DRAFT
Case studies of Israeli Biotechnology
Companies
IFISE Project
Dan Kaufmann
Chen Levin
The Jerusalem Institute for Israel Studies
Table of Contents
Biotechnology Global Overview .................... 3
Drug Development Process and Value Creation .............................................................. 5
Israeli Biotechnology Industry – Overview .... 7
Research Summary ....................................... 11
The Sample ................................................... 13
Entrepreneurs Background .......................................................................................... 16
Work Experience: ................................................................................................... 16
Team work ............................................................................................................. 17
Triggers and reasons for Foundation ......................................................................... 18
The importance of the cluster....................................................................................... 18
Technology Transfer ................................................................................................... 19
Sources of Finance...................................................................................................... 20
Incubators: ................................................................................................................. 21
VCs ........................................................................................................................... 22
Office of Chief Scientist (Ministry of Industry and Trade) ......................................... 24
Business Models ......................................................................................................... 24
Human Resources ....................................................................................................... 26
Policy Recommendation ............................... 28
2
Biotechnology Global Overview
The biotechnology market is expected to grow by 12% annually and to generate over
$40Bn revenues in 2004 (potentially $100M by 2010). Market capitalization of US
companies reached over $250Bn in 2000 (more than 25% growth per year since 1996)
with revenues above $22Bn1.
Among European countries (Fig 1) Germany is leading with the 350 companies. In
the UK about 300 companies exist. Israel, with 160 biotechnology is in the 5th place.
This market is mostly dominated by bio-therapeutic and platform technologies (80%
of the market) with the development of new age therapeutic products. Post-genomic
technologies are laying the foundation for a new era of therapeutic products with
many of the conventional drug therapies being replaced by safer and more effective
ones over the next decade.
Fig 1: European biotechnology companies per country
Source: Earnst and Young
1
Source: Ernst & Young and Recombinant Capital
3
Worldwide bio-therapeutic drug sales are expected to be around $28Bn in 2004,
growing by 10% annually (i.e., sales projection of existing drugs). An aging
population in the developed world, the existence of large markets with sub-optimal
treatments and incurable conditions, and the emergence of new protein-based drugs is
driving this growth. The three key therapeutics areas are cancer, autoimmune and
Central Nervous System (CNS), with cancer being the most significant.
In 1999, the NIH allocated 19% (or $3.3Bn) of its grants to cancer research. Cancer
therapies account for 47% (175 drugs) of all the compounds currently in clinical
trials. There are at least 49 biotech cancer products on the market, which together
generated sales of $2.7Bn in 1998 (already 15% of the entire market for cancer
therapeutics). These sales are expected to reach $8.8Bn in 2005, growing by 18%
annually. At the same time, the total cancer therapeutic market is expected to be
around $34Bn in 2002 (17% annual growth).
Auto-immune diseases cover a wide spectrum of illnesses including diabetes which is
the most prominent one. There are currently 16 biotech products on the market for
auto-immune disorders with an additional 19 in clinical trials. Their expected sales for
2005 are around $5.5Bn, a 12% compound annual growth rate.
Central nervous system (CNS) disorders include a number of common old-age
conditions like stroke, Alzheimer and Parkinson diseases. CNS is the third largest
therapeutic market with total sales of $31Bn in 1999. The sales of biotech products
were still limited to $672M in 1998 but they should be over $1.6Bn by 2005 (13%
compound annual growth).
Infectious diseases, especially viral diseases, are still the subject of intense scientific
investigation. Modern medicine still lack effective cures for many viral infections,
from simple flu to the most deadly infections such as AIDS. The market for proteinbased drugs in infectious diseases is expected to reach $1.2Bn by 2005, a growth of
17% annually. Currently there are over 50 biotech drugs in clinical trials.
Cardiovascular diseases are still one of the main cause of death in the modern world.
However, the market is fairly mature and should remain stable. By 2005, the market
for cardiovascular products is estimated to be $1.3Bn, enjoying an annual growth of
only 4%. Currently, there are 19 biotech drugs in clinical trials.
4
Drug Development Process and Value Creation
The process of drug development has few phases, which are derivate from the regulation
procedure. Drug development companies increase their value by successfully passing each
phase. In general the drug development process consists of the following phases:
1. Preclinical Testing: this phase includes test of pharmacology; toxilogy;
preformulation; formulation; analytical; and pharmacokinetics.
2. Investigation New Dru (IND) Application: After completing
preclinical testing, a company files an IND with the U.S. Food and
Drug Administration (FDA) to begin to test the drug on people. The
IND enables a sponsor to ship an unapproved drug in interstate
commerce. Clinical trials may proceed 30 days after filing unless the
FDA places a hold on the proposal.
