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Funding and Opportunities of Life Science Companies - The Israeli Experience

Yuval Horn - Horn & Co, Law Offices

Yuval Horn

Yuval Horn

One of the leading life sciences lawyers in Israel lends us his perspective on financing and support opportunities in Israel for the innovation and export of technology.

Israel is one of the worldwide leaders in the innovation and export of technology. Israel is ranked fourth in the world in terms of the number of patents per capita and second in Europe in terms of the number per capita of private biotech companies with products in the pipeline, as listed in Genetic Engineering and Biotechnology News, dated 8 June 2009. Israel is ranked number two in the world in terms of the number of approved bio-therapies per million population (the OECD Biotechnology Statistics 2009), and third in the world for venture capital availability, according to the IMD World Competitiveness Yearbook 2009.

The unique financing and support opportunities that have lead to Israel’s entrepreneurial success are outlined below.

Pivate Funding – With Potential Government Backing

Several Israeli venture capital funds, lead by Pontifax (set up in 2004 and 2007), and several “angel investors” are active in the investment in life science companies. Due to the relative strength of analysts, investment appetite and scientists, there is investment in non-Israeli life science opportunities as well.

In November 2009, the Ministry of Finance and the Ministry of Industry, Trade and Labor published the terms of a tender for the management of governmental supported biomed oriented investment funds. The government intended to invest approximately US$80 million, to be leveraged by private investments funds, with a view to increase the support of the life sciences sector.

In March 2010, four groups were announced as winners of the tender. The winners were required to raise US$70 million or so by November 2010. By the end of November 2010 only two funds remained in the “race”. Commitments are expected to be finalised by April 2011. Success will mean a boost to financing of up to US$200 million for life science companies.

Public Funding and Market Appetite

The Tel Aviv Stock Exchange (TASE) has accepted many early stage drug development and device companies for trade. In 2006, the TASE lowered the threshold for research and development companies, enabling very young enterprises to seek public funding despite short track records and no sales (or regulatory approvals). Market appetite has, during recent years, supported the public funding of biotechnology companies. On 2 March 2010, the TASE launched the Biomed Index, which includes Biomed Companies that have an average market value of at least 50 million shekels (approximately US$14.5 million) 25 per cent of public holdings, valued at 25 million shekels (approximately US$7.25 million) or more. There are 50 companies categorised as biomed companies, whose securities are traded on TASE. As of December 2010, 27 companies are included in the Biomed Index.

Funding and Support By The Office Of The Chief Scientist

Many drug discovery projects have been supported by the Office of the Chief Scientist (OCS) at Israel’s Ministry of Industry, Trade and Labor.

The OCS operates by virtue of the Law for the Encouragement of Industrial Research & Development, 1984 (the “R&D Law”), and is responsible for the implementation of governmental policies regarding the support of research and development activities in the Israeli industry.

The OCS implements a wide variety of support programmes aimed at encouraging entrepreneurs, investors and companies to enter into early research and development projects, which by nature are highly speculative and involve substantial risks. The OCS has announced its intention to prioritise projects in the fields of biotechnology and nanotechnology.

OCS programmes include: grants for specific research and development projects; repayable through royalties upon future commercialisation of products resulting from the funded projects; programmes for the support of development of generic technology through collaboration between industrial companies and Israeli academic institutions; support of research and development centres in academic institutions, multinational support and collaboration programmes; and the OCS Technological Incubators Program, established in 1991.

Technological incubators provide entrepreneurs with the preliminary support and infrastructure necessary to develop their innovative technology during the first two years of development for future commercialisation. The privately held, state-supported incubators, are required to provide entrepreneurs with physical premises, certain financial resources, tools, professional guidance and administrative assistance.

Such support is intended to assist entrepreneurs with technological and scientific background and capabilities, who often lack relevant funding or commercial and corporate experience necessary for the establishment of technology oriented companies. Projects to be funded by the incubators are subject to acceptance procedures by the OCS professional committees, based on scientific innovation and commercial potential criteria.

In the first half of 2010 the OCS approved the establishment of 42 new start-up companies, with the support of technological incubators, granting approximately 81 million shekels (approximately US$23.2 million). Half of these companies were in the medical device sector, 26 per cent develop software, 12 per cent develop drugs, 10 per cent are in the clean technologies sector, and 2 per cent are in other areas.

During 2009, companies that started as incubator companies raised a total aggregate of around 340 million shekels (approximately US$95 million).

Project companies are subject to the provisions of the R&D Law, which prohibit the transferring of OCS-financed technologies and related intellectual property rights outside of Israel, except under limited circumstances. The R&D Law imposes further limitations with respect to the manufacturing of products outside of Israel, which may result in enhanced liabilities towards the OCS under certain circumstances.

The OCS provides the incubator with a convertible loan of up to 85 per cent of the project’s authorised budget, which should not exceed US$460,000 to US$580,000, depending on specific characteristics of each incubator, for a project support period of two years. Under certain terms and conditions, projects in the field of biotechnology may be entitled to a third support year and additional financial support. The incubator is required to provide, by itself or through a third party investor, the supplementary investment of at least 15 per cent of the project’s authoried budget.

The incubator invests the loan amount in the share capital of the project companies, and the shares issued to the incubator serve as collateral for the repayment of the OCS loan. The loan is repaid upon each disposition of the securities.

On 15 July 2010, the Israeli government instructed the Ministry of Industry, Trade and Labor to amend the terms of the OCS Directive 8.3, so that the loans provided by the OCS shall be repaid by the project companies by way of royalties payable from future commercialisation of products resulting from an OCS-funded project. The amended Directive 8.3 is also expected to provide that the supplementary financing shall be provided by the incubators and not by third party investors, who may, in turn, add to such funding. The amendments are expected to enter into force in January 2011.

New Rules For Exploitation Of Life Science Research

The handling, ownership and commercialisation of inventions by researchers employed by governmental hospitals are governed by several laws and regulations, partially overlapping due to the varying capacities of the inventors (state employees, researchers, physicians). Such disparities provide uncertainty to inventors and investors. In several cases in Israel, they have created legal conflict, due to the state’s demand for retroactive payment of royalties or their equivalents.

On 20 October 2010, the Israeli Ministry of Health and Ministry of Finance issued a new directive with respect to the handling and ownership of intellectual property conceived in research conducted in Israeli governmental hospitals and their technology transfer companies.

The new directive grants the state full proprietary rights over the products of applied research and grants the relevant technology transfer company with full powers to act on behalf of the state with respect to the commercialisation of such products. This is important news for the researchers. In the past, hospitals were not authorised to finalise a licensing transaction with them, but now they are.

The Directive also sets clear distribution of royalties resulting from governmental products – 10 per cent to the hospital, 10 per cent to the state, 30 per cent to the health corporation and 35 per cent to the inventor.

In addition, the Directive specifies additional clear labour limitations with respect to researchers who are already employed by governmental hospitals, so as to decrease the risk of conflicts of interest. The removal of ambiguity is good news – however the incentives that are given in the directive have yet to be proven.

* * *

The success of a large number of Israeli life science companies during recent years - to be sold, to license and, most of all, in clinical trials - provide the fuel required to continue the funding and support. With additional private funding opportunities and continued support by the Israeli government authorities, 2011 is expected to be as exciting as previous years.

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