Israeli subsidiaries of big pharma and multinational healthcare companies employ thousands of people at R&D centers, which have an annual turnover a turnover of billions of dollars. "Globes" surveys the sector.
The heart of Johnson & Johnson
Biosense was the first company founded by Prof. Shlomo Ben-Haim, who went on to earn the nickname "serial exiter". Ben-Haim, a cardiologist with an interdisciplinary education, developed a device for navigating through cardiac arteries to reach an exact location in the heart to ablate it in a way to ease fibrillation.
Ben-Haim developed his idea in parallel with an American scientist who was working on deep brain navigation. The two men joined forces to found Biosense, which was initially financed by Lewis Pell, whose resume already included several exits.
Pell invested a substantial amount in Biosense, and hyped the company among all the relevant parties. "Long before the company was sold, it had a reputation for being the next thing," said a source close to the company at the time.
After a while, Biosense decided to focus on cardiology, which turned out to be a wise decision. "The success was not just related to the procedure, which was successful, or to Pell's influence, but also to the timing," said the source. "Cardiac ablation was new, and faced a problem - to know exactly where to ablate. Doctors guessed the location, but did not know precisely. The company's slogan at the time was, 'The difference between guessing and knowing'."
Biosense's procedure contributed to the development of cardiac ablation and the company grew in tandem with the procedure. In 2000, the company had its first sales. Its managers talked with all the big companies in the business, including GE Healthcare, Philips Healthcare, and Medtronic Inc. (NYSE: MDT), as well as smaller companies, before being sold to Johnson & Johnson (NYSE: JNJ).
Biosense was sold for $427 million, becoming highest-priced Israeli high-tech company until the $4.8 billion exit of Chromatis Networks. "20 of the company's 50 employees greatly benefited personally from the sale," said a source.
Following the sale, Biosense became part of Johnson & Johnson's cardiology division, Cordis Corporation. Biosense, which now has over 200 employees in Yokne'am, was later merged with a catheter company, and the merged company, Biosense Webster Inc., is Cordis's fastest growing business, with a 40% share of the cardiac ablation market.
Several Biosense executives climbed the Cordis corporate ladder: Shlomi Nachman is president of Cordis, Biosense Webster Israel general manager Uri Yaron is also responsible for business development of several cardiology centers in other countries, and Assaf Gov-Ari heads Biosense Webster's advanced R&D group.
Sources at Biosense Webster say that the inclusion of Israelis in top management was critical for the integration of the two companies. "The basic conditions of such a merger are lack of trust, but when successfully handling crises together, ties tighten," said a source. Although Biosense initially functioned as a development center with limited responsibilities, it now plays a more important role.
Johnson & Johnson Global Surgery Group chairman Gary Prudan says that Biosense Webster has an annual turnover of over $1 billion, and that it has been promoted to become an independent unit which partners in developing Johnson & Johnson's general cardiology strategy.
Philips Healthcare imaging operations in Haifa
The Philips Healthcare center in Haifa, which has hundreds of employees, is a reincarnation of Elscint's CT division. The Israeli imaging company was broken up into several divisions, which were sold off individually, with the CT division sold to Britain's Marconi, which was sold to Royal Philips Electronics NA (Euronext: PHIA, NYSE: PHG).
Philips inherited the Israeli development center without making a conscious decision whether to acquire or set up this activity. Nonetheless, Philips Healthcare is now one of the top medical devices companies operating in Israel, and the Israeli CT activity has become one of the multinational's most important units. "Since the acquisition, the company's manpower has tripled," says Philips Medical Systems Technologies general manager Guido Pardo Roques.
Philips later acquired Israeli start-up CDC to digitally collate images, invested in SHL Telemedicine Ltd. (SWX: SHLTN), and became a distributor for Corindus Vascular Robotics Inc.
