Stock market provides biotech with financial life line

Among the newest arrivals at TASE are a group of small firms which launched their IPOs beginning in late '05.

biotech 88 (photo credit: )
biotech 88
(photo credit: )
Among the newest arrivals at the Tel Aviv Stock Exchange are a group of small biotech firms which launched their IPOs beginning in late 2005. "The biotech industry in Israel is not young, though it is not particularly old - it just changes over time," said Dr. Raphael Hofstein, CEO of Hadasit, the technology transfer company of Hadassah University Hospitals. Hofstein explained why Israeli biotech firms have turned to the stock market for financing, and set out his vision for the future of biotech in Israel, in a recent interview with The Jerusalem Post. Israel's famous information technology (IT) and electronics industry originally got its head start from a project called "Yozma," where the Israeli government, in the early 1990s, guaranteed venture capital investment in hi-tech to the tune of some $100 million. The investment more than paid off, with the sector now generating some $10 billion a year. The situation for the biotech industry was totally different. "Israelis were simply interested in biology, and the mapping of the human genome excited the Israelis' curiosity and entrepreneurial spirit," said Hofstein. "This led to the development of an industry - beginning around 1995 - but one which was not adequately financed." With no major project financing the industry, the sector turned to "technology incubators," small companies supported by the Chief Scientist's Office whose goal was originally to nurture the start-up ideas of Russian immigrant computer scientists. As those began to mature and find independent means of financing, the incubators looked for another resource to develop - and the life sciences fit the bill. "People working in IT began to feel that the lessons learned in that industry could be applied in medical science, particularly with the medical device sector," Hofstein related. Today, Israel is one of the world leaders in medical device innovation. "Unfortunately, the medical device industry developed only partially," Hofstein continued. "There are a number of exceptions, but the majority of the products of Israel's innovation and entrepreneurial spirit end up being sold to international companies at a very early stage of the value chain." Meanwhile, the story of pharmaceutical development was entirely different. While the human resource component was well-developed, thanks to the fine educational systems at the Weizmann Institute of Science, Hebrew University and Tel Aviv University, the intensive development costs and regulatory demands - as well as the high risk factor inherent in drug development - made it extremely difficult to get funding for Israeli biotech projects. A common industry estimate is that just one of 20 drugs will end up being commercially developed. The total cost of developing a single drug from concept to production is some $1 billion. "Venture capitalists were reluctant to be involved. The government wouldn't put up funding like it did for Yozma. We tried to get tax breaks set up, but the Finance Ministry was too caught up in other things. 'Come back in three years,' they said," recalls Hofstein. But Hofstein and other biotech executives could not afford to wait that long. Kamada was the first to go public in late 2005, and Hadasit and others followed shortly after. "The IPO was a crucial tool for us; there simply were no other options," said Hofstein. "A chief scientist grant will cover $500,000-$1 million over three years. At most, that could get you to proof-of-concept in animal trials, while global pharma companies will only begin to talk to you when you show results from human trials." The leap between animal trial stage and human trial stage has become known as the "valley of death" in the industry, because the intensive financing necessary for human trials meant few would be able to make the jump. "The 'bridge' through the 'valley,'" Hofstein said, "went through the stock market." David Tsur, CEO of Israeli biotech pioneer Kamada, confirmed Hofstein's opinion of the significance of stock market funding in the progress of Israel's biotech sector. "In order to participate in the full value chain of drug development, you need significant funding, and that requires a developed financial market," said Tsur. Tsur, who spoke to the Post by telephone from Brazil, said he is not worried about the current stock market volatility. "Kamada has just raised a significant amount of cash, so we have enough to get us through the coming period. Of course, there's no doubt that this will be a difficult time for the entire sector, but we are still putting effort into investor relations in the US, improving our visibility and keeping in touch while we wait for better days to come." "At the end of the day, the financial markets know how to appreciate quality," he said. Tsur is not concerned about US President-elect Barack Obama's promise to reduce drug and health-care prices. "This is not new. There has always been pressure to keep prices down," he said. "The way to deal with that is to introduce options which will be more effective for less money. For example, our company has developed an inhaled version of a drug that was previously administered through injection, which is actually more cost-effective for hospitals." Brainsway CEO Uzi Sofer expressed a similar sentiment. "The world of pharmaceuticals is an 'insurance world' - if you can prove that your product is just as good for a lower price, or that it answers a need that is not currently being met, then you will be able to sell your product," said Sofer, whose company produces drugs with multiple uses in the mental health field. Hofstein says current depressed stock prices can't eliminate the achievements of the past few years. "First of all, a total of $400m. that has been raised and invested is important in and of itself. But look at where some of these companies have gotten. Bioline has gotten to the level where they can be in discussions with the big pharma companies, and Clal Biotechnolgies (of the IDB group) has seen at least four subsidiaries reach that level. Kamada is at the level of FDA approval, and, of course, Hadasit itself has moved forward - all thanks to stock market money." But Hofstein estimates that the $400m. invested so far is only about 10 percent of what the industry needs to really grow. "We have institutional investors sitting on piles of tens of billions of dollars, so the money is there. But they have to feel comfortable about investing in biotech." Hofstein believes that more specialized analysts are needed to make investors feel safe with biotech. Also, there is the critical issue of risk dispersal in such a risky business. Hadasit, for example, is a consortium of 10 companies, allowing for both risks and rewards to be diffused. The last piece of the puzzle, though, is an issue of a much larger scale. "There's no point in all of this funding if we cannot develop a real industry, otherwise everything we come up with will get produced overseas," he said. "We are asking the government to make the major commitment necessary to jump-start the process. We have made great strides until now, but there is still a great challenge ahead for us. It is a potential we cannot miss. We can't let this opportunity pass."