3. Clinical trials: this consists of the following:
Table 1: Phases of Clinical Trials
Number of
Patients
Length
Mainly
safety
Some shortUpto
Several
term safety,
Phase 2
several months to
but mainly
hundred
2 years
effectiveness
Several
Safety,
hundred
1-4
Phase 3
effectiveness
to several
years
, dosage
thousand
Phase 1
20 - 100
Several
months
Purpose
Percent of Drugs
Successfully
Tested
70 percent
33 percent
25 - 30 percent
For example, of 100 drugs for which Investigational New Drug applications are submitted to
the FDA, about 70 percent will successfully complete Phase I and go on to Phase II; about 33
percent of the original 100 will complete Phase II and go to Phase III; and 25 to 30 of the
original 100 will clear Phase III (and, on average, about 20 of the original 100 will ultimately
be approved for marketing).
4. New Drug Application: Following the completion of all three phases
of clinical trials, a company analyzes all of the data and files an NDA
with the FDA if the data successfully demonstrates both safety and
5
effectiveness. The NDA contains all of the scientific information that
the company has gathered. NDAs typically run 100,000 pages or more.
By law, FDA is allowed six months to review an NDA.
5. Approval: Once the FDA approves an NDA, the new medicine
becomes available for physicians to prescribe. A company must
continue to submit periodic reports to the FDA, including any cases of
adverse reactions and appropriate quality-control records.
The following chart provide graphical presentation of this process.
Chart 1: Drug Development Process
Source:FDA
6
As a general rule it is possible to say that companies increase their value by passing
each phase as follows:
Table 2: Value Creation During Drug Development Process
Phase
value
Basic idea/technology
1
Animal testing
X2
Pre clinical tests
X2
Phase 1
X2
Phase 2
X3-4
Phase 3
X2
As will be presented, startup companies are commonly performing the drug development
process up until phase II. As such companies are limited in their financial resources they need
to either sell\license the knowledge to “big pharma” companies or to join a strategic partner in
order to continue in the development process.
Israeli Biotechnology Industry – Overview
The biotechnology cluster in Israel consist of 220 companies of which 160 are “pure”
biotech and the rest are service providers, private labs, and private incubators. The
Biotech sector in Israel is located in four main areas around the major universities:
Jerusalem (23%), Rehovot (25%), Tel-Aviv (14%) and Haifa (14%). The rest of the
industry is located in different areas with some concentration in the North and in the
center, mainly as a result of strong and dedicated incubators. The industry employs
about 4000 employees in pure biotech companies and about twice as many in the
whole cluster.
7
Biotechnology Companies in Israel by Location
Other
%
MigdalHa'Emek
%
Haifa
%
Tel-Aviv
%
Rehovot
%
Jerusalem
%
Most of the companies are small startups with less than 20 employees (75% of the
companies), while a dozen companies represent 80% of the total market value of the
industry, they generate 2/3 of the sales and employ about 50% of the industry’s
human resources2.
In the last decade, the number of companies increased by an average of 17% per
annum, while the sales generated by the sector grew 27% per annum over the same
period3. However, over the last 5 years the annual growth in the number of companies
slowed to 13% with only 14% annual growth in sales.
In 1990, Israel boasted only 30 biotechnology companies employing just 600
employees, but by 2000 there were 160 companies employing more than 4,000 staff.
The rate of growth accelerated markedly toward the end of the decade: during 2000,
25 new companies were registered, $238 million was invested privately in
biotechnology-based business, and three companies raised $140 million on foreign
stock exchanges (data from Ernst & Young).
Even the recently renewed hostilities between Israel and the Palestinians have not
dampened enthusiasm for biotechnology in the region. During the first quarter of this
year, new companies were being registered at the same rate as that during the
biotechnology "boom" of 2000. According to Ernst & Young, the rate of investment
has slowed just 10-20%-far less than the dramatic slowdown seen in the high-tech
industry globally.
2
Include BTG, Compugen, D-Pharm, Interpharm, Keryx, Omrix, Peptor, Pharmos, QBI and three
companies with limited biotech activities (Abic, Hazera, Sigma Israel) but still significant player in
their biotech specialty; Estimated market value as per August 31, 2000
3
In 1990, there were 30 companies with 600 employees and $50M sales
8
However, despite having one of the highest rates of startup creation globally, revenue
from Israel's biotechnology sector is not keeping apace. Business Data Israel recently
announced that in 1999 revenue grew only 10-15% compared with a 40-50% seen in
Europe and the United States. The lion's share of Israeli biotechnology companies are
still at an early stage of development, and the country's combined sales of
biotechnology-derived products generated $600 million in 1999, and about $790
million in 2000. This is still just a small fraction of Israel's gross domestic product of
$93 billion (1999 figures).
