February 1, 2009 (Vol. 29, No. 3)
Vicki Glaser Writer GEN
Dearth of Venture Capital Spawns Innovative Actions to Invigorate Country’s Life Science Industry
Regardless of the ambient economic climate—which is, needless to say at the moment quite chilly—obtaining funding to support a start-up biotech company and to commercialize an early-stage product or technology is difficult. The situation is not very different in Israel, despite an abundance of world-class academic and research institutions to serve as breeding grounds for cutting-edge therapeutic and diagnostic development programs, a history of successful endeavors across the high-tech spectrum, and the presence of pharmaceutical giant Teva Pharmaceuticals.
The life science sector in Israel must contend with limited venture capital funds available to stimulate the growth of young biopharmaceutical companies. Even as Israel’s economy and the focus of life science research have diversified, most venture capital firms with an interest in the biomedical industry continue to focus on the medical device sector. This dichotomy between an abundance of promising biomedical R&D and a dearth of funding sources has set the stage for some unique government-sponsored initiatives, regional programs, and a corporate-sponsored bioincubator aimed at fostering the expansion and financial success of start-up and existing biotech and biopharma ventures throughout the country.
For the biotech industry, Israel is a country of opportunity and challenges, of wealth and need. The wealth of knowledge and academic research programs in Israel and the opportunity to commercialize cutting-edge discoveries stems from the country’s “innovative culture,” says Elka Nir, managing director of life sciences at Giza VC.
She points to the large number of patents that have emerged from basic R&D activities at institutions around the globe (Figure 1). The ongoing need in Israel is for development dollars. Key challenges for biopharma companies include location—far from the largest market in the U.S.—and a limited supply of professionals with management expertise and experience in starting and sustaining a biopharmaceutical company and taking a drug through clinical development and to the market.
VC firms such as Giza try to fill some of these gaps by offering, not only early-stage financing, but also knowledge and experience, access to advisors, and help with business development and networking. Giza, for example, has an office in Singapore, which can assist young companies access the Asian market. “It is easier if you have a presence in Asia to identify suppliers and help with regulatory issues and due diligence,” says Nir.
Giza introduced a preseed and seed-stage investment plan called the Ofek Program, a milestone-based plan in which the firm will invest no more than $500,000 in seed funding for early-stage projects being developed into commercial ventures in an incubator setting. As a project matures, if it meets established milestones, then Giza will invest additional funds. If it does not, then Giza can cut its losses. The Ofek Program also includes early investment-round funding to bring experienced entrepreneurs and managers in-house.
Nir further reports that venture capital activity in the life sciences has been steadily increasing. Giza’s investment in the life sciences is split about 70/30 for medical devices/drug development, which mirrors the overall VC picture in Israel, with approximately 60% of VC investments in the life sciences overall going toward the development of medical devices, according to the Israel Life Science Industry (ILSI), a group founded in 2005 that serves as an umbrella organization for the Israeli biotech industry.
Currently, about 10 VC funds are active in the Israeli biotech sector. Eli Hazum, partner and chief scientist at Medica Venture Partners, agrees that the two main challenges young biotech companies face are the small amounts of seed funding available and the insufficient numbers of experienced managers and drug development teams, with Teva Pharmaceuticals being the only large company from which to draw seasoned professionals.
“We have the culture,” says Hazum. “It will take time, but we are on the right track, and the government is contributing.” Hazum points out that Israeli investors in the life science sector are becoming increasingly sophisticated. They are looking for specialized pharma companies with innovative strategies such as novel drug delivery methods.
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.
Recognizing that drug development is inherently more risky and requires longer timelines than medical device development, the Israeli government proposed establishing two specialized incubators solely for biotech-related R&D, with an increased funding ceiling ($1.8 million) and longer residence times (up to three years).
Although this vision has not yet become a reality, one biotech incubator, BioLine Innovations Jerusalem, owned by BioLineRx, an Israeli clinical drug development company, was recognized by the government in 2004 as being essentially equivalent to what it had planned to create and received a special $23 million grant from the Ministry of Trade and Industry.
Unlike a traditional incubator, in which a corporate structure is built around a drug or technology, BioLineRx takes a different approach and in-licenses projects that are developed as independent programs under a single corporate structure. Successful projects can be developed further by BioLineRx or licensed out. If a project is successful, the incubator pays the government back for that project; if it is not, BioLine shuts it down.
“We have created an incentive to fail unsuccessful projects early,” says Morris Laster, M.D., CEO of BioLineRx, who has a history of successfully commercializing innovative technologies, having cofounded four publicly traded companies, including Keryx, XTL, and Neose Technologies.
“We don’t believe in the need for a company for each project,” Dr. Laster says. “A company is a living thing,” and as such is inherently driven to remain in existence, even when there is no longer justification for it to exist.
Dr. Laster sees potential advantages of the BioLine Innovations incubator model for regional development of biotech outside of Israel as well, in areas that are research/academic-rich and investor-poor, such as the southeastern U.S., for example.
BioLineRx was founded in 2003 through a joint effort of Teva Pharmaceuticals, Israeli venture capital firms Giza and Pitango, Hadasit (the technology transfer company of Hadassah Hospital), and the Jerusalem Development Authority (JDA).
Focus on Jerusalem
BioJerusalem is an economic initiative of the JDA, intended to boost development of the life science industry in the city by encouraging start-up ventures and the relocation or expansion of existing companies.
In May 2008, the JDA began offering grants of 2.4 million NIS (about $617,000) to life science companies that establish a facility in Jerusalem, with the requirement that they hire at least 50 new employees and rent more than 2,500 square meters of space. Last fall, the program expanded to offer incentives amounting to 600,000 NIS ($154,240) for start-up companies that are less than six years of age and plan to hire at least three new employees and rent at least 50 square meters of space.
Shirley Kutner, Ph.D., executive director of BioJerusalem, describes how the group works with universities, hospitals, medical schools, industry, and a variety of organizations to increase awareness of what the city has to offer, including a wealth of students, technology parks and incubators, and a sizable labor force.
Dr. Kutner notes that 30% of all Israeli academic research is done in Jerusalem, as well as 43% of biotechnology research and 50% of clinical research. The city is home to the highest number of Ph.D. students in the life and biomedical sciences, and 35% of the country’s biotech companies are there.
While BioJerusalem cannot provide R&D funds, it can invest in companies by helping them pay municipal taxes and contributing to rent if company employees relocate to Jerusalem.
For start-ups it can provide assistance in developing a business plan, make advisors available, and offer free management courses, forums, and networking opportunities. It can also invest in infrastructure needs in the city, including industrial parks such as the new BioMed Park at Ein-Kerem that houses only life science companies and is located near the campuses of Hebrew University Medical School and Hadassah Medical Center.
Yissum, the technology transfer company of Hebrew University in Jerusalem, handles about 120 new projects each year, according to Nava Swersky-Sofer, president and CEO of Yissum. About “43% of total biotech research in Israel is done at Hebrew University,” she says. Since its inception, Yissum has overseen about 6,000 patents and 1,800 projects. About 80% of these have involved licensing deals to existing companies, while 10–15% have formed the basis for start-up companies.
Swerksy-Sofer points to clean technologies as an emerging area of interest, including water purification technology and biofuels. In December, Yissum launched a $1 million Cleantech Programme to support the development of cleantech inventions by scientists at HU.
Hebrew University and its School of Agriculture are particularly strong in the area of agrobiotechnology. The vigorous hybrid seed industry in Israel emanated predominantly from research done at HU. Swersky-Sofer cites CollPlant, a biotech company housed in Weizmann Science Park, as an example of technology that emerged from research at HU.