US-based international investment bank RM Global is establishing a new venture capital fund that has already closed its first financing round of $30 million and will soon embark on a second financing round. The fund will invest exclusively in companies operating in Israel's FutuRx incubator (accelerator) in Ness Ziona near Rehovot. The fund has raised money from financial and strategic investors, and hopes to raise additional tens of millions of dollars.
The FutuRx incubator was founded three years ago by OrbiMed Israel Partners; Johnson & Johnson Innovation (JJDC), pharmaceutical and medical devices company Johnson & Johnson's venture capital arm; and Takeda Ventures, the venture capital fund of Takeda Pharmaceutical Company, after they won a tender held by the Office of the Chief Scientist (now the Israel Innovation Authority) for the establishment of a dedicated biotech incubator.
Nine companies currently operate in the incubator. The incubator's vision is to invest in the very early stages in breakthrough science, including the initiation of new companies based on technologies from academic institutions. The CEO of FutuRx is Dr. Einat Zisman, former CEO of Hadasit Medical Research Services & Development Ltd., the Technology Transfer Organization (TTO) and commercial arm of Hadassah Medical Organization. OrbiMed Israel partner and senior managing director Erez Chimovits is chairman of FutuRx.
RM Global is a specialty bank for life sciences investments. It provides advice for financing rounds, commercialization, and acquisitions, as well as consultation for companies in selecting the right indications for technology and prioritizing among technologies.
The company's Israeli branch was founded five years ago by Yaron Breski, a partner in RM Global in the US, and Assaf Keret, whom Breski recruited from the Swary accounting firm.
Together with Chimovits, Breski and Keret devised the fund's unique investment model. There are jointly owned technology incubators and funds in Israel and elsewhere, with the incubator supplying its best projects to the fund. There are also corporate incubators belonging to pharmaceutical or medical devices companies. RM Global's model of investing in a separate incubator is new.
Breski: For our investors, the fund is a way of investing in science that is truly groundbreaking, while taking advantage of the existing system that is already performing due diligence and selecting the best portfolio for us. Were it not for the fund, our investors would be unable to be gain exposure to companies at such an early stage: they lack the mechanism for assessing and selecting companies, and each one of them by itself is not a competitive enough investor (from the standpoint of capital, experience, and connections) to prioritize investments in the most revolutionary companies.
"Our investors know that someone who is not currently involved in breakthrough companies from the beginning won't have a foothold in the next scientific revolution. At the stage at which the best of these companies is opened to external investment, they'll already be too expensive. We've seen this trend in the immuno-oncology field. That's why investors in our fund are interested in this model. The investors also know that the basic science in life sciences in Israel is at an extremely high level, and in combination with government support, extraordinary young companies are springing up here.
"In addition, some of the investors in the fund are large pharmaceutical companies, but not yet as big as Johnson & Johnson and Takeda. For them, the fund is a way of sitting together with those companies at the same table, learning from them about how they make investments, and strengthening connections with them."
What do the existing partners in the fund – OrbiMed, Takeda, and Johnson & Johnson – get out of this? They have enough capital to make follow-on investments themselves in companies, and even made an investment this week in a company that started in the incubator.
"In order for the incubator's companies to really race forward competitively, they need more financing during the incubation period, beyond the money they get from the incubator (which amounts to several hundred thousand dollars a year, G.W.) Sometimes they need this money quickly, and in a case like that, even if OrbiMed, Johnson & Johnson, and Takeda want to invest these amounts, their investment decision-making process isn't quick enough, and it will be difficult for them to raise additional substantial financing in-house for incubator companies when they are still in the incubator so that these companies will really be able to constantly streak ahead without a stop."
In other incubators, the franchise holders themselves established an auxiliary fund for the incubator for this purpose.
Keret: "The FutuRx franchise holders decided to allocate a certain amount for investment in the incubator, and additional amounts for investment in these companies after they graduate from the incubator. Their ability to invest in early stage ventures in Israel is not unlimited.
"In addition, the incubator franchise holders and managers want to facilitate a situation in which companies can be accepted into the incubator even if not all of the franchise holders regards future investment in these companies as a possibility - companies that might be more suitable for only one or two of the franchise holders.
"Another motive of the incubator franchise holders is their desire to bring additional enterprises to the companies that can act as a force multiplier in creating connections and opportunities for the companies. Our investors in the fund are investors that have not had activity in Israel before; it just wasn't on their agenda."
What is the fund's structure?
"It's a classic venture capital fund with a defined period. As is the case with any venture capital fund, RM Global, the fund's management entity, is paid management fees and a success percentage. Yaron and I manage the fund, together with RM Global managing directors Bruce Roberts and Ted Moon.