Pardo Roques says that Philips's development center in Haifa stopped relying only on CT technology, the basis for the acquisition of the Elscint unit, a long time ago. "The resources added to Philips's Haifa development center have enabled the development of more products, a wider range of detection systems for various products. We've also opened in Haifa a new department for advanced R&D for CT scanner," he says.
Even after the manufacture of some CT systems was moved to China, detectors, which are the systems' brains, have stayed in Haifa.
In 2010, Philips Healthcare established a new division to develop radiology workstations and advanced imaging processing applications for CT, MRI, nuclear medicine, and other images. "The technologies developed at the Haifa center have a key role in these workstations," says Pardo Roques.
"Globes": How do you fit in with Philips's corporate management?
Pardo Roques: "We report to the CT management, which is based in Cleveland. In contrast, Yair Briman, manages from Haifa Philips's Applied Clinical Division, which is responsible, like the management in Cleveland, for activities outside its own geography. I personally serve as the general manager of the company in Israel and also as the manager for global CT systems R&D activity. Doron Bar-Natan, who mostly resides in the Galilee, manages the division's industrial software on all continents."
What did the merger's first days look like?
"In retrospect, now that we are harmoniously integrated with all of the company's activities, everything seems simple, but there is no question that it was a challenge. Both the management in Cleveland and we were inexperienced with integration. We initially were busy trying to show who was the best, instead of realizing that we'd only succeed together and by joining forces.
"It took us time to realize that the success of each center was not dependent on protecting its unique capabilities, but on pure excellence. Companies want to succeed, managers want to succeed, and a person who proposes and implements plans that will enable the entire company to succeed, will himself succeed.
"It's a race; frequent trips by managers and employees. A Philips employee was once asked where he lived, and replied, 'Row 16, aisle seat.' We installed constantly upgraded computerized cooperation tools, and most important, we've adapted, together with our foreign colleagues, that we in Israel are available 24/6, i.e. around the clock, except for the Sabbath.
"We initially felt that our Zionist journey as an Israeli company was over. Today, ten years later, and after becoming the flagship of Israeli medical equipment manufacturing, we realize that we've actually continued to journey and even expanded it."
Are their cultural clashes?
"All the time, but we learned the lesson that if there is a problem, don’t conceal it, and seek help if you need it."
Edwards Lifescience seeks innovation in Israel
"Before I joined Percutaneous Valve Technologies (PVT), I worked at Instent, which was sold to Medtronic, and they closed it down a year after I began working there," says Edwards Lifescience Israel general manager Assaf Bash. "That scarred me for life, and affects how I manage Edwards Lifescience's center in Israel. It's not enough to supply the most innovative product in the world once. You have to continue to innovate and be constantly relevant. The Americans don’t take anything for granted."
PVT was the first company in the world to develop a method for implanting a valve via a catheter. "It was a unique start-up: a French idea founded as an American start-up with a development center in Israel," says Bash. "The entrepreneurs were Americans who initiated the development at Aran Engineering Services Ltd. Three years later, at Aran, the development was spun off to an Israeli subsidiary of PVT, which was ultimately acquired by an American company."
Edwards Lifescience Inc. (NYSE: EW) had an extensive portfolio of heart valves, which were implanted surgically, rather than by catheters. It also had an in-house unit which tried to develop a product similar to PVT's, but made slower progress. Edwards Lifescience looked at PVT with fear and interest. "They knew that if we succeeded, we might destroy their business," says Bash. "They said, 'If this succeeds, it's better to succeed with us, and if it fails, it's better that it fails at us, so we'll know not to repeat the same mistakes'."
When PVT was acquired for $155 million in cash in 2004, it had 22 employees, including 17 Israelis, all of whom benefited from the exit, as did the company's main Israeli investor, Medica Venture Partner, and US investor Oxford Bioscience Partners. "In retrospect, they bought it for pennies, but they took a big risk at the time," says Bash.
