Facets of the Israeli Economy- Biotechnology

by Nechama Goldman Barash
Series editor: David Rosenberg

Israel is home to a successful high-technology industry and a young and highly educated workforce including a talented pool of physicians and biologists. This makes the country a natural breeding ground for biotechnology development, as well as a leader in agricultural biotechnology.

Moreover, with a high percentage of graduates in mathematics, physics and computer sciences, the industry is well placed to make an impact in interdisciplinary technologies such as bioinformatics (the creation of sophisticated machinery capable of sifting through the vast amounts of molecular information accumulated by the Human Genome Project) and proteomics (the identification of proteins through human tissue analysis). Israel has also taken a world-leading role in cancer and autoimmune disease research, as well as research into diseases of the central nervous system.

Biotechnology is a relatively young industry worldwide. The founding of Biotechnology General and of Interpharm - a subsidiary of the Swiss pharmaceutical company Ares-Serono - in 1981 catalysed the birth of Israel's biotechnology industry. For over a decade, these two companies were virtually the only players in the field, despite the active research taking place in the country's hospitals and universities. As the high-tech wave gathered strength in the early 1990s, the first biotech start-up companies began to emerge, aided by research and development grants from the Office of the Chief Scientist at the Ministry of Industry and Trade. Meanwhile, the government's "Magnet" program created a framework for bringing together university-based scientists with already existing companies to work on basic research aimed at eventual commercialization, while its high-tech incubator program created a home for projects to be developed in their earliest stages (see "Government Aid" below).

By 1996 there were close to 90 biotech companies, but government funding was targeted only at the very early stages of projects, and many were unable to survive the difficult market conditions in the latter half of the decade. By the turn of the century, however, the playing field was rich with companies performing the first and second of the three clinical trials required by regulatory authorities in order to get commercial approval for a drug.

There are about 160 biotech companies currently operating in Israel, running the gamut of technologies from therapeutic pharmaceuticals to diagnostics, bioinformatics and agricultural biotechnology. In 2000, 25 new companies were registered, $203 million were invested privately in biotechnology-based business and three companies raised $140 million on foreign stock exchanges. The industry employs 4,000 persons and sales reached $800 million - up from $600 million the previous year - with 80% of biotech products going to export.

Yet despite the industry's growth over the past few years, the country's combined sales of biotechnology-derived products was just a small fraction of Israel's gross domestic product ($93 billion). A number of factors may be responsible: the majority of biotechnology companies are still at an early stage of development; there is a paucity of commercially viable technologies; and many suffer from a lack of adequate funding.

Biotechnology Sales Breakdown (%)

Source: Israel National Biotechnology Committee

Raw Materials

Israel has an enviable pool of human talent and research facilities, with more than 1,700 students a year graduating in the life sciences. Life sciences represent about 35% of civilian research activities, mainly at its seven universities (Ben-Gurion University, Haifa University, Tel Aviv University, The Technion-Israel Institute of Technology, The Weizmann Institute, Bar-Ilan University and the Hebrew University of Jerusalem), four medical schools (Ben-Gurion University, The Technion, Tel Aviv University and the Hebrew University) and two agricultural research institutes (the Volcani Institute and the Hebrew University's Faculty of Agriculture). Funds for life science research equal half of the total research funding in Israel. All of the country's major hospitals are involved in advanced biochemical research and some 60% of the country's scientific publications are in biology and related medical and agricultural fields.

In addition, Israel is well placed to make an impact in interdisciplinary technologies, thanks to the mathematics, physics and computer science training fostered by the universities and the country's specialized military units.

Early-stage biotechnology companies need venture capital (VC) financing to support years of expensive research and development into new products and the subsequent clinical trials. Later they need the bigger financial resources of the stock market to raise more capital and the marketing muscle of multinational pharmaceutical companies to bring their products onto world markets. While previously Israeli biotech companies had little access to venture capital or foreign partners, the situation has improved considerably in recent years. Today there are about 20 VC funds active in Israeli biotechnology, each with capital of between $10 million and $100 million. According to the IVC Research Center, some 75 Israeli life-science companies raised $238 million in venture capital in 2000, up from $135 million in 1999.

Clal Biotechnology is a $100 million VC fund, which is supported by a consortium of institutional investors including Israel Discount Bank, Hapoalim Investments and the holding company Clal Industries. Koor Industries, another holding company, has joined forces with the Swiss company Medabiotech to create a $10 million fund called BioMedica. Makhteshim-Agan, a large agrochemicals concern, operates a $30 million fund called MAH, for investment in plant genomics. In addition, many VC funds that had previously focused on telecommunications, software and electronics have started diversifying their portfolios by investing in biotech companies.

Foreign investors have also begun taking an increased interest in Israeli biotechnology. The American company Johnson & Johnson invested in two biotech companies - Peptor and neurosurvival Technologies, while multinationals Bayer and Baxter have invested in the Medica II VC fund. America's Beckton Dickinson and Germany's Bayer AG have become partners with the Israeli biotech companies GamidaGen and Omir through the BIRD Foundation, a binational industrial research and development foundation set up in 1977 by the governments of the U.S. and Israel.

