A month ago, a $15 million dispute of many years standing between the State and Omrix Biopharmaceuticals came to an end. Omrix, the producer of "biological glue" for stopping hemorrhages, is now part of Johnson & Johnson, which acquired it for $438 million. The state, or rather the State Prosecutor's Office and the Accountant General's office in the Ministry of Finance, fought like a lion in this case, asserting that the technology on which Omrix's product was based had been developed at the Sheba Medical Center, a government hospital, and that the state therefore had a share in it. The man who more than anyone else represents the state's intellectual property, however, Israeli Innovation Authority chairman and Ministry of Economy and Industry Chief Scientist Avi Hasson, unexpectedly has a different view.
"I don't know the Omrix case very thoroughly," he qualifies his remarks initially, "but in general, I argue that when the government is suing Johnson & Johnson, it might do better to look at the matter from a broader perspective than that of the Omrix case, because the benefit to the Israeli economy is not confined to royalties on the product, and the state has a lot of dealings with Johnson & Johnson. It may be possible to leverage this matter in order to generate economic activity somewhere else."
"Globes": In other words, make a deal with Johnson & Johnson?
Hasson: "It's not a deal; it's a broader way of thinking. Take the Waze deal, for example. When it was sold to Google for $1 billion, the Innovation Authority got $3 million. In venture capital, in which I worked (in Gemini Israel Ventures) before coming to the Chief Scientist's Office, they would have fired me for such a small return on a company in which I invested $1 million at the beginning, when the risk was high. The perspective here, however, is different, more general. Something else happened in this deal: Google paid the Israel Tax Authority hundreds of millions of dollars, a tax event unrelated to the Chief Scientist's grants, but which certainly contributed to the country."
How did you set the amount of your return?
"When a company in which we invested is sold, there is a complicated formula with a minimum floor - the amount of the grant - and a maximum ceiling. We deliberately set a ceiling, and because I'm the idiot who did it, I'm the one behind all this. In the case of Waze, we didn't bother using the formula, because it was clear that due to the size of the exit, the return would reach the ceiling, and the ceiling was the triple the amount of the grant if the employees stay in Israel - and six times if the 25% or more of the employees are taken out of Israel.
"If the company is sold immediately at the beginning, our share is very large. In the end, however, my goal is not to make money; it's to create incentives to leave the non-financial activity and the intellectual property here."
It seems that your position is different from that of the Ministry of Finance, for example.
"Where intellectual property developed by state employees is concerned (which is not under the jurisdiction of the Innovation Authority), there was a lot of discussion, reports by the State Comptroller, and sometimes also lawsuits. Our position is quite complex, dualistic, and doesn't represent the government. I'm not portraying it as a dichotomy, but our position is that most of the economic benefit for the country doesn't come from a share in the intellectual property that has changed hands; it comes from employment, growth, and payment of taxes.
"For example," Hasson adds, "take the question of knowledge coming from the defense establishment. It was argued that by induction, you could say that when he founded Check Point Software Technologies Ltd. (Nasdaq: CHKP), Gil Shwed might have used work he did or led during his compulsory military service, and that the state therefore has a legitimate claim to Check Point's intellectual property. I thought, and I still think, that it would be a mistake. In discussions on the subject, however, the Ministries of Defense and Finance held the opposite views from ours."
Because it created employment and tax revenues and so forth. But what would have happened had he sold what he developed as soon as development was completed, done a quick exit, and the state would have been left with nothing except for the income tax he might have paid?
"It's important not to look at an isolated case. A country has to look at the overall picture, including in considering what success consists of. There are many examples of companies that failed miserably, but which made an enormous contribution to the state in the form of startups that came from them, patents, and know-how. The Lavie project, Better Place, Dov Moran's Modu (none of the three, incidentally, received money from the Chief Scientist)."
