications in Israel, and a lot of publicity, but it wasn’t reliable enough for the needs we were looking to meet. To this day, we don’t know if the problem lay in the maturity of the chemistry involved in the research, or in the device, because we couldn’t even manage to isolate the problem. We began to upgrade it, but we realized that in order to develop CellScan, we’d need more things as a basis, and we starting looking,” Weiss recalls. Medis is now looking into the possibility of transferring CellScan to the testing of individual cells outside the patient’s body, in order to decide which drugs in the cocktail of drugs usually used for chemotherapy are essential, and which are dispensable. Weiss says that Medis is negotiating with hospitals in Israel, and hopes to commercialize the product.
Medis began searching for new technologies towards the end of the 1990s. Zvi Rehavi, ex-IAI, who was involved in the Patriot missile program, and who managed Medis-El in Israel, was put in charge. Rehavi succeeded in recruiting immigrants to Israel from Russia, notably Gennadi Finkelshtain, the man who changed the dream on which the company was based, and currently serves as its current CTO, and the late Prof. Mikhail Khidekel. Finkelshtain, who has experience in the field of energy, emigrated from Russia to Israel in 1990, while Khidekel was a scientist researching special materials in Russia. The patent registered in his name for electrically conductive polymers is now Medis’s main asset. “Were Khidekel still alive, we would have at least another three programs running at the company,” Weiss declares.
In 2000, Medis El engineered a clear external change. Through an exchange of shares, Medis El became a subsidiary of Medis, a new holding company, which owns Medis El and More Energy, which currently manages fuel cell activity. Medis is now the Nasdaq-listed company, not Medis El. “We found Gennadi and Mikhail, and took them under our wing. The courtship began in 1998.” Finkelshtain and Khidekel received a few hundred thousand dollars for the development, and by 2000, the company appeared to have a real direction fuel cells, which is now Medis’s hope, and on which it has been working for the past four years.
”This timetable was critical. Time and money were running out, compared with other companies in the field,” Weiss says. This is where a subject arises that makes Weiss, Finkelshtain, and even Medis senior VP finance and CFO Israel Fisher’s eyes sparkle. Medis is developing tiny fuel cells designed for wireless telephones, portable computers, personal digital assistants (PDAs), and other devices, even for home use. The fuel cells are also designed for military applications.
Large fuel cells, used as replacement for power stations, are based on hydrogen, a hazardous, heavy, and expensive chemical not recommended for use as an energy source in small batteries. “It has been a 160-year disappointment,” Weiss says in describing the problem. What Finkelshtain has invented is a miniature fuel cell with a hydrogen molecule in liquid form that undergoes a pollution-free and non-combustive electrochemical process, and which does not emit poisons. This environmentally friendly fuel is inexpensive, and works at room temperature. In a system of disposable batteries, there is no fuel transportation or cooling and air blowing system, which are needed for large fuel cells.
The first product that Medis is working on is a mobile charger for 3G cellphones, iPod, MP3, every other hot electronics product in the market. When it is used in cellphones, callers can talk for 15-20 hours. The next product is a rechargable battery. If that reminds you of Arotech (Nasdaq: ARTX) (formerly Electric Fuel), another dream company, it is no coincidence. Arotech’s technology, however, is zinc-based, and no longer aimed at the commercial market.
Development of Medis’s mechanism, the size of a small alarm clock, has been completed, and the company plans to ship 340 units for testing by distributors and communications providers in the early months of 2005. Medis will obtain feedback from them on necessary improvements, and configure the first product. “The goal is to launch the first models on the market in late 2005, and we hope for substantial sales in 2006,” Weiss says. “The entire value of the company today is based on this battery.”
Finkelshtain, the father of the technology, says that the company’s product will be ready “at exactly the right time,” since demand for valued-added wireless services, for example, is growing, but conventional batteries are unable to support all of it. Weiss adds that the goal is to sell the first product, a fuel cell-based disposable battery, for NIS 20.
