The year 2001 marked a high point for life sciences in Israel. This achievement is even more remarkable, when mirrored against the relative weakness of the high-tech sector in that very same year.
Approximately five years ago, in 1997, Ernst & Young Israel established its life science practice, which included the biotechnology and medical devices areas. At the time, we felt that it was the opportune time, to set up this department, since we predicted, that the areas had excellent potential, for growth and expansion in the future.
And, indeed, during this period, we have seen that the industry met our expectations, and has expanded and matured vastly, penetrating the awareness of the public-at-large, so that even academics, the Government, entrepreneurs, angels and venture capital funds, are now aware of the opportunities this industry has to offer.
The progress in 2001 is expressed in numerous areas which can be quantified, among which are the scope of investments in companies, the plans for Government support which were proposed, government participation in R&D, the relative increase in salaries and, most impressively, the number of new students who feel that a promising future lies in this direction.
Private placements
A record amount of 293 million dollars was raised in 2001, as compared with 205 million dollars in 2000 and only 122 million dollars in 1999. We are speaking about an increase of 43% in the amounts raised in 2001, as compared with 2000, and an even more impressive 193% increase, over 1999. If we only think about the drastic decline of nearly 40%, in the amounts raised in the high-tech sector between 2001 and 2000, what the life science sector has achieved is truly spectacular, and the situation as it currently stands, is that the capital raised by the life sciences sector in 2001, amounted to almost 16% of all capital raised.
Let us take a look at the quarterly cutoff of the private capital raisings. We see that in general during the past three years, what took place on a quarterly basis is similar to what happened on an annual basis. What we learn, is that there is a constant trend of an increase, in funds raised in the sector.
However, we need to take into account that what took place in any one quarter, is not indicative for all quarters, due to the relatively small sampling, which the activities of one quarter in the life sciences sector in Israel, is representing.
What is especially surprising, considering the above, is the fact that since the beginning of 2002, there have not been material capital raisings in the sector. Still, as said earlier, we can not refer to trends, just on the basis of what happened in this or that quarter, in connection with capital raisings. We must keep in mind, that the life sciences sector is one with roots, that is based on know-how, technology and long-range needs, so that any trend, be it a decrease or increase resulting from any influence, is usually moderate, and any change is measured in terms of years.
Looking at the decline in the amount of investments by venture capital funds, and the reduction in activities in the capital market and the positioning of new companies, it is quite likely, that there will also be a decline in investment rounds during 2002, in comparison with 2001, possibly receding to the levels of 2000.
I mentioned earlier the amounts raised during the past three years. Yet we need to look also, at the number of investments it took to raise those funds, since this is also indicative of the progress for the life sciences sector. In 2001, 293 million dollars was raised through 55 investments, while in 2000 205 million dollars was raised through 37 investments, and in 1999 122 million dollars was raised through 52 investments. Thus, while the average investment in 1999 was for 2.3 million dollars, it was 5.5 million dollars in 2000 and 5.3 million dollars in 2001. Not only do these data indicate a rise in the average investments, what is impressive is that the average investment in 2001 was more than twice the average for 1999.
And what is additionally important to point out, is that the majority of the capital raised in 2001, was through follow-on investments in existing companies, however seed investments declined rather significantly, which can be attributed to the relatively weak capital market.
Today, there is uncertainty, as to the availability and timing of investments. Investment procedures have become longer, mainly due to both more thorough due diligence, and lengthier negotiations revolving around the terms of the agreements.
The combination of these facts, means that now the majority of companies, begin investment rounds at least a year or more, before they anticipate their cash surplus, to be fully expended.
There are companies which, because they do not have adequate funds to assure them reaching the next milestone, end up releasing employees and cutting back on expenses related to research and clinical trials, while focusing more on their main development plans.
Companies’ values declined in 2001, so that many capital raisings are being carried out at values determined at earlier rounds, and sometimes at even lower values. Still, the majority of the more mature companies, succeed in obtaining follow-on investments, but all of this is subject to their being willing to compromise on their value.
