We always suspected that Israeli biotech firms had a pretty bad name on Nasdaq. The companies themselves of course would deny this, and American underwriters, investors and analysts have also mostly not dared say so explicitly. They would say that it's true, there have been some disappointing small Israeli biotech companies, but that's not just an Israeli phenomenon; small, dream-based companies often disappoint. Investors, they would say, know how to differentiate between ephemeral Israeli companies and the serious ones. Israel, they would add reassuringly, is known as the Startup Nation, and everyone wants a slice of it.
A week ago, however, a tweet appeared from Adam Feuerstein, a veteran biotech columnist on the STAT website, whose Twitter account is a lively meeting place for the industry. "Why are Israeli biotech firms so consistently horrible?" Feuerstein tweeted, confirming the worst fears about how the Israeli industry is perceived.
Feuerstein continued with a comment about an announcement from a particular Israeli company, the name of which I shan't mention because it's not the main issue here, just as I didn't make mention in real time of the announcement itself, because it didn't seem to me to be dramatic in any way, despite the 50% leap in the company's share price that followed it.
Feuerstein appears to agree about the quality of the announcement: "'Breakthrough' safety? Guys, c’mon… No one is going to take you seriously w/ B.S. like this," he wrote.
Most of those who responded to the tweet agreed with Feuerstein. "You simply can never, ever, ever invest in an Israeli biotech," wrote one of them, and Feuerstein replied, "And it’s a shame because lot of good science and scientists come out of Israel but then they turn into hucksters when forming companies."
Several of those who responded mentioned companies that they saw as exceptions: NeuroDerm, Mazor Robotics, Urogen Pharma, but agreed with the generalization. "God Forgive me but the Truth Shall Be Told.. and then I went to hell?" one wrote. The nastiest comment was "Fraud is a national specialty."
Foreign, obstinate, undiscriminating
What has led to Israeli Israeli biotech firms on Nasdaq being regarded so negatively? First of all, there isn't much with which to compare them. There is only one country that sends a steady stream of young drug development and medical device companies for listing in the US. The companies that turn up from other countries are well established ones that have been traded on their local stock exchanges for years, or else there's a trickle of young companies for a while and then it stops.
By contrast, Israeli medical companies have been arriving on Nasdaq regularly since about 2000, and dozens of them are listed today. So American investors see before them American, Israeli, or "other foreign" biotech companies, and what's foreign by definition always looks rather strange.
That, however, is the simple explanation. The truth is more complex. Another characteristic of Israeli companies is that they won't take no for an answer. They carry out offerings with underwriters large or small, to financial institutions or retail investors; when the flotation window is closed, they tend to merge with stock market shell companies, or to hold an IPO in Tel Aviv and then dual-list through ADRs; or they list on the OTC market and take advantage of a good announcement or an momentary uptick to get themselves upgraded to the main market.
Nothing will stop Israeli companies starved for cash in their market of origin, for which Nasdaq is their only hope for finance. Many make offerings when they have no other option, and not necessarily because the company is ripe for it. Israeli companies therefore tend to reach Nasdaq when they are younger. Since they mostly don't make large offerings, their investors are likely to be small investors and retail investors, whose trading pattern is very volatile, rather than US financial institutions and prominent funds. Israeli managers of biotech companies tend (apparently more than their US counterparts in companies of comparable size) to report small bits of progress as huge achievements. This is due to, among other things, the fact that they know that they are speaking to an audience of retail investors, who on the one hand are eager for exciting short-term events, and on the other hand are not entirely familiar with the field.
Even when Israeli companies are traded on Nasdaq, most of their investors are Israelis. For Israeli investors, a company that has made it to Nasdaq is at the top of the heap in the local market. Investors respond in a much more extreme way to announcements from companies like these than would seem logical to an American investor, who looks at such companies in the context of many others like it.
No monopoly on hype or failure
Israeli companies generally have little cash, relative to equivalent US companies. They often have enough to reach the next milestone - and that's it. In cases like that, woe betide them if the milestone doesn't lead to the jump in the share price required in order to raise more cash. Hence the tendency, not, God forbid, to lie or swindle, but sometimes to puff up the announcement or to put the best possible gloss on the event.
Israeli hype is different from American hype. CEOs of US biotech companies also tend to exaggerate and sell dreams; that's what the industry is based on. Most American CEOs, however, will sell the ultimate dream, the wonderful market potential, but in the immediate term will make promises they can keep. An Israeli CEO, or PR person, is not used to talking to investors who look at the long term, and so will stress his or her confidence in the company's ability to reach upcoming milestones. His or her claims will meet the test of reality sooner.
But in the end, there is no avoiding the perception that clinical trials by Israeli companies really do have a higher failure rate. The gut feeling, even if not at present backed by precise numerical evidence, is that the Israelis, for lack of choice, carry out cheaper and smaller trials, that sometimes put them at higher risk of failure from the start.
It must be emphasized that not all Israeli companies are like that. But there are apparently enough that are to justify the image. All the same, perhaps we shouldn't beat ourselves up too much. After several downright failures, the Tel Aviv Stock Exchange isn't keen on hearing about US biotech companies either. They have caused immense damage to the savings of Israeli investors in the past couple of years - from the day they latched onto the local stock market until most of them decided to delist from it in recent months. A tweet such as "Why are US biotech firms so consistently horrible?" would be completely fair if it came from an investor in Tel Aviv.
Published by Globes [online], Israel business news - www.globes-online.com - on January 15, 2018
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