When the US sneezes, Israeli biomed catches cold

Dr. Eyal Kishon: When our companies don’t sell, relevant investors don’t want to invest, IPO market is weak, the entire sector suffers.

August 13, 2011 22:37
MOTI HAZAN, chairman of the Jerusalem Development

Jerusalem Startup 311. (photo credit: Daniel Alster)

The recent events in the American economy, namely the downgrading of the US credit rating by S&P, may affect hi-tech and biomed companies.

These companies depend on the American economy in several critical ways: the US is the main market for their products; they need to raise capital, most of which comes from American venture-capital funds; and to make an exit, they need an active capital market, or high-growth companies with money available to invest in acquisitions. These are almost exclusively American companies.

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‘When the IPO market is weak, the sector suffers’ “Current events in the US are definitely not good for us,” Genesis Partners partner Dr. Eyal Kishon said. “When our companies don’t sell, when the relevant investors don’t want to invest, and when the IPO market is weak, the entire sector suffers.”

Nissim Darvish, a partner at OrbiMed Advisors LLC, which specializes in biomed, believes this is not just an American problem.

“This is a global problem,” he said.

“Economies are not stable, money is becoming expensive, and everyone will want to run away from high-risk investments.”

Darvish believes the main victims will be public companies.

“Private companies with some money stored away will survive, unless the crisis intensifies and drags on longer than expected,” he said. “Public companies, on the other hand, will experience a drop in value even though nothing fundamental has changed.”

Darvish actually views the crisis as an opportunity for OrbiMed.

“We plan to invest 30 percent of the fund in public companies, now that their value has fallen,” he said.

Itamar Medical Ltd. chairman Giora Yaron, who has founded numerous hitech companies, considers this a minirecession and not a long and deep crisis.

“Historically, in countries whose credit rating was downgraded from AAA to AA, no significant movement in interest rates resulted,” he said. “Some companies will make money and some will lose money.

Whoever tries to offer the American economy new products now should be prepared for a long and painful period; whoever offers products that cut costs of existing processes might actually be successful.”

“In good times, everyone wants to improve,” he added. “But perhaps they fear change and ask themselves, ‘If it ain’t broke, why fix it?’ When a crisis occurs, suddenly you have an incentive to install a product that performs similarly, but at a lower cost.”

Yaron said budget cuts, as well as streamlining in the American health-care system, led by President Barack Obama, have hurt the biomed industry.

“Biomed companies already understand that they should only offer cost saving ideas to the American health-care system,” he said.

‘The market is waiting for a dramatic event’ The two previous crises in the US hit the hi-tech industry hard. The Internet bubble burst in 2001, mainly affecting technology companies. The 2008 economic crisis affected them through the financial world, since it hurt the financial institutions that invest in venture-capital funds, which invest in hi-tech companies.

“I do not believe that the financial institutions will directly affect the funds now,” Kishon said. “The crisis will affect us as a byproduct of the market. And I don’t think that it will be equivalent in intensity to the 2008 crisis.”

According to Frost & Sullivan consulting director Eran Flumin: “The direct effect of the credit-rating downgrading will not be dramatic. [But] this action did not take place in a vacuum. It was the result of the American market’s instability, which itself might be leading us into a recession. Over the last few days, Obama has had to implement actions that could have ramifications on the hi-tech and biomed sectors similar to the previous crisis.

“Sometimes an unstable market is just waiting for a dramatic event to get things moving. I say this in reference to the questions that arose at the stock exchange; is this a U-shaped [prolonged slump] recession or a W-shaped [double dip] recession? In other words, is the recent recovery a real correction, or is it just a temporary rise before another fall?” The question of whether the recession will be drawn out or end quickly will determine if start-ups in need of capital will become distressed.

“There is money in the system, and it will not dry up overnight,” Yaron said.

“Whoever currently has cash, whether it is a company or a fund, will not be affected, provided that the crisis lasts for only a year or two. Only those who are caught with no cash and are in the midst of raising capital will be in trouble.”

Globes: What do you recommend hi-tech companies do? Yaron: “They should know that it will get even harder, and they should watch their money. They should wait a few months to see which way the wind is blowing. However, there is no point in panicking, and they shouldn’t make any cutbacks, lay off employees, or change direction.”

Darvish: “We are mostly telling companies to watch their money as much as possible.”

One of the people who apparently followed this advice is PrimeSense CEO Inon Beracha. PrimeSense has sales in the US and worldwide. It’s analysis of body movement technology is integrated into Microsoft’s Connect, which connects to Xbox 360 game consoles.

“The crisis is affecting consumption in the US,” he said. “There is no doubt that the credit-rating downgrading will affect the Americans. There is also no doubt that there will be secondary waves. We are not talking about something virtual; the American debt is insane.”

Beracha does not appear concerned about the company’s investment status following the crisis.

“We are profitable and are not waiting for additional money from investors,” he said. “In contrast, young companies that are looking toward the American market will have a hard time. It does not bode well for them.”

As a result of the economic situation in the US, PrimeSense cannot base its sales solely on the American market, Beracha said, adding, “Ultimately, there are other markets.”

Beracha is not the only one who views S&P’s credit-rating downgrade of the US as just one of a series of threats to the American economy. Israeli hi-tech companies and funds have been speaking for some time about the need to reduce dependence on the US and to increase exposure to the rest of the world, including Europe, the Far East and mainly to the giant markets in China, India and Latin America.

“We have been directing our companies to become more exposed to these countries,” Kishon said. “However, the situation in Europe is not [encouraging]. Most of our companies sell wherever they can, but their dependence on the US is still extremely high.”

“Risk must be decentralized geographically, and this is a process that needs to be carried out gradually,” Darvish said.

“However, we have to take into account that Asian companies are still not ready to pay the price for innovation.”

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