Bioe News

Published online: 15 September 2005, doi:10.1038/bioent882

When will Israeli biotech grow up?

*Alla Katsnelson is a freelancer in New York City

The biotech sector is maturing, but investors are still cautious.

Ruti Alon, general partner at Pitango Venture Capital in Herzliya, Israel, says it's all about critical mass. Pitango Venture Capital

Investors have known for years that some of the best medical devices and generic medicines are developed and produced in Israel. Business opportunities in these fields are plentiful not least because investors do not have to look far to find good science, serial entrepreneurs and experienced product development talent in the country. Oddly, the country's nascent biotech industry has struggled to find its way in Israel.

From afar, the missing link would appear to be lack of money and maturity. According to the quarterly MoneyTree report published by PricewaterhouseCoopers, there has been a jump in life science investments this year compared to last year's volume. But, biotech investment in Israel in the first half of 2005 still topped out at a puny $12 million.

"Twelve million dollars is very similar to nothing," says Itzhak Forer, chairman, Ernst & Young Israel. Indeed, there are dozens of biotechs in Europe or the US that raise more than that on their own.

There are few doubts about Israel's creativity in the life sciences, much of which bubbles out of the country's seven major academic institutions. According to the US Patent & Trademark Office, and data analyzed by the Israel Life Sciences Industry organization (ILSI), the total number of granted patents in Israel per capita in biopharma ranks fourth worldwide. In fact, Israeli life sciences patents comprise almost a third of the country's total patents.

		"'Twelve million dollars is very similar to nothing,' says Itzhak Forer, chairman, Ernst & Young Israel."

What seems to be lacking is the ability to turn all this life sciences–focused intellectual property into biotech products. Israeli-patented drugs generated $3 billion in global sales last year. But, only one of these drugs is sold by an Israeli company, says Ruti Alon, general partner at Pitango Venture Capital in Herzliya. That company is the $4.8 billion sales generics firm Teva.

"There are good [biotech startup and product] ideas," says Alon, "but the ability to turn good ideas into a company is a special skill" that Israeli biotechs have thus far failed to exhibit.

Industry experts are quick to point out that biotech in Israel is still a very young industry that just needs more time and experience. Indeed, more than half of the industry is composed of companies that are 5 years old or less and about a quarter are still in seed stages, according to ILSI, which itself was founded just this January. Unlike other sectors like medical devices and information technology, early-stage Israeli biotechs have had trouble drawing interest from overseas investors.

The Israeli government has established a system of incubators and grants to bring university research into the commercial arena. But support and funding for maturing companies that are at least 5 years old is scarce, says Benny Zeevi, managing general partner at Tamir Fishman Ventures in Tel Aviv. Life sciences–focused venture capital (VC) groups in Israel, for example, invest only about 20% of their capital in biotech. Not surprisingly, perhaps, the rest is allocated to medical device startups. Equally problematic is the fact that there are only ten VC groups in Israel that even invest in biotech.

Zeevi says that almost half of the funding for US biotechs comes from deals with big pharma. "There is no such investment in Israel, and one of our main concerns is how to attract it."

With Teva the only local source of large pharma capital, there is less opportunity to form such strategic partnerships. "Not one single [multinational pharma] company has developed an R&D center here," despite the fact that several medical technology and high tech companies have, says David Haselkorn, former CEO of the VC fund Clal Biotechnology Industries in Tel Aviv, and now an independent consultant.

This dynamic has had a profound impact upon the talent pool. Throughout the 1990s, the absence of a base of successful biotech companies created a limited pool of talent from which to draw the managerial experience investors seek. But as more successful smaller companies emerge, managerial talent is slowly becoming more plentiful, says Haselkorn.

Jonathan Silverstein, general partner at OrbiMed, a life sciences VC firm in New York that has invested in Israeli companies, agrees that the talent pool is growing. More is needed. "It's just a matter of the industry maturing a little more," Silverstein says.

		"Observers predict that within the next five years, Israeli biotechs will start to become as interesting to investors as Israeli medtech."

Call it intuition, but some think that the biotech industry in Israel is inching closer to critical mass. Observers predict that within the next 5 years, Israeli biotechs will start to become as interesting to investors as Israeli medtech. Alon, for one, says it will take that long for Israel to create a critical mass of successful biotechs. "If you look at medical devices," Alon says, "there are many successful companies that can attract investors today. That was not true 5-10 years ago. In biotech, we're in the same place medtech was then."

In the meantime, say this much for Israel's biotech startups: they have figured out how to turn hardships into assets. "Because the market is not in Israel, Israeli companies had a very global approach from the start," says Yael Margolin, CEO of Gamida Cell, a Jerusalem company with its first stem cell therapy in late-stage clinical trials. Many Israeli biotech startups open a US office from the outset of operations to be culturally and physically close to the world's prime capital markets, partners and customers.

Still, the Israeli government and Israel's venture capitalists must do more to fund homegrown biotechs. The government must also do more to lure back the expats who have been acquiring experience in pharma and biotech firms in the US. Singapore and Ireland, for example, have made a concerted effort to coax back expats with biotech bona fides, and their efforts have largely helped turn around the biotech fortunes of these countries. It will take more than this to achieve the critical mass in Israel that Alon says is needed, of course, but few things would boost Israel's biotech prospects more.