Fig 2: Israel Biotechnology Sector
The estimated market valuation of the entire biotech industry in Israel is about $3.5Bn
in 2000, including 7 public biotech companies capitalizing $2.1Bn4. The vast majority
of the valuation is driven by bio-therapeutic and bioinformatics companies (80% of
total market cap) following worldwide market trends. These sectors are expected to
generate higher returns than any others, as indicated by their ratio of market valuation
per employee, which is 5 times higher than that for other industry sectors, such as
agrobiotech.
4
By August 31, 2000
9
Israeli Biotech Companies Statistics
Companies
Employees
1999 Sales
$M
2000 Market
value $M
Therapeutics
43
1,280
166
2,222
Diagnostics
27
471
28
138
Agrobiotech
30
830
114
286
24
191
39
93
Biologicals
14
492
79
149
Bioinformatics
6
231
3
472
144
3,495
429
3,360
144
3,276
376
3,238
Segment
Industrial
7
Total
Adjusted Total
7
Source: Monitor Report
The sales of the biotech sector in Israel, reached $376M5 in 1999 (close to $600M
including Copaxone sales by Teva) of which 92% was generated by less than 10% of
the companies. This low revenue stems from the fact that most biotech companies’
products are still in the R&D phase. An estimated 21 therapeutic products are
currently in clinical trials phase I, II and III with at least 51 products still in preclinical development. In the therapeutic sector, it may take 10 to15 years before a
company can enjoy any revenue. Even in the sectors of diagnostics and agrobiotech it
can take over 5 years.
In 1999, venture capital funds invested $28M in biotech firms and are becoming
increasingly interested in this sector. Since the beginning of 1999 four additional
Israeli biotech companies have gone public, increasing the total to seven. This
provides more exit opportunities for VC funds.
The biotech industry in Israel is still emerging with no backing from large ethical
pharmaceutical companies. Therefore, the companies lack the appropriate experience
to fully develop a therapeutic drug. On the other hand, Israel has a comparative
advantage and synergy opportunities with its strong related industries in computers &
physics to develop platform technologies, bioinformatics and diagnostic tools.
5
Adjusted for Hazera biotech activities which are estimated to represent only 20% of their total
activity; Industrial includes food, cosmetics, environment and chemical industry
10
Research Summary
1. The study has pointed to the growing importance of technology transfer
agencies (TTA) in the process of startup creation in the field of
biotechnology. Most startup companies in the field are based on ideas
which were generated in the academia. TTA are required to be pro-active
in their search for both financial resources as well as for experienced
entrepreneurs who can take a lead. In addition, research staff employment
policy needs to be more flexible in order to encourage researchers to
initiate startups.
2. Two main financial resources for early stage startups have been identified:
Incubators and Venture Capital. Regarding incubators the study found
inadequacies in the current structure of the incubator program. Incubators
are lacking the required basic infrastructure such as common research
facilities, clean rooms, water supply etc. As result, a few VCs started to
create their own private incubators. In addition the time frame as well as
the available resources made available by the incubators program are too
limited for startup companies in this field.
3. The shortening of the drug development process, the reduction of drug
development costs as a result of utilizing biotechnology techniques and
bio-informatics, and the existence of exit opportunities have increased the
interest of VCs in the field. Most companies in our study raised money
from VCs. The study also showed that all public companies have
performed IPO in a period of less than 6 years.
4. The number of Israeli VCs active in the field is rather small and stands at
about 15. The number of specialized VCs is even smaller. This causes
imperfections, which sometimes result in “flock behavior”. On the other
hand this increases the dependency of startups on foreign VCs.
5. The growth model of most companies in our study was similar and based
on completing phase II of drug development. After phase II two strategies
have been identified: selling\licensing the knowledge or continued
development with a strategic partner who took responsibility on operating
11
phase III. In each case after completing phase II the company started
developing another new drug. This process was also true for companies
that raised substantial amounts of money from IPO. Only after creating
stable cash flow as an outcome of successfully developing new drugs with
a strategic partner, did the companies allow themselves to conduct phase
III alone.
6. Israel has a very strong basis of academic research in human science. Each
year more than 850 students graduate M.Sc. and Ph.D programs. As a
result, there is not yet a shortage in workforce. On the other hand, as the
sector is still in its developing phase, there is a critical shortage of
experienced managers. In the current situation companies are required to
recruit managers abroad. In some cases companies succeed in attracting
Israelis who gained experience in “big pharmas” or VCs abroad.
12
The Sample
During the course of the project 10 bio-pharmaceutical companies, 1 technology
transfer organization, 2 incubators and 2 specialized VCs were studied by conducting
in-depth interviews and using public information. The sample consisted of 2 incubator
companies, 3 small startup companies (up to 30 employees), 1 medium company (up
to 70 employees) who plans IPO within a period of a year and 4 companies which
have already gone public. The selection of this sample enabled us to focus on
different development stages of companies within the bio-pharmaceutical sector. The
study of the technology transfer company as well as the specialized VC and the
incubator was made in order to obtain a complete view on the process of
entrepreneurship in this sector.