”There are now two billion people in the world with cellular telephones. If just 1% of them buy one battery every two months, we can grow to astronomical numbers. That’s not just a dream. We’ve signed contracts with major distributors, who supply equipment to Circuit City and Best Buy. We’ve got a development agreement with Eastman Kodak, and we recently signed a contract with Superior, a private US company that supplies products to the brand name stores of service providers like Cingular Wireless and T-Mobile. I hope that, by the middle of next year, we’ll already have orders from all these companies.”
Weiss adds, “At this stage, it’s hard to make quantitative forecasts, but the scenarios are optimistic. When we talk about a potential of 20 million people, and a $3 profit per unit, the numbers become frightening. On the other hand, I can promise you that we don’t plan to sell tens of thousands of products. We’re thinking about millions of units. After we succeed, we’ll certainly be a very valuable company.”
Military applications
The company also has hope for military applications. Medis has a cooperation agreement with General Dynamics (NYSE: GD), whose main business is the sale of various PDAs and mobile devices to the US Armed Forces. “They have a product that works on ordinary lithium batteries, which makes GPS broadcasting possible. The device has reserve batteries on the side, and a number of chargers attached to it. An average mission that we’ve been asked to develop is a solution for a soldier in the field for 72 hours. For that, he would need 144 separate batteries in the field, which today costs $500. We can replace these batteries with our batteries. If, for example, we charge $250 for this battery, it will be a great cost saver for the US Army. Here the profit for us is very large, but all the figures in the military sector are sheer speculation.”
Medis receives money from General Dynamics for milestones. Under the agreement between the two companies, Medis will begin shipping units and supplying them to the US Army, which has a $2 billion agreement with General Dynamics, in June.
”Today, a transition from technologies to applications is taking place in all of our fields. There won’t be many of our products in the market tomorrow; it will take another 18-24 months,” Weiss predicts. “When we reach the production stage, we’ll have to raise tens of millions of dollars on the capital market. There are offers from various parties to inject cash and cooperate with us, and we’ll enjoy benefits from their governments. I can’t talk about it yet, but if we sign cooperation agreements like that, we won’t need to raise so much money.”
The hopes are accompanied by enormous risks. This is not a matter of a loss of sales, since there are none. If the dream does not come true, however, the company’s value will undoubtedly shrink. “We have a risk connected with timing. We must meet the targets that we’ve set. Technologically speaking, I don’t think that we’ve got any risk; that part is behind us. It’s clear, however, that as long as we haven’t sold anything, we’ve still got a lot to prove,” Weiss continues.
Without doing too much to spoil the optimism at the company’s offices in Lod, I can mention a few more risks, which I have taken from Medis’s own warnings to the US Securities and Exchange Commission (SEC). Medis has generated losses since it was founded, amounting to a total of $120 million. It is liable to fail in completing and commercializing its fuel cell-based application. In addition, the company has competitors, which are also working on alternative energy sources. These include Manhattan Scientifics, which has reported that it is developing similar products for the telephone and beeper industry; Motorola (NYSE: MOT), which is cooperating with a laboratory in New Mexico in the production of a methanol-based fuel cell for cellular telephones; and Mechanical Technology, which is also developing methanol-based products. Medis believes that Toshiba (TSE: 6502; LSE: TOS; XETRA, AEX, Paris: TSBA), NEC (Nasdaq: NIPNY; LSE: NEC; XETRA, AEX: NIPN; TSE: 6701), and Hitachi (NYSE: HIT; TSE: 650) are also developing solutions. Above all, the market for fuel-based batteries may simply fail to develop.
Medis has 75 employees in Israel, and takes pride in the fact that half of them are what is called “new immigrants.” The company had 20 employees in 2000, giving it a high growth rate. When I toured the company’s laboratories with Weiss, one employee asked him, “Can I help you?” Weiss laughs: “You see? We’ve grown so much that some employees don’t even know me.”
Published by Globes [online], Israel business news - www.globes.co.il - on January 6, 2005