Despite the compensation, PVT's employees were fearful. "We knew that they had their own department in the same field, and we were sure that we'd all be fired immediately," said Bash. "It turns out that employees in the US department had the same fears - that they'd all be fired. That was the opening point for the connection between the two units which had to work together."
Edwards Lifescience did not fire the Israeli team. On the contrary, it has kept eight of the seventeen original employees, and tripled the workforce to fifty. The product was launched in Europe in 2007 and obtained US Food and Drug Administration (FDA) certification in November 2011. The second-generation product was approved in Europe in 2010 and is currently undergoing a clinical trial in the US. Edwards Lifescience considers the trial to be the main event at the company at this time. The third-generation product, which will begin clinical trials in Europe and Canada soon, should generate $500-600 million revenue.
"In addition to developing next generation products, the Israeli development center has its fingerprints on a range of the company's other products," says Bash proudly. "Edwards uses us as its development unit for valves which are replaced by catheters, and uses our help to solve other engineering problems. We're also a kind of in-house incubator, we get a list of needs from the marketing and characterization departments, and begin to toss ideas around. Some of these ideas ultimately go back to the company."
This situation has turned Edwards Lifescience Israel into an exception in the local scene. Most companies which have survived here are profitable units that include development and production activity, but Edwards Lifescience Israel is solely a development center. "This requires alertness and the ability to develop relations with the American bosses and work closely with the marketing department and all the other departments to test whether our development services can help them. We initiate ideas of our own. All these activities mean that we have a constant in-house deal flow.
"The company's travel budget is quite large, and I believe that there is no alternative to a face-to-face meeting. I also support employee exchanges. I was at Edwards Lifescience in the US for three years and returned here."
Do you still think like a start-up?
Bash: "We try very hard in some areas. We take more technology risks, try to be faster than the company. We're officially designated as a body whose role is 'to meet Edwards Lifescience's system of values while preserving our start-up culture'. Edwards Lifescience Israel is the company's only global development center, and it also initiates its own activity to locate new technologies."
Is there still a culture clash between the Israeli center and the US company?
"Yes. It's impossible to ignore the fact that you sometimes say something and the other side doesn’t understand you. This is especially problematic with Americans, because they won't say to your face that they think you're speaking rubbish. If they say, 'I propose', they mean that it's an order.
"In Israel, sometimes when I want to convene a meeting, I deliberately say something provocative to someone to create a stormy discussion in which your employees say that you're an idiot and explain why, and very honest information emerges. I tried this in the US, and I suddenly saw everyone twisting uncomfortably and starting to justify the stupid thing that I said. In short, it's impossible to take Israeli management there as is."
Life Technologies keeps Etrog Medical
The story of Etrog Medical Ltd. demonstrates that a tiny acquisition can turn into an established Israeli development center. Life Technologies Corporation (Nasdaq: LIFE), which acquired Etrog Medical, has a current turnover of $4 billion, tens of millions of dollars of which comes from the Israeli operations.
Etrog Medical was founded by Prof. Shmuel Kvili and Ori Yogev in the 1990s to automate chemical reactions in biology laboratories. "They turned a manual process by researchers and used chemistry and smart electronics to package it into a cassette, which works faster, reproducibly, and without contact," says Life Technologies head of food safety and animal health Nir Nimrodi.
This was precisely the business of Invitrogen Ltd., which acquired Etrog Medical and was in turn acquired by Life Technologies. Invitrogen had $400 million in sales at the time, and the merged company became one of the fastest growing companies in the world, through acquisitions.
The companies signed a distribution agreement, but before Etrog Medical could exceed sales of a few hundred thousand dollars, Invitrogen decided to acquire it. Nimrodi, who previously served as CEO of Proneuron Biotechnologies Ltd., joined Etrog after its acquisition. "Today, ten years after the acquisition, budgets and the workforce have grown. The company's products are sold in more than 100 countries, including Indonesia and Saudi Arabia, which always excites me," he says.