The selected companies are:
Gamida-Cell: is an early stage company engaged in the dynamic field of cell therapy.
Using a proprietary platform technology for the ex-vivo modulation of cell
proliferation and differentiation, the company is developing a kit for the expansion of
stem cells derived from umbilical cord blood as a first product. This kit will provide a
crucial and revolutionary tool for stem cell transplantation in patients with leukemia
or lymphoma. Clinical trials are expected to start in 2001. The company is
collaborating with luminary cord blood banks and transplantation centers in Europe
and the US. Gamida Cell is developing relationships with strategic partners to develop
additional applications in non-hemopoietic stem cells and in gene therapy. The
company was established in 1998 and has applied for broad worldwide patent
protection of its core technology. Gamida Cell is based in Jerusalem, Israel.
Keryx: is a post-genomics, drug discovery and development company that uses
bioinformatics to build a pipeline of product candidates and actual drugs. The
Company employs applied genomics platform, a novel, kinase-based approach to
identify drug leads rapidly. Keryx Biopharmaceuticals was established in 1997 as a
US-based company with R&D and manufacturing facilities in Israel. The Company is
traded on Nasdaq and on AIM since 2000.
13
BTG: develops, manufactures and markets pharmaceuticals and devices for human
health care, which
are manufactured by genetic engineering and other
biotechnological methods:
1. Recombinant human therapeutics (hGH, SOD, Imagex, Factorex).
2. Recombinant vaccines (HBsAg -in mammalian cells).
3. Viscoelastic devices for ophthalmology and orthopedics (based
on hyaluronic acid.
The company was established in Israel in 19980 and has currently 6 registered
products, which are marketed all over the world, Six other products in various
development stages and various research products all related to human health-care.
The company is traded on NASDAQ since 1984.
XTL Biopharmaceuticals: develops novel therapeutics to treat life-threatening
infectious diseases based on fully human monoclonal antibodies (hMAbs) and small
molecule drugs. The Company's pipeline of therapies, designed to combat chronic
viral infections, drug-resistant bacteria and serious systemic fungal infections,
comprises internally developed products as well as those being co-developed with a
number of biopharmaceutical partners.
The Company was incorporated in Israel in March 1993 and commenced operations
in November 1993. The company was established to commercialize technology
originally developed at the Weizmann Institute of Science in Rehovot. XTL has
exclusive rights to 14 patents and 17 patent applications world-wide which protect its
proprietary technology. The Company employed 65 people - the vast majority of
whom are scientists. The company is traded in the London Stock Exchange since
2000.
Pharmos: The company uses advanced methods of drug design, combinatorial
chemistry and screening tools to invent new and to improve existing therapeutic
compounds. Pharmos' proprietary technologies have resulted in products that have
increased efficacy and/or reduced side effects relative to their precursors and to
competing products. Pharmos was established in 1990 and has developed proprietary
and novel lipid-based Drug Delivery Systems (with a wide range of therapeutic
14
applications for a variety of drugs that are delivered by parenteral, dermal or oral
routes of administration. Pharmos is traded on NASDAQ since the 1993.
MINDSET: develops biotechnological and pharmaceutical methods for the
prevention and treatment of brain disorders, for example Alzheimer's disease,
Parkinson's disease, schizophrenia, depression and brain tumors and Platform
technologies include CNS gene therapy and anti-oxidants/anti-amyloids. Mindset was
established in 1997
Idgene Pharmaceuticals: is a population genomics company focused on identifying
the genetic basis of common diseases. Founded in 1999, the company has developed a
focused scientific strategy, which is applied to one of the most informative population
resources in the world. IDGENE relies on population-wide association analysis for
gene identification. Association analysis has the advantage of great statistical power
and precise localization of the genes, once detected.
Atena-Cardionet: The company develops drugs based on binding heavy metals and
free radicals for treating neuro-degenerative diseases such as Alzheimer and
Parkinson, as well as cancer and cardio diseases.
Natural Compounds: The company was established in 1994 in an incubator. It
engaged in the development of a new line of anti diabetic, Anti lipidemic and
antioxidants, based on natural sources. In addition MC succeeded in preparing several
synthetic compounds exhibiting hypoglycemic and anti oxidant effects.
CellStain Technologies: The company is engaged in the development of drugs and
tools for the treatment of cancer. CellStain has developed a technique capable of
marking cancer cells of all types differentially from other cells and tissue, based on a
newly discovered common denominator of all cancer cells. Based on the this
technique the company is developing three clusters of products: drug-screening
architecture aimed at whole-cell assaying of anti-cancer drug molecules and
carcinogenesis; tools for functional genomics and pharmacogenomics, and a cellular
diagnostics solutions.