As to the internal division in the sector, between biotech and medical devices, whether we are speaking of the amounts raised, or data as to the number of companies that raised funds, we can say that in general, both segments have an equal share, in the life sciences pie.
Capital raised from the public
In 2001, 257 million dollars was raised from the public, through 2 public offerings, while in 2000 399 million dollars was raised in 8 offerings, and 67 million dollars was raised in 1999 through 4 offerings.
The companies which raised capital in 2001, were Given Imaging, about 60 million dollars, and Taro which succeeded in attracting an investment of nearly 197 million dollars. Taro's results especially stand out, considering the fact that out of the aggregate amount of 197 million dollars, almost 60 million dollars was used in financing the sale of shares by its shareholders.
These issuances were carried out in October, after a break of almost 10 months, from when the last capital raisings occurred.
The average amount raised has increased steadily, from 17 million dollars in 1999, to 50 million dollars in 2000, and 128 million dollars in 2001.
Public company shares
There are 20 publicly traded life science companies in Israel, 10 in the biotechnology sector and 10 in the medical devices sector. In 2001, we, Ernst & Young Israel, began to follow the performance of the shares of those companies, by devising a combined index for them. The index gives equal weight to each share, so as to prevent inclining the results, because there are major differences in the sizes of the various companies. The data for the Israeli companies, are then compared with the performance of shares in the corresponding segments in the U.S., as expressed in the Dow Jones index, for the biotech and medical devices sectors.
In 2001, the Israeli shares declined by a rate of 11%, as compared with a 20% decline for the U.S. shares, and that for the most part of the year, the decline for the Israeli shares was lower than that for the corresponding U.S. companies.
During the first two months of 2002, the Israeli shares declined by 18%, as compared to 8% for the U.S. shares, thus evening out the results for both locations.
In the medical devices sector, Israeli shares declined by 25% in 2001, while in the U.S. there was only a decline of about 6% for medical devices companies’ shares, and that during 2001, the Israeli shares did not perform as well as those of the U.S. companies.
During the first two months of 2002, the Israeli medical devices shares declined by additional 27%, as compared to 6% only for the U.S. shares, resulting an increase of the gape between the performance of the shares for both locations.
Cooperation agreements and anthrax
During 2001, the number of cooperation agreements signed in the biotech sector, between Israeli and foreign companies, exceeded those signed in previous years. It is difficult to quantify such agreements, mainly with respect to the future potential cash flow arising. We can expect to see the cash results of these agreements, reflected in the financial statements of these companies in the future.
The anthrax panic of three months ago, had two Israeli-related consequences:
- Teva had a generic substitute for Bayer's Cipro drug, which was tentatively approved by the FDA. Subject to various arrangements, Teva will be able to take part in producing the drug, in crisis situations. At the end of 2003, Bayer's patent will expire, and Teva will then be able to produce the drug without any restrictions.
- As published in the newspapers, the Biological Institute in Nes Ziona, developed an innovative vaccination against anthrax, which is much more efficient than existing drugs. However, there was no indication, as to the drug's current stages of clinical trials and FDA approvals.
Government encouragement activities
As will be recalled, the Monitor report was issued at the beginning of 2001. The report discussed the recommendations for the government, concerning the support and encouragement of the life sciences sector in general, and the biotechnology sector in particular.
However, the recommendations are only being carried out partially and sluggishly. At this stage, there is quite little action taken involving these recommendations.
Privatization of government incubators The privatization of the government incubators has begun. At this stage, some of the negotiations for transferring the incubators to private hands, are in very advanced stages. In exchange for a commitment by the entrepreneurs for an investments of a few hundreds thousands dollars, the incubators and the companies involved, will be transferred to the entrepreneurs, and the support of the Chief Scientist at the peripheral areas, will increase beyond present levels.
I would like to point out that at the beginning of 2002, Clal Biotechnology opened a biotech incubator, providing infrastructure and management services to its portfolio companies.
Biotechnology incubators A tender was published for two incubators in the biotech field, which is geared to entrepreneurs, who can bring financing of about 20 million dollars to the project. The bids were supposed to be made by the end of February. The Government will participate in the R&D of the portfolio companies, in an amount of nearly 1.6 million dollars per company.
