Israel's economy is currently caught between a global crisis and the economic consequences of the country's political situation, and this is being strongly felt in the healthcare sector. This sector has survived crises in 2001 and 2008 and come out stronger but will this happen now?
There are many optimistic voices in Israel's healthcare sector that claim now is a good time to invest when prices are low, so that the fruits can be picked later but others claim that by the time we come out of this crisis, there won't be much of a healthcare sector left in Israel.
The situation especially hits healthcare companies because most of them are not yet at the revenue stage, and the few that are, for the most part do not record operational profitability. They need a constant stream of fundraising, and are completely dependent on external investors.
During times of available money and appetite for risk, healthcare companies thrive on big dreams. Even in periods of recession characterized by a lack of consumer spending but in functioning capital markets (or that have returned to functioning in preparation for the exit from the crisis), these companies have an advantage, because they form a hedge against consumer goods companies that may be harmed by the reluctance of consumers to spend. But in the current period, speculative money on stock exchanges and venture capital have completely dried up, leaving healthcare companies in trouble.
All healthcare companies worldwide are in trouble and the situation for Israeli companies is worse due to the uncertainty that international investors are feeling about the local market because of the political situation. The announcement that the judicial overhaul has only been paused until after the holidays has only extended the uncertainty.
Triventures cofounder and managing partner Michal Geva says that the halt in investments began immediately after Minister of Justice Yariv Levin presented the judicial reform, even before the tech protest.
She recalls, "Immediately after the reform plan was presented in the media we began getting calls from concerned investors who asked where we kept our money." Some of the managers we spoke to said that they had already moved the money from Israel due to pressure from their investors.
"In a market in which all the power is with the investors, any uncertainty leads to non-investment," says PwC Israel partner, Pharmaceutical & Life Sciences Leader Omer Gavish, "The chances of a new Israeli company receiving an investment are close to zero."
Arkin Holdings head of pharma Dr. Pini Orbach stresses the harm done to the support network of Israeli industry, "Over the years we have enjoyed contact with people who cared about Israel. Jews, former Israelis as well, but also people who saw this small country that tries and succeeds in doing miracles, and were enthusiastic about what is here. We depend on the network of these people of good will at every step. They are investors, underwriters, bankers, analysts. In this context we are in a serious crisis because all these people are examining their relationship with Israel against the background of what is happening.
"In the worst case scenario, there may be some special regulation in the US for investments in Israeli companies."
"It could be that the damage is irreversible"
Accelmed managing partner Dr. Uri Geiger who works in the medical devices sector, mainly in the US, stresses that it has always been difficult in Israel. "It is anyway a distant and incomprehensible place. At one point we enjoyed a certain aura, and funds opened offices in Israel, but these were closed after Israeli companies did not provide returns equivalent to good US companies. The Israelis in the biomed sector did not know how to commercialize their products like the US companies, and did not reach significant revenue, so the exits were small."
In recent years even funds established with the stated purpose of investing in companies with ties to Israel preferred to take advantage of opportunities abroad.
The biomed sector in Israel has not enjoyed rises and has suffered more falls," says Gavish. There have been several high-profile failures in clinical trials by publicly-traded Israeli companies including Ormed, PolyPid and VBL, which have contributed to problems in the sector.
One Israeli CEO says, "When an Israeli company fails, somehow the failure stigmatizes all of us. It's a little unfair, seeing as many American companies fail and have wiped out much more value. But the perception is that Israeli companies have promised too much and perhaps we might also do this."
So what will be
Geiger: "There is a danger that the entire sector will be wiped out. It will take years to rehabilitate the damage to Israel's image as a stable market and it could be that this is irreversible."
Peregrine Ventures cofounder and general managing partner Eyal Lifschitz says, "In Europe, the crisis in 2008 almost finished off the industry there. There was no money, so no companies were formed. Since no companies were founded then, when the crisis ended no money arrived. And then no companies were founded again. They now have a hole that cannot be filled."