In addition, the NAIOT incubator specialized in biotechnology and the incubator of
the Technion institute and Clal-Biotechnology venture capital were interviewed.
15
As a general rule we preferred to include in the sample more mature companies in
order to get a wider and more complete perspective on the long process of drug
development.
Entrepreneurs Background
Common to all entrepreneurs in this field is their strong academic background. All
entrepreneurs have a Ph.D. in biology or other fields of the life sciences with 1 being
a M.D. The need for substantial education usually results in relatively more mature
entrepreneurs aged 40-55. All entrepreneurs gained academic experience both in
Israel and abroad while most of them developed the idea for their company while
abroad.
Work Experience
Beside the fact that all entrepreneurs had academic work experience both in Israel and
abroad 3 companies were set-up by people with former entrepreneurial experience
namely: Keryx, Pharmos and Gamida-Cell.
In the case of Keryx the entrepreneur gained experience as Vice President of Medical
Venture Capital with Paramount Capital Investments LLC., a merchant and
investment bank. After finalizing his medicine studies he came to Israel and was
involved in the creation of XTL. In 1999 he set-up Keryx which went public by
September 2000.
The creator of Pharmos gained his experience from setting-up BTG 10 years before.
By the end of 1993 the company started to be traded in NASDAQ.
In the case of Gamida-Cell the entrepreneur gained his experience while managing the
technology transfer agency of Haddash: one of the biggest academic hospitals in
Israel.
The other entrepreneurs were well into their academic careers after post-doc work
while creating their companies.
16
Team work
In most cases of the sample (6 out of 10) the companies were created by a team and
not by a single entrepreneur. The basic team usually consisted of a scientist who came
up with the idea and another person experienced in entrepreneurship. Very often the
other person was also from the field of life sciences. Interestingly, in about half of the
cases the entrepreneur was the one to find the scientist and not vice versa.
The case of Cell-Stain represents in some aspects the general case of an entrepreneur
joining a scientist. When Lev Goltsman emigrated from Russia to Israel in 1991, he
took with him several skills, as a pathologist, a natural scientist and an acupuncturist.
After working in an Israeli hospital, he was persuaded by Dan Gelvan, a business
economist, to join him in establishing CellStain as an incubator company in the
Weizmann Institute of Science.
CellStain found it could differentiate between normal and malignant cells in a
relatively fast 15 minutes process. Normal cells were stained green; malignant ones
red. CellStain believes malignant cells can be distinguished more easily by this
method, and decided to use it for detecting cervical cancer. CellStain belives its
method could increase the detection of pre-malignancies and malignancies. Moreover,
labour-intensive manual screening could be replaced by a computer-integrated imageanalyst system capable of screening Pap smears.
Similar cases where companies were founded by a team were Keryx, Gamida-Cell,
Pharmos, ID-gene and XTL.
Our study shows clear advantages for startups created by teams. From the 3
companies initiated by single entrepreneur only one is successful. The benefits of
team-entrepreneurship stem from the fact that a newly-founded biotech company
engages in, from very early stages, intensive activity in many different fields such as
IPR, regulation as well as R&D. Moreover, in order to attract financial sources any
biotech startup is required to set-up a strong advisory board consisting of reputed
scientists and experts in the field.
17
Company
Team
1
2
Gamida-Cell
Keryx
E+S
E+S
Work
experience
A + SU (I)
A + VC (A)
3
Biotechnology
General (BTG)
XTL
Mindset
Idgene
Pharmos
Atena Cardionet
Natural Compounds
Cell-Stain
S+S
A
S+E
S
S+E
E+S
S
S
E+S
A + I (A)
A
A + I (I)
A +SU (I)
A
A
A + SU (I)
4
5
6
7
8
9
10
IPO
Nasdaq
London
Nasdaq
London
Nasdaq
Development
Phase
Phase II
Phase III
Location
Approved Drugs
Rehovot
Phase II
Phase I
Proof of concept
Approved Drugs
Rehovot
Jerusalem
Jerusalem
Rehovot
Jerusalem
Haifa
Rehovot
Not Relevant
Phase II
Jerusalem
Rehovot
Team: E = Entrepreneur; S = Scientist
Work experience: A = Academic; SU = Startup (Israel/Abroad); I = Industry (Israel/Abroad)
Triggers and reasons for Foundation
As mentioned in 4 cases, the driving force behind initiating the companies were
entrepreneurs who were seeking good scientific ideas. Two out of these entrepreneurs
had prior experience in establishing at least one biotechnology startup. The rest of the
companies were the result of promising ideas that emerged during the scientists’
academic careers or as part of their Post-Doc work. However, good ideas were usually
not the only driving force. Strong entrepreneurial character was also needed. In most
cases (8 out of 10) the decision to found a company was followed by giving-up on a
stable academic career, as rules regarding additional employment for academic staff
in Israel creates substantial difficulties for entrepreneurs to keep their academic
position. This fact increases the personal risks for entrepreneurs. Policies towards the
development of the biotechnology industry should pay attention to this point.