The government invests little
After six years in his position, Hasson, married +3 in Modi'in, is just a few weeks away from leaving the job. He started as an intelligence officer and graduated from the Talpiot program for outstanding officers. After finishing a BA in economics and Middle Eastern studies and an MBA at Tel Aviv University, he served in management at ECtel Ltd. (Nasdaq: ECTX) and ECI Telecom Ltd.. He then joined the Gemini venture capital fund as a general partner, and learned this side of the industry for 10 years. Now that he is finishing his term as Chief Scientist, he plans to take a year off, after which he will do something else.
As Chief Scientist, how do you choose in whom to invest?
"There are criteria, such as innovation, technology, commercial potential, and strong teams. To that extent, it's quite similar to the venture capital criteria. The difference is that the value created in the company itself and the exit are what really interest the venture capital man, and it doesn't interest me at all. When I was in venture capital, I rejected excellent companies because they were too risky for investment. Now, just give me as many of them as possible.
"Paradoxically, the riskier the project, the more likely it is to receive funding from us - whether it's technological or business risk. For me, a project that failed, but which 'leaked' into the technological environment, was a wonderful investment, which will be reflected in the next project. Like they say in a casino, the house (the country) always wins."
That is long-term thinking, which does not always interest Israel
"When I first arrived here, my first question was what proportion of our projects made back their investment. Had they told me 70%, I would have realized that we're not investing in the right projects. We mustn't be too successful. Obviously, had they told me 5%, that would also have been no good, because in that case, it would have been better to throw money from airplanes, and let it fall where it may."
It's not as if you have so much money for throwing from airplanes.
"Right. I'm a very small player who has been on the wrong end of budget cuts for many years. Israel is a leader in national R&D investment, but the government's share in this investment is the lowest in the OECD. So I can't say, as could once have been said, let's throw seeds and let them sprout wherever they fall. I have to decide where to put them, and one of the considerations is where I add something for the entire industry."
It doesn't sound very good. Are there also good news?
"A lot of it. We're now working on something called franchises-licenses. As of now, payment is required for removing any property created with Chief Scientist grants, even if it is only transferred to a different division of the company. But we want to make it possible, mainly for multinationals, to share information developed here with other divisions of the company, and in exchange to share information developed elsewhere with company's R&D center here.
"That's part of a bigger measures we did in the Economic Arrangements Law, led by the Ministry of Finance. There's a new OECD tax guideline called BEPS putting an end to tax shelters for intellectual property. Up until now, companies developed intellectual property in a different country and registered it in a place with lighter taxation, such as the Netherlands, the Cayman Islands, Singapore, or Ireland. This guideline says that it has to be registered where it was developed. The US was the main proponent of this. We and the Ministry of Finance regarded it as a threat on the one hand, and as an opportunity on the other."
Why a threat?
"Because the relevant tax levels in Israel - corporate tax and tax on dividends - are very high by international comparison, and that's one of the reasons why multinationals with a development center here register the intellectual property elsewhere. If the place of development determines the place of registration, they are certainly liable to transfer the development work itself to another place."
So where's the opportunity?
"In contrast to other countries, which have only a low tax rate to offer, but have to build an environment suitable for R&D centers, we have 340 such centers here, and all that has to be done is to adjust the tax regime to encourage companies that are already here to register their intellectual property here, and to attract additional companies and more business. Substantial tax benefits for multinational companies interested in registering large amounts of intellectual property here were approved in the most recent Economic Arrangements Law."
What else is new?
"We're entering the open code issue with the upper hand. It's a very complex matter - which part is registered as the property of the company and what part is left to the community. Up until now, I've had a very simple policy: I barred open code from programs I financed. The world is changing, however, so we're rewriting the rules now. It makes things much more complicated, but we didn't found the Innovation Authority in order to ignore changes happening around us; we did it in order to adapt ourselves as much as possible."
Published by Globes [online], Israel Business News - www.globes-online.com - on February 26, 2017
© Copyright of Globes Publisher Itonut (1983) Ltd. 2017