"Two years after the Second Lebanon War, when the plant at Tel Hai became too small, it was decided to build a new plant, it could have been a great opportunity for the company to get rid of the 'lunatics' who lived under the threat of missiles, but that didn’t happen," says Nimrodi. "A cold business decision was made - that's what decisions by American companies are - to build the new plant in Kiryat Shmona itself. Tax breaks were not the main reason. In Singapore, Life Technologies has a bigger tax break. It's a combination of inexpensive but high-quality manpower. The employees speak English, which is terribly important. Targeting the US market flows in managers and employees' veins.
"Today, the plant has two main production lines, each of which has scores of secondary products. We also manufacture and sell the products of Israel's RealBio Technology Inc."
Life Technologies workforce in Israel and other countries has declined lately as the company tries to redefine its targets. "Budgets of our main customers, academic and pharmaceutical companies' research institutes, are not growing," says Nimrodi. "We therefore decided to move more resources to applications markets: testing of food, synthetic biology (production of living cells from artificial substances), forensics, and agrotechnology. I am responsible for these fields at the company."
Life Technologies Israel will undergo changes, and it is actively seeking to acquire an Israeli company.
Does the fact that Israeli employees work with US projects facilitate integration?
Nimrodi: "It doesn’t solve all the problems. In the US too, there are huge culture clashes, by the way. On the West Coast, everything is sugarcoated, but things are blunter on the East Coast. Life Technologies' CEO is a determined and direct man, a bit like an Israeli. I like this a lot.
"There are still misunderstandings. For example, one of our best scientists proposed a new project to an executive, against his opinion. Even though Life Technologies is American, it's OK to present ideas that your boss doesn’t agree with you. The answer she received was, 'That's a great idea, but you have to push it in the right way'.
"Americans say, 'The idea isn't important, it's very low priority'. Our scientist was sure that the intent was that her idea would immediately be included in the work plan."
Nimrodi says that all of Life Technologies' negotiations for procurements, include operating instructions at a minute-by-minute resolution: who goes and who stays, how much money it will cost the company to hook up a new generator, when paper with the new logo will be printed. "This sometimes seems wasteful, because not every procurement is made, but it improves the procurements that are carried out," he says.
"In general, the plan is king among Americans. When a manager signs a plan, he must stick with it, no matter what. Israelis see Americans as wasting time on planning and setting targets that are not ambitious enough. That's not true: they plan well and set realistic targets to reduce risk. They still make mistakes and don’t always meet the targets, but the chances of meeting them are higher."
How do you preserve the DNA to make an acquisition succeed?
"We first appoint an integration manager on our behalf, but beyond that, we allow the company to continue operating in the successful way which was the reason we acquired it. We want to celebrate differences. Later, there is sometimes a greater integration. For example, Life Technologies Israel has no single general manager, and the research department reports to our research department, it's the same thing in production, and so forth. This was initially traumatic for the Israelis, who felt that they lost their identities, and their cohesive factor. But it greatly improved their global perspective and work procedures.
Inter-Lab's research thrives
Sources in Israel's life sciences industry stubbornly insist that it's not enough to establish local R&D centers, and that if there is no local production, it will be easy to send the business elsewhere.
Merck Serono SA unit Inter-Lab is an example that, sometimes, multinationals send manufacturing out of Israel while R&D continues to thrive in the country. In 1978, Serono established Interpharm as its research activity in Israel on the basis of discoveries by Prof. Michel Revel of the Weizmann Institute of Science. The discoveries resulted in Rebif, a treatment for multiple sclerosis, which competes against Teva Pharmaceutical Industries Ltd's (NYSE: TEVA; TASE: TEVA) Copaxone. Interpharm went on to develop other drugs.
At the insistence of the Weizmann Institute, Revel, and the Office of the Chief Scientist, Serono also established a production plant in Israel. At its height, the plant employed 200 production and 60 R&D employees, and was an important foundation for the creation of Israel's life sciences industry.