The importance of the cluster
In all of the cases in our sample companies have stressed the importance of being
located near a leading academic institute in order to exchange information, to be close
18
to students and in some cases to use research facilities. In most cases entrepreneurs
choose to locate their companies in proximity to the university from which they
graduated. The reason for this is twofold: first the personal relationships of the
entrepreneur with the university staff and especially with of specific department that
has been established during the long period he was studying/working there. Secondly,
as has already mentioned, entrepreneurs in the field are usually around the age of 4055 already with families and with less readiness to relocate. In addition, unlike other
sectors, all entrepreneurs mentioned the importance of being located in proximity to
other biotech companies and to suppliers.
The tendency of entrepreneurs to locate their companies near leading academic
institutions and in proximity to other biotechnology companies, creates geographical
clusters of biotechnology companies. This fact should be considered while designing
policies oriented towards developing biotechnology industry.
Technology Transfer
The process of technology transfer suffers from a number of problems impeding the
development of the biotechnology industry in Israel:
1.
Problems regarding to the ownership of IPR. Whereas universities require that all
patents will belong to the university, investors tend to insist the IPR will belong to the
companies. In some cases this gap leads to a “dead end”.
2.
Different models of technology transfer in different academic institutions as well
as a lack of one clear T.T path increase the transaction costs associated with the
process.
3.
Differences in business culture between universities and private investors create
difficulties in company valuation. In addition, in many cases the demand of
Universities to receive royalties before the company creates any type of cash flow is
rejected by investors.
Moreover, university rules in Israel limit the possibilities of a scientist to hold another job. In
general, scientists are obliged to teach and are allowed to work only one day outside the
university. This reality forces scientists to take a leave of absence from their university
post while increasing personal risks. In order to avoid the need to leave the university
19
we found that in some cases, scientists work in their company on a part time basis
while impeding the development of their strat-up.
In order to maximize commercialization of academic research and to minimize cases of
excellent ideas remaining unutilized, technology transfer agencies are required to be proactive in their search for either financial resources or an experienced entrepreneur who can
take a lead.
Sources of Finance
Drug development processes have been shortened dramatically in the last two decades
as a result of employing techniques based on biotechnology, the genomic database
and the use of bio-informatics tools based on super-computers. However, conducting
phase III tests on thousands of people is still an extremely expensive procedure, which
is beyond the financial capabilities of most startups. In most cases phase III trials
were conducted in cooperation with one of the leading pharmaceutical companies
under different types of licensing/commercial agreements.
In all the public companies in our sample we found that IPO occured before Phase III.
However, interestingly, none of these companies used the raised capital for
performing phase III alone. Alternatively, the money from the IPO was used as a
means to improve their negotiation conditions as well as for future development of
other new drugs.
Early stage capital was obtained from two sources: VCs and Incubators. Only one
company started its operation on the basis of self-financing of the entrepreneur. None
of the companies had any investments made by strategic partners in the seed phase.
It seems that the reduction of risks involved in drug development process besides the
fact that “exit” opportunities appears within a period of less then 7 years cause
biotechnology companies to be more attractive for VCs. Companies such as Keryx,
BTG and Pharmos in our sample succeeded to perform IPO in a period of less than 3
years and XTL in a period of less than 6 years.
In our sample we have identified a number of strategies companies used in order to
shorten the drug development process and to become more attractive for VCs:
20
a)
Shortening the process of drug development using sophisticated
genome-based technologies. Companies such as Keryx, Idgene and
Gamida-Cell belong to this group.
b)
Concentrating on improvement of drugs (such as reducing side effects,
increase efficiency etc.) of generic drugs rather on developing ethic
drugs. Companies such as Pharmos and BTG belongs to this group.
c)
Developing drugs based on natural compounds and do not require FDA
approval. Companies such as Natural Compounds belong to this group.
However, the relatively difficult process of screening and evaluation, which requires
experienced personnel with relevant background still limit the number of VCs capable
of entering the field and creates significant value for specialization.
Incubators
Incubators have been found as a relatively simple funding mechanism, which shorten
the “ignition” period of the startup. Furthermore, entrepreneurs in the incubators
mentioned that the incubator was a good “school” regarding the management of a
company in terms of book keeping, legislation etc. In the non financial contribution
differences have been found between different incubators. Entrepreneurs attributed
these differences to the quality of the incubator staff and especially to its manager.