"We invest exclusively in FutuRx incubator companies, but we don't have to invest in all the companies. The first investment is usually made during the incubator period, after which we can participate in later stages as a preferred investor. Each of our investors in the fund, the financial and strategic groups that I mentioned, can invest independently in companies from the fund of special interest to them on preferential terms."
It is often said that the early stages are less suitable for a classic venture capital fund with time constraints, unless it has very large sums available. The first investors are diluted unless they are able to participate in follow-on investments, and the time-to-exit is likely to be long.
"Things have been changing in the medical field in recent years. The US payer, if it is an insurance company or hospital, is less willing to pay for small innovations; it pays only for breakthrough innovations. As a result, even large pharmaceutical companies are buying assets at earlier stages. The entire game has moved to the earlier stages. This was also Chimovits's approach when he started building the incubator. Furthermore, we have set up mechanisms that give the fund and the investors in it advantages in future investment rounds."
Breski: "We believe that investing in FutuRx companies reduces the risk, because these companies have already been selected by the franchise holders, each of which understands its field. When investors give us money, they do it while knowing about the existing portfolio of companies from which we can choose; they aren't faced with the unknown. That's part of the value. Such an approach is suitable to a very small cadre of investors, but it's very appropriate in the right cases."
"There is progress"
Establishing a special fund for investments in FutuRx companies is certainly welcomed by the Innovation Authority (Chief Scientist's Office). OrbiMed began operating in Israel in 2012, after winning a Chief Scientist Office tender to establish a fund with government support for investing in the life sciences. Following its first fund, OrbiMed founded a second fund in Israel, this time with no support, and a biotech incubator, together with two new partners: Johnson & Johnson, which was only sporadically active in Israel at the time (but which has since increased its activity) and Takeda, for which it was the first investment in Israel. This activity, with government support, is now generating tens of millions more in investments in very early stage biomed companies with no need at all for government support, from investors, most of whom have never before done business in Israel.
What is RM Global's background in Israel to date?
"Our activity in Israel began in 2010, when I joined RM Global as a managing partner, after we did a deal in which an Israeli company was involved. I was originally a biologist with an MBA from Wharton, and I worked in various positions at Novartis and Israeli diagnostics company Rosetta Genomics. When it was decided to open the office in Yavne, I recruited Assaf, an accountant who worked mainly at the Swary firm, as a partner."
Keret: "I bring the financial know-how. I learned gradually about biomed and investment in early-stage assets. My only connection to development was being in charge of the development of airborne systems. I learned there that every development project always needs three times as much money, time, and management resources as planned."
Breski: "In Israel, we're a boutique bank with 2-5 customers at any one time, and with a preference for the smaller number. Not all of what we have done is public knowledge, but I can cite as an example our work with BioLine, which we helped with consultation at the beginning, and later advised in the investment deal and cooperation with Novartis, and we were part of the of the team that negotiated the deal.
"Another example is Kahr Medical, for which we raised $15 million from strong investment institutions less well known in the Israeli market. Then we did consultation for them in focusing on the flagship product in various forms and on a technological platform, from which they had to decide which products to produce. At this stage, the board decided to take us as exclusive long-term strategic advisors and for financing all of the company's next deals. We really like working by this method, because it's an expression of confidence, and also because it's enjoyable to get to know a company close up and in depth for years."
Together with their business activity, Breski and Keret are active in a committee of the Israel Advanced Technology Industries (IATI). The committee's task is to encourage international life sciences corporations to be involved in Israel.
"There's progress in this area," Breski
FutuRx's portfolio companies are Ice Therapeutics, which has developed a drug for treatment of nerve pain and urinary inflammation resulting from conditions of unusual cold; MabTrix (an antibody for treating inflammatory digestive tract diseases); HepaRx (a cancer drug developed using unique drug development calculation systems); MBcure (a microbiome for selectively attacking certain bacteria in order to treat diseases featuring imbalances in the body's bacteria); Mitoconix (treatment of diseases like Parkinson's and Huntington's by preventing disintegration or dysfunction in mitochondria); PiTX (a new cancer treatment mechanism); Protekt (protection against memory and cognitive deterioration at advanced ages); XL Therapeutics (treatment of rare diseases Wiskott-Aldrich Syndrome, X-linked thrombocytopenia featuring immune failure); and XoNovo (treatment of degenerative diseases of the brain and central nervous system).
Published by Globes [online], Israel Business News - www.globes-online.com - on May 18, 2017
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