Early stage companies as an investment opportunity
A certain optimism can be drawn from the assumption that, from a cultural point of view, Israelis are probably unable to stop founding startups and this, perhaps, is what will keep the industry alive. Lifschitz cites the tech incubators that always breed new companies, and Gavish also claims that despite everything, he has not seen a slowdown in the founding of startups. However, a wave of emigration - brain drain - could lead to most of these companies actually being founded abroad.
OurCrowd CEO Jon Medved speaks with cautious optimism. He says, "It's hard to see this market stopping for a long time, because the technology in it is so exciting. We have seen the revolution that the field of big data has brought to the world of health, and now there is another revolution that will come from Generative AI (products like Midjourney and ChatGPT that can generate information in addition to processing it). Israel is a powerhouse in the field of AI. A sensible investor would say that it is worth investing now, because the prices are cheap.
"Investments in late stage companies, which were considered 'pre-IPO' and therefore achieved high valuations in anticipation of the imminent IPO, are over. But why not invest small amounts now in early stage companies? Now is the time and I get the impression that this is really what is happening, that there are investments in the early stages."
Of the various healthcare sectors, Lifschitz stresses that medical devices in currently hot. He says, "In recent years, all the money flowed from medical devices to pharma, because that was playing on the stock market. Now the pharma sector has been hurt because the stock market has fallen, while in the meantime, Covid highlighted broken health systems, and governments worldwide are working to inject capital into the health system, in a way that prioritizes medical devices combined with digital health."
Peregrine Ventures itself, which comes to the crisis after raising an early stage fund in 2019 and a growth fund in 2022, does not plan "sitting on the money" in Lifschitz's words. "We intend investing $50-100 million over the next two years. If we don't invest in these companies, they will disappear." A large part of the money will probably be allocated to portfolio companies, but some will find its way to new companies.
But Lifschitz punctures his optimism by adding that there are limits. "We need syndicates to invest in the later stages and that is more difficult to find."
Orbach comments, "Companies with products in clinical trials that are very distinct can receive investments at more limited valuations than in the past. In Israel there are currently very few distinct companies with the ability to raise a significant amount."
Arkin, which invests in some Israeli companies, is expected to continue investing abroad.
The road to survival is through streamlining
What must healthcare companies do to survive? Geva says, "They must streamline even more and work harder, in the hope that somewhere on the other side of the crisis, the existing investors will help them."
Gamida Cell (Nasdaq: GMDA), for example, announced this week that it is very close to the potential approval of its product and that it is cutting its workforce and R&D efforts around a very promising product in its pipeline in order to focus on the commercialization of its lead product. This is probably on the assumption that even a company like this would struggle to raise money on attractive terms in the current circumstances. Gamida Cell is a publicly traded company but the situation also applies to privately-held companies.
Lifschitz says, "You have to be creative and bring in strategic investors earlier and sell earlier to countries other than the US."
Geiger raisers the option of company mergers. This was advice also given during the 2008 crisis but it was difficult for Israeli companies, both emotionally and logistically, to apply this. In the current crisis we are already seeing the first of perhaps many such developments, with the merger of Ayala Pharmaceuticals into US biotech company Advaxis. "Besides," says Geiger, "companies will sell cheaply - not only Israeli, but also American. Accelmed recently bought a company for $6 million that had been worth $500 million." "The situation in the market leaves some companies with no choice and they have to make drastic changes to ensure their continued existence," says Gavish. "One of the ways is a merger or collaboration with other companies in the industry. Another measure that companies make is to reduce the number of indications and products in development, or lay off employees. This is a problematic situation because on the one hand these actions emphasize to investors that management is responsible and knows how to cope with challenges and handle them, while on the other hand, deterring investors by increasing the risk."
Mediwound (Nasdaq: MDWD) CEO Ofer Gonen sums up the situation. "When the dust settles and everything stabilizes companies that have proven that they do what they promised will reach high values, and they are the ones that will be attractive to investors, because drugs are always needed," Mediwound has seen its share prices fall 70% from its peak, despite the rare achievement of having its treatment approved in the US. The company is expected to start recording revenue soon, so its situation is relatively good.
Published by Globes, Israel business news - en.globes.co.il - on March 30, 2023.
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