However, despite these advantages a number of barriers, which limit the use of this
system by entrepreneurs, have been raised:
1.
Most government incubators are not suitable for biotechnology projects,
because the units are not equipped with the necessary facilities such as clean
rooms, refrigerators, centrifuges etc. Except one
2.
Incubation period of biotechnology startups is usually longer than 2 years –
the maximum time companies can currently benefit from the incubator
services.
3.
The amount of money available to entrepreneurs during the 2 years of
incubation is usually too small for founding a biotechnology startup especially
when it is required to equip itself with the basic equipment as well.
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4.
Discrepancies between the rules set by the universities regarding the ability
of their staff to carry out commercial research, and those governing scientists'
participation in the incubator program may cause considerable difficulties. The
universities retain intellectual property rights (IPR) for inventions, whereas
companies retain IPR within the incubators. There are also differences where
ownership rights are concerned: academic scientists sometimes get less than
50% of the ownership rights in the company, whereas incubators demand that
the scientist owns at least a half of the company.
It is important to note that a recent study, conducted by Monitor group has suggested
some policy recommendation in order to overcome some of the above mentioned
barriers. Among the recommendations are setting up two dedicated incubators
equipped with the necessary research facilities and expanding the incubation period.
VCs
The most common means for financing the seed phase of biotechnology companies is
raising money from VCs. The average amount of seed funding in our sample is $2
million, which is similar to the general average investment of VCs in biotechnology
companies in Israel.
Investments of VCs in the biotechnology sector increased by 124% during 2000,
attracting 11% of investments (compared with 15% during 1999). Israeli venture
capital funds invested $124.4 million (compared to $64 million in 1999) in 115 deals,
and the average amount invested showed an increase of 71% to $1.2 million from
$0.7 million in 1999. Investment in the sector climbed in each quarter of 2000,
including the fourth quarter, which increased by 11%. The total amount raised by
Israeli biotechnology companies increased by 76% from $135 million in 1999 to $
238 million in 2000.
Two of the specialized VCs (Clal Biotech and BioEagerGroup) have set-up private
incubators in order to support their portfolio companies. In the case of BioEager, the
incubator includes common basic facilities. In the case of Clal their incubator aims at
providing their companies with GLP (good laboratory practices) conditions which
will include clean rooms and other services to support production such as cell
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cultures, clean water, treatment of contamination etc. Both initiatives are, to some
certain extent, a response to the lack of such facilities in Israel.
VCs play an important role in the development of the biotechnology industry. Besides
providing capital we found a number of areas where their contribution was
significant:
1.
Recruitment of managers, especially from abroad
2.
Setting-up strong advisory boards consisting of “no.1” experts.
3.
Introducing the company to strategic partners
4.
Exposing the company to other potential investors and managing capital
raising rounds and private placements.
5.
Active participation in board meetings
The important role of VCs to companies’ development is linked to the fact that in the
whole field of biotechnology in Israel is still young. In many cases VCs are required
to fill the gap created by lack of experienced managers in the field.
Tale 4: Capital raising by round (in $million)
Company
Total till
Name
IPO
First
Second
Third
Gamida-Cell
25.5
2.5
8
15
Keryx
24.5
5
2.5
9
4
3
1
XTL
46
6
2
Idgene
8.5
0.5
8
Natural
0.5
0.5
Biotechnology
IPO
Valuation
45
52
110
10
500
50
180
General
(BTG)
30+8
35
1.5
Compounds
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Cell-Stain
2
0.4
1.5
5
However, despite the increase of VC funds available to the sector, our study identifies
a shortage of capital, especially for seed or early stage investments. As a result a
number of companies were required to raise money from foreign VCs. This gap
received, as mentioned, only partial solution from the incubator system.
Office of Chief Scientist (Ministry of Industry and Trade)
Most companies in our sample are using OCS grants. These grants vary between a
few hundred thousands to a few million dollars annually. Only two companies have
stated that they ignore OCS grants because of the restrictions they impose on the
companies.
In general, companies use two types of OCS grants: a grant for applied research,
which is provided for a company to carry out its R&D activity. This grant covers 50%
of the total research costs; and MAGNET grants, which are provided to long term precompetitive R&D conducted by a number of companies and research institutes. This
grant covers 66% of the total R&D costs.
Business Models
Most Israeli biotechnology companies do not perform phase III by themselves. This
stems both from the high cost of performing phase III as well as the strong managerial
capabilities this phase requires. In order to overcome the “phase III barrier”
companies can adopt one of two strategies:
1. entering into agreement with a strategic partner who in turn receives
some degree of exclusivity in marketing the new drug
2. selling/licensing the knowledge to a third party (usually on of the big
pharmaceutical company).
