Medical Device Daily Contributing Writer

ZICHRON YAAKOV, Israel - Commenting on recent awards that went to technology start-ups (see following item), Acting Prime Minister Ehud Olmert, who also is minister of finance and minister of trade, industry and labor, said, “Young companies should form the basis for the next generation of Israeli companies who will lead the Israeli economy forward.“

But the Finance Ministry did not seem to be listening.

The Office of the Chief Scientist (OCS) budgets for R&D have been halved by the Treasury, relative to the allocation for 2001, and despite strongly voiced objections from industry leaders:

Chemi Peres, head of the Israel Venture Association , warned that start-up companies will close as a result, seeds will wither, and R&D in mature companies dry up.

Oded Tyreh, head of the Israel Manufacturers Association , said that the cuts will cost $1.3 billion in lost exports, dry up 250 R&D programs, cause 30 Israeli firms to move overseas, and prevent creation of 5,000 high-wage jobs.

What is remarkable is that the Ministry of Finance, which made the R&D cuts, continues to proclaim that high-tech exports are leading Israel's economic growth and will continue to drive future Israeli economic expansion, and that medical devices are leading the wave. Chief Scientist Eli Opper said that less R&D means fewer high-tech exports two to three years hence.

The good news is that private industry seems to be taking up the slack created by government cuts, although the new focus seems more directed toward investing in products, not the producers - the life scientist entrepreneurs themselves.

According to data released by Rina Pridor, longstanding director of the Technological Incubators Program in the OCS, more than 60% of companies graduated from technology incubators in 2005 raised money from private sources, an increase of 10% over pre-privatization years.

Some 112 incubator graduate companies raised an aggregate $175 million in 2005, with 54 companies raising an aggregate $75 million in first financing rounds. Some 62 ventures were launched; and a few even made it to the stock exchange.

Since the program began in 1991, more than 1,000 ventures have been initiated in the 24 incubators, including the 13 incubators that have been privatized starting in July 2002.

The Office of the Chief Scientist (OCS) invested NIS 140 million ($30 million) in running the incubators in 2005, of his total budget of NIS 1.2 billion.

These sums are half of the 2001 OCS budget.

The private sector invested about $75 million in the incubators, reflecting the greater commitment in privatization of the technology incubators. Pridor noted that the private sector's willingness to match each dollar of government funding with more than $2.50 of private money proved the effectiveness and success of the Technological Incubator Program.

The medical device sector in particular is showing signs of continued strength, according to a survey conducted by PriceWaterhouseCoopers, with $22 million invested by venture capital in 4Q05 compared with $19 million in the previous quarter, despite a slowdown in investment in all other areas during that quarter, according to the report.

In fact, Israel is the world leader in medical device patents. Medical device companies represent more than 54% of the country's life science companies, the report said.

Exports of life science products in 2005 totaled $3.3 billion. The main export markets for the life science sector are the U.S. (63%), Europe (27%) and the Far East (7%). In 2005, medical device exports totaled $1.25 billion, representing 14% growth over 2004.

Some $2.2 billion worth of drugs were sold worldwide, a 50% increase from the previous year. Those sales accounted for 13.1% of Israel's industrial exports.

The OCS designated a national biotechnology/biomedical accelerator, BioLine Innovations Jerusalem (BIJ), which is fully owned by BioLineRx. BIJ began operating in January 2005 with a $21 million budget allocated over five years from the OCS, adding to the $14 million put in by private investors.

BIJ is designed on an in-licensing model that grants far less than the 50% equity in the discovery to the entrepreneurs, even lower than the 30% allowable in the privatized incubators. On the other hand, all development is taken over by an internal expert team, leaving the scientist total freedom to remain in academia or work on other discoveries.

Thus far, 10 products are under development, with another two removed from the pipeline following a continuous, intensive due diligence during the entire process, according to CEO Morris Laster, a physician by training and a serial healthcare entrepreneur with more than 14 years of experience in the biopharmaceutical industry.

Is this many eggs in one basket enough? Pridor warned that in the current budget framework, between 30 and 40 projects a year are not being admitted to the incubators, and although they may have real technological innovation, are lost to science and medicine.

Meytav is named outstanding tech incubator

Meytav Technological Incubator , formerly called the Kiryat Shmona Center for Technological Entrepreneurship , has beaten 14 other competitors to take first place in the competition for outstanding technological incubator of 2005.

Meytav, with 13 of its 15 start-ups developing medical devices, was privatized in August 2005 by a joint venture of BioLineRX (Jerusalem), Teva Pharmaceutical Industries (Tel Aviv), Pitango Venture Capital and Giza Venture Capital.

Other investors are Biomedix Incubator (formerly Team DCL , a publicly traded company belonging to the British hedge fund F&C Citrine Fund and Zeev Bronfeld), Orhag (owned by Hagai Shalom and the Kahan family), Kiryat Shmona Economic Corp. and Galilee Development.

The chairman of Meytav is Tevas' vice president for global marketing, Aharon Schwartz.

Meytav set a precedent in Israeli incubator history when a public company traded on the Tel Aviv Stock Exchange, Biomedix Incubator , invested $3 million, taking controlling interest, including a call option on all remaining shares in the incubator.

“This investment completely re-shuffles the incubator paradigm: external investors can still leverage state funds, but financing capabilities, professional management and transparency are at new levels, driven by the presence of a publicly traded entity as a controlling owner,“ said CEO Zvika Rubinstein.

Within a few months, the incubator saw its first exit when one of its start-ups, NasVax , raised more than $10 million on the TASE.

The second-place winner for outstanding technology incubator was L.N. Innovative Technologies (Haifa), which is chaired by David Durban and managed by Klara Oren.

New strategy for Pluristem

Pluristem Life Systems (Haifa, Israel), which is focused on the commercialization of cell therapy products, said it is changing its business strategy. Instead of working toward the goal of out-licensing the use of its bioreactor-enabling technology, the company said it plans to develop cell therapy products that can be marketed on a for-sale basis.

The company said it expects its first products to be cell grafts that will provide an efficient and superior alternative to the standard procedure of bone marrow transplantation (BMT).

Zami Aberman, president and CEO, said, “My belief is that aiming toward marketing actual cell therapy products, rather than towards only developing the enabling tools for the production of cell products, will provide Pluristem with added value. The market for cell-based products is enormous and only the tip of the iceberg has until now been uncovered.“

The bone marrow transplantation market is estimated at annual expenditures of $5 billion and the cardiovascular market for cell-based products is estimated to exceed $30 billion, according to the research reports.

“The development of an environment that mimics [the] natural bone marrow environment is currently being pursued for application to the expansion of cord blood cells to be used in bone marrow transplants,“ said Aberman. “We plan other developmental efforts toward the creation of additional cellular solutions to severe clinical problems.“

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