When Serono decided to send Interpharm's production operations out of Israel in 2004, the disappointment in the local industry almost snuffed out the remaining R&D activity in Israel. Serono, however, did not forget Interpharm, and rebranded its R&D activity as Inter-Lab, which stayed open and has even grown.
When Serono was acquired by Germany's Merck KGaA (DAX: MRK) in 2006, the connection with Israel was actually strengthened. Merck Serono chairman and CEO Karl-Ludwig Kley has made several visits to Israel since taking up his post in 2007. The company created a special cooperation plan with biotechnology and chemical pharmaceutical start-ups in the company's areas of specialization. In 2011, Merck Serono established an Israeli incubator in which it plans to invest €13 million, a substantial amount compared with investments by other big pharma companies in Israel.
Further evidence of the close ties is seen in the list of Israelis who hold key positions in Merck Serono: Dr. Ezra Uziel manages the company's largest biotechnology center, located in Switzerland; and Prof. Avinoam Kadouri was head of pharmaceutical R&D until his retirement.
"Inter-Lab, Merck Serono's Israeli R&D center, is part of the company's global R&D chain," says Inter-Lab managing director Regine Shevach. "We specialize in cloning, and we're engaged in a range of projects that are important to our parent company. We've become the experts in basic research, drug discovery, and many of Merck's most innovative projects begin here."
When Interpharm's production was moved to Europe, Inter-Lab's research department was also reduced, but in an orderly way. "Teva hired our employees as an complete team, and turned it into the company's biosimilars development group. That was my agreement with Israel Makov, and it had the full support of Serono," says Shevach.
How do you make sure that the development center will be critical for the company?
Shevach: "The creation of a good relationship with the company is an art. We worked with the Swiss and now with the Germans, and it isn't always simple, but the key is to be smart, not right. That's everything. If you think, 'I'm better, I know more, and I'm more innovative', you won't get far. You have to see things through their eyes, of the company. How do you fit in and contribute.
"The company won't object to having a good asset in Israel. It might object because of costs, or because of ego clashes. You have to be a bit humble and a bit politically correct, and to accept things as they are. We've established a very good relationship, and they've now invested here and they may invest more."
Other life sciences R&D centers in Israel
GE Healthcare Israel - established in the 1960s on the basis of Elscint; specializes in ultrasound and nuclear medicine; has hundreds of employees.
Perrigo Israel - founded as Agis Industries by the late Ziama Arkin and his son, Mori Arkin, in 1961; develops generic medicines with a specialization in dermatology ointments; 900 employees. Sold to Perrigo Company (Nasdaq:PRGO; TASE:PRGO) for $800 million in 2005.
Omrix - founded by Robert Taub in 2004; specializes in the development of surgical sealants based on human plasma; over 400 employees. Sold to Johnson & Johnson (NYSE: JNJ) for $438 million in 2008.
Starlims - founded by Isaac and Haim Friedman in 1986; specializes in the development of laboratory information management system (LIMS) software; 150 employees. Sold to Abbot Laboratories Inc. (NYSE: ABT) for $123 million in 2010.
Algotec Systems - founded by Dr. Menashe Benjamin in 1993; specializes in developing algorithms for digital imaging processing; 150 employees. Sold to Eastman Kodak for $42.5 million in 2003, which later sold its healthcare division to Carestream Health Inc. Now Carestream Health Israel.
Mediguide - founded by Gera Strommer and Uzi Eichler in 2000 as a spin off from Elbit Systems Ltd. (Nasdaq: ESLT; TASE: ESLT); specializes in minimally invasive navigation and tracking within the human body; several dozen employees. Sold to St. Jude Medical Inc. (NYSE: STJ) for $300 million in 2008.
Published by Globes [online], Israel business news - www.globes-online.com - on January 1, 2013
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