According to ILSI, there are approximately 900 life science companies in Israel, with more than 70% founded within the last decade. The industry is heavily biased toward the medical device sector, with about 55% of companies focused in this area. The second largest sector (21%, or about 184 companies) is biotech, with pharmaceutical companies accounting for about 12% of all life science companies.
Of the 184 biotech companies, 55 (30%) are revenue generating, with most selling diagnostic kits or research equipment. Another 64 companies (35% of the total) are in the seed stage, while 33 (18%) companies are in the preclinical drug development stage, and 20 (11%) are in clinical-stage development. There is increasing activity in the areas of tissue engineering and cell therapies.
In 2007, the biotech sector was the recipient of about $66 million in venture capital funds, or about 4% of total VC financing in Israel. VC represents about 28% of the total financing for biotech R&D (Figure 2), according to ILSI. The majority of biotech financing comes from the Israeli government, which plays a key role in supporting entrepreneurship in general, and particularly in the high-tech sector.
One way in which the government fosters high-tech R&D is through its support for a system of 23 technology incubators located throughout the country. Through the Office of the Chief Scientist (OCS) of the Ministry of Trade and Industry, the government offers grants to cover 85% of a start-up’s approved R&D expenditures ($300,000 to $500,000) for two years. The scientists or project teams have to come up with the remaining 15%. If the effort is successful and results in a viable commercial venture, the company must repay the grant in the form of royalties on product sales. More recently, the government has encouraged the privatization of these incubators to increase involvement of private investors, and, to date, 12 of the existing incubators have been privatized.
Once a product leaves an incubator it is subject to Israeli R&D restrictions: the intellectual property must remain in Israel and manufacturing has to be done in Israel.
Opportunities for biopharma in Israel continue to expand as drug development success stories increase, and the government has recognized the unique needs of life science R&D compared to other high-tech industries and has responded with grants and incentives aimed at fostering the emergence and survival of fledgling drug development companies.
Another government-funded mechanism, the TNUFA program, is intended to encourage technological entrepreneurship and innovation by providing economic and other forms of assistance to individual inventors and start-up companies during the preseed stage. This support may include assistance in evaluating a concept’s technological and economic potential, patent proposal preparation, prototype construction, and business plan preparation, as well as help in attracting investors and establishing a relationship with an appropriate industry representative. Monetary grants may cover up to 85% of approved expenses, up to a maximum of $50,000 per project.
To provide an incentive for private equity funds to invest in seed-stage companies, the Israeli government launched the Heznek Fund, which provides seed funding that must be matched by a private equity fund.
To qualify for the Heznek program an R&D company must have been formed within the previous six months or have total expenditures of less than 800,000 Israel New Shekels (NIS; about $215,000), and not have already raised money from investors, except for primary financing to support feasibility studies.
The government will invest up to 5 million NIS ($1.35 million) per company for two years, which can account for up to 50% of approved R&D expenses. In exchange for its investment, the government receives shares of the company. The private equity firm that put up the matching funds has the option to buy out the Heznek Fund’s equity stake within the first five years, prior to any merger or acquisition.
The government’s Magnet Program targets generic R&D in an effort to mobilize private investment funds to support start-up ventures. It was established “to provide a competitive position for Israel’s industry with regard to state-of-the-art technologies of global interest,” according to the OCS. R&D programs of a generic nature can qualify for Magnet funding if the company has been in existence for six months or less and has not incurred more than $250,000 in expenses.
The government will invest no more than $1 million over two years to support up to 50% of a start-up company’s approved program. The level of funding must be matched by venture capital financing, with both the government and the private investor receiving equity in the company. The private investor has the option to purchase the government’s shares at the initial price any time within the first seven years, plus interest and cost-of-living increases.
In addition to government funding available through technology incubators, the Heznek Fund, TNUFA, and the Magnet Program, start-up companies may seek seed funding available from Israel’s venture capital industry, from foreign investors, or through a public offering on the Tel Aviv Stock Exchange.