Several groups have collaborated, to respond to the tender, including several international biotech and pharmaceutical companies.
Among those who were mentioned as involved in the bid, are Teva, Machteshim-Agan, Genzyme, Johnson & Johnson, Israel Chemicals, the Rad Group, and the Ofer Brothers. The objective, is that at the end there will be a consortiums of investors, in each of the two incubators, including as many and varied groups as possible, which will hopefully increase the companies’ chances to succeed.
Data bases The Ministry of Science is negotiating with Celera and Compugen in order to access their data bases, making them available to Israeli academic researchers.
Research support There are also plans, to bolster the support granted to innovative researches in academic institutions. Such researches should have commercial applications. The preferred areas are the genome field and stem cells.
Infrastructure companies Rules were devised for supporting companies, which will establish infrastructures, and provide services to R&D companies, by providing loans to purchase equipment, and determining procedures for the repayment of those loans.
The Ministry of Science wanted to declare the biotech sector, as a national priority sector in 2002, and to support it, using the resources which were approved in principle, during the initial budget deliberations in September 2001. The idea was to initiate a five-year plan, from 2002 through 2007, with support being expanded very substantially. However, because of the recent budget cuts for the Ministry, most of these plans will have to be put on hold, until the economic situation improves.
At this stage, what is happening in the field, is that the first two items in the slide are taking shape, while the other items, will be implemented, in a more subdued scope. On the other hand, participation by the Chief Scientist, in R&D expenses in the life science industry in 2001, increased to 16% of total actual participation in that year.
Manpower
There have been several articles in the local newspapers during the past year, about changes in the salary levels, for the various high-tech segments, including the life sciences segment.
The bottom line is, that while salaries have eroded by as much as 10% to 20% in the high-tech sector, the salaries in the life sciences sector, have risen slightly, and are now almost even with those paid in the high-tech sector. There has also been a sort of evening out, regarding options granted, to those working in both fields, reflected in the total number of company shares distributed, and their terms.
The reason for this, is the growth in the number of employees required for the life sciences sector, basically by mid-range companies. The result, is fiercer competition over professional manpower, between the companies.
My opinion is that this will only intensify in the future, when the shortage of experienced manpower, becomes more pronounced, since it takes years to properly train professionals, in the area. What this means is, that the salary conditions for those employees will only get better.
There has been a striking increase, in the number of students enrolled in the life sciences, at the various universities in Israel, during the past year. I am speaking of an increase of tens of percentages in the number of students, which comes in the wake of the traditional high-tech studies having lost some of their attraction.
The most popular courses, are those which combine life sciences with high tech. Bioinformatics, which is a mix between life sciences and computer sciences, is being the front runner.
The increase in students, could also be viewed as the answer, to the perceived shortage in professionals for the sector in the future, as they complete their studies and enter the job market.
Summary
I do not expect that 2002 will be an easy year for industry, especially for young companies. This is a year in which quite a few companies, being at their early stages and having little cash reserves, will be forced to close shop. It is likely that there will be a decline in funds raised in 2002, as compared with 2001.
On the other hand, the more mature and established companies, with enough working capital to weather it out for a year or more, are more favored by the various investors. These companies are expected to continue to develop their products, sign cooperation agreements with foreign partners, and end the year much stronger, both technologically and financially.
The progress by the mature companies, will increase the need for professional manpower, encouraging the competition between the companies on this limited source.
In 2002 the structure and rules for the operations of the incubators, will be determined.
We measure the life science trends in Israel by a range of years. Therefore, I believe that in spite of the difficult year, the growth trend, which has characterized the sector during the past few years, will continue. We can only hope that the government of Israel, will contribute its vital part, in assisting the life science becoming a major industry, as things are done in the U.S, Europe and the Far East.
The author is a partner and head of life science at Ernst & Young Israel. Click here for other presentations made at the Biotech Israel - 2002 conference.
Published by Israel's Business Arena on 25 March 2002a