JERUSALEM - The Israeli ministries of Finance and Industry and Trade have agreed to re-examine their policy on state support for private-sector research and development in hopes of agreeing on jointly set guidelines covering policy goals and criteria for investment.

The biggest change will be to move research and development support from big companies to smaller ones.

The move comes just after release of the second-quarter 1999 Kesselman & Kesselman PricewaterhouseCoopers Money Tree survey report that Israeli high-tech start-ups have attracted a record $229 million in venture capital investments, a 76 percent increase over last year's figures, and breaking the $159 million mark set in the fourth quarter of 1998.

Yossi Pillus, head of Kesselman & Kesselman's high-tech division, said investments in companies at the seed stage remain small, commanding only 3 percent of all venture-capital investments. Biotechnology companies continue to attract only 5 percent of investments, while 12 companies in the medical devices sector attracted a total of $23 million, representing 10 percent of the total investment, an increase of 29 percent from the first quarter.

At the same time, the Ministry of Industry and Trade is moving toward slashing its support for high-tech incubators and shifting more of its annual NIS 1.2 billion (US$240 million) budget for R&D to support younger companies, a move that would clearly benefit the biotechnology sector, as would adding another NIS 300 million for the "Magnet" program (generic R&D projects performed in cooperation with academia).

"Phasing out the incubator system may not be a total loss if the money is invested into universities to encourage researchers to remain another few years in the academic environment, at least to reach proof of principle in animal studies, to patent their inventions, before venturing out into the commercial world," Benad Goldwasser co-founder and managing director of Biomedical Investments Ltd., told BioWorld International.

This would support the academic infrastructure critical to the biotechnology sector, support the long incubation period of biotech and biomedical companies, and also nurture substantially the early-stage biotech start-ups that are struggling for funding.

Biomedical Investment, a venture capital fund Goldwasser founded in 1997 with three partners, serves as a strategic partner for start-up companies in the medical technology and biotechnology fields.

One industry source pointed out that "the scrutiny and due diligence by the incubators is not as stringent or professional as that done by the industry-wise venture capitalists in selecting the seed and start-up companies in their portfolios, especially critical in young biotechnology firms which usually have a very long incubation period due to the nature of the products."

Zachi Berger, chairman of the Israel Biotechnology Organization (IBO), which includes 50 Israeli biotech companies, aims to advance the sector in Israel and abroad.

"The current R&D law [which supports mostly high-risk R&D in bigger Israeli companies] has been in effect for about 20 years and has not changed in response to changes in the business environment, especially the globalization of product and companies' development," Berger told BioWorld International. "It is specifically tough for biotechnology because the law limits out-licensing and manufacturing of products outside Israel. We are looking forward to the changes.

"Most biotech companies and other start-ups are too small to carry on to commercialization alone, but as the law is right now, the companies receiving the R&D law grants must negotiate with the Israeli government every time they out-license a product or manufacture it outside Israel," said Berger, who also is chief operating officer of XTL Biopharmaceuticals Ltd. in Rehovot.

"The changes would make it easier to do this, and companies would know exactly what the costs to them are when dealing with big pharma or biotech companies," he said. "It also may become easier to negotiate M&A activities with global companies.

"The incubators were not set up in favor of biotechnology," Berger said. "They are not structured for the long development time and the big expenses of most biotech ideas to become ready for the venture investments."

Ironically, the single greatest star from the incubator system is Compugen Ltd., now in Petach Tikvah, which was awarded the title of "Start-Up of the Year" by Israel's financial daily, Globes, in 1997, for the twin criteria of technological innovation and marketability. Compugen director Eli Mintz said his bioinformatics company "would not exist [if not for the incubators] because no one would invest in our futuristic technology when we really needed the money."

As of the end of 1998, more than 239 projects were being carried out, employing 900 people. Since the inception of the program, 476 projects have left the framework of the incubators; 239 have matured and continue on their own. Of those, 188 projects have managed to attract investments ranging from $50,000 to $18 million.

"The capital market and industry have invested more than $200 million so far in projects that have grown out of incubators; this is the best proof of all that the program is both needed and successful," said Eldan Nissenbaum, marketing assistant/program director of the OCS Technological Incubators.