Keryx for example, has 40 drugs in its pipeline waiting for strategic partners or
selling. Although the company raised substantial amounts of money by IPO it is not
considering entering phase III.
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In addition, most companies do not have self production capabilities, again, as result
of the high costs associated with drug production under GMP (Good Manufacturing
Practices). As a result, it comes out that biotechnology companies function more as an
R&D companies rather than “big pharmas”. The opportunity to break the “phase III
barrier” and become an independent drug producer may come only after securing
stable income based on past developments. Pharmos, for example, has only recently
decided to perform phase III with its dexanabinol for the treatment of traumatic brain
injury side effects. This became possible as the company already has two drugs in the
market. This reality creates advantages for companies who have platform
technologies, enabling them to enter new drug development using capabilities which
already exist in the company.
Another factor affecting the ability of the biotechnology startup to grow relates to the
competency of its entrepreneurs and it core management team. This factor is of
substantial importance in this field, as leading a biotech startup requires, from very
early stage, different management skills. In our sample we found very strong relation
between the success of the company and its core entrepreneurial team. All three
companies that started with single entrepreneurs are the less successful companies.
Another important factor is, of course, the originality of the idea and the extent to
which it provides a real breakthrough. One common problem of
researchers/entrepreneurs in this field is the fact that many of them are not aware of
similar ideas/technologies that are being developed in parallel in other places.
The following chart present a typical growth profile of Israeli pharmaceutical startup
company:
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Chart 2: Growth Profile of Israeli pharmaceutical Startup Company
Strong Team of entrepreneurs
Significant Innovative Idea
Pre-Clinical Tests
Royalties
Royalties
After 2-3 successful drugs
Phase I + II
Strategic Partner
Licensing/Selling of IPR
Phase III
Phase III
NDA+Marketing
Human Resources
The seven Universities and research centers involved in biotech in Israel host over
800 research projects in the field, with additional research projects conducted in
hospitals. Two thirds of the academic research is related to therapeutic drugs (of
which 75% are in a basic research phase), one quarter to agrobiotech, and a further
10% to bioinformatics. The last two are by their nature considered applied research.
When comparing the sectoral focus of the academia and industry there appears to be
considerable alignment. For example, both show limited activity in genomics and
post-genomics reflecting Israel’s relative absence from the original genome research
project.
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Number of Graduates by Faculty in
Sciences Related* to Biotechnology (1998)
2000
Ph.D.
M.Sc.
B.A.
1600
130
1,747
286
393
1200
938
Number of
graduates
800
400
0
Biology
Agriculture
Pharma. &
Medical Research
Total
Biotech
Engineering
There is a large reservoir of science-skilled human resources in the academia. There
are about 900 senior faculty members in the biotech-related departments in the
Universities,
including
biology,
biotechnology
engineering,
agriculture,
pharmaceutical & medical research. In the 1998/1999 academic year, a third of all
Ph.D. graduates were in biotech related programs (210 graduated), and there were
about 650 graduates with a biotech related M.Sc. (10% of all Master’s graduates)6.
The level of research conducted in Israel is of a high quality, as measured by the
number of publications in leading professional periodicals. When corrected for the
population, Israel’s publication level is very similar to the UK, while the US is
holding the lead in research intensity and quality worldwide.
As the industry is still in its early development stage there is no shortage of personnel.
However, and for the same reason, there is a shortage of managers almost in all levels.
In some companies such as XTL some of the management was recruited abroad. In
addition, other support services mainly in the fields of IPR and regulation specialized
in biotechnology are not yet developed in Israel and companies are dependent on
services from abroad.
6
Source: VATAT (Council for Higher Education - Planning and Budgeting Committee)
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Policy Recommendations
Policy recommendations are made on several levels:
1.
The Government should act to simplify the process of technology transfer.
This should include a unification of procedures between different academic
institutes. This objective can be reached by setting up joint committees
consisting of representatives from universities’ transfer technology agencies,
investors, companies and public policy makers.
2.
University employment policy of research staff should become more
flexible if more entrepreneurial activity is expected. The present reality forces
researchers to chose between business and academic careers while increasing
their personal risks in case they choose to initiate a startup.
3.
The incubator system should be adjusted to support biotechnology
startups. This may include extension of the incubation period, an increase in
the funds available to startups and supplying some necessary joint equipment.
4.
The Government should act in order to encourage early stage and seed
investments in the sector. This objective can be achieved by establishing coinvestment funds and by allocating financial assistance, in the form of the
R&D grants, to startup companies
5.
Encouraging international support services to initiate cooperation with
Israeli offices and branches in Israel (like Yozma did for VCs). This should
include IPR and regulation.
6.
Adopting a cluster oriented policy that encourages cluster dynamics. This
may include both financial incentives and activities toward increasing the level
of cooperation between companies and between companies and academic
institutes.
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