Since the publication of a key report by the American consulting company "Monitor" in 2001, which strongly recommended that Israel turn biotechnology into a national priority, biotechnology has become an increasingly important part of the government's aid programs. The consultants had recommended that the country invest $52 million to support research projects with commercial potential, as well as another $45 million in two dedicated biotechnology incubators.

The government offers the biotechnology industry a variety of programs for financial and technological support. The Office of the Chief Scientist (OCS), of the Ministry of Industry and Trade, is responsible for supporting and encouraging industrial research and development, including biotechnology. Companies can apply to the OCS for funding to cover their R&D costs, and are liable to repay the loan only if the projects lead to commercially successful products - a method that helps reduce the risk of engaging in cutting-edge research. In 1990, under the aegis of the OCS, the national Biotechnology Committee was founded to promote biotechnology research and entrepreneurial activities and to advise the government on the industry's development. The committee is made up of industry executives and academics in equal numbers.

The largest and most important of the OCS's ventures is "Magnet", a program that sponsors consortia of companies and universities to develop novel generic technologies, underwriting up to 65% of their budgets. Examples of successful consortia are Da'at - involved in bioinformatics and protein modeling - and PharmiLogi, which advances technologies and forecasting systems aimed at developing low-risk pharmaceutcals.

The OCS also sponsors high-technology incubators that provide a supportive environment for scientists who lack entrepreneurial skills to interest investors. Until recently, biotechnology projects operated in general technology incubators, and were therefore subjected to the same demands as software and communications start-ups. However, the unique qualities of biotechnology, with its longer and more expensive development cycle, have compelled the OCS to set up two specialized biotechnology incubators that will host biotech projects for longer periods, and provide up to $1.8 million in financing.

Outside the framework of the OCS, the Ministry of Industry and Trade also gives grants and tax incentives for capital spending on plants and equipment through its Investment Center. In addition, the Ministry of Science, Culture and Sports has recognized biotechnology as a "national project" for 2002-2007, allowing at least 10 different research groups to train manpower, strengthen research infrastructure and allocate funds for academic biotechnology and medical research. The Ministry also sponsors national centers for intermediate strategic research that requires advanced instrumentation and skilled scientists, such as protein purification and microsequencing, transgenic plant and animal technologies, genomic technologies, gene therapy and high-throughput screening technologies.

Teva Pharamceutical Industries is Israel's leading drug company and one of the world's largest manufacturers of generic pharmaceuticals, due to an aggressive acquisition and product development program. In addition to generic drugs, the company spent 10 years developing its first proprietary drug, Copaxone, for the treatment of multiple sclerosis. The injectable drug has the efficacy of rival beta interferon treatments, but with less disturbing side effects. Teva has also invested in start-up biotechnology companies including Peptor, which has developed a drug to halt the development of type-1 diabetes, thereby reducing the need for a daily insulin injection, and in Proneuron Biotechnologies, whose work in immune system cells could lead to a recovery for people paralyzed by injuries to the spinal cord. In addition, Teva is developing experimental proprietary treatments for Parkinson's disease, Alzheimer's disease, epilepsy and other conditions.

Bio-Technology General Corp. develops, manufactures and markets products for human health care. It was founded in the mid-1980s and spent almost 15 years in research and development - investing over $100 million - before it saw revenues. Today it has many products on the markets of the U.S., Europe and the Far East, including a genetically engineered growth hormone called Bio-Tropin and Bio-Hep-B, the first recombinant hepatitis B vaccine to be approved anywhere in the world. The company continues to actively invest in drug development, and has a number of promising products in its pipeline.

D-Pharm employs proprietary technology that re-engineers existing drugs rather than creating new ones. The company begins with an active ingredient already known to be effective and then modifies it to make it work more efficiently and with less side effects, thus enabling physicians to reduce the dosage. At present, the company is developing a drug called DP-VPA for treating epilepsy, bipolar disorder and migraine prophylaxis and is working on other drugs for the treatment of cerebral strokes.

XTL Biopharmaceuticals develops novel therapeutics to treat life-threatening infectious diseases, based on human monoclonal antibodies and small-molecule drugs. It is currently focusing on therapeutics for hepatitis B and hepatitis C viruses, both on its own and in collaboration with other biopharmaceutical companies. XTL's Trimera technology may be used to develop models of human diseases for the early stages of preclinical testing. One of XTL's most important clients for Trimera is the American pharmaceutical company Eli Lilly, which is using the model to test an anti-hepatitis C drug.

Compugen, a bioinformatics and proteomics company, was founded in 1993 by three graduates of an elite military intelligence unit. The company's technology platforms help scientists gather and process the huge amount of data generated by the Human Genome Project and to develop new drugs more quickly. In addition, Compugen offers other computational solutions to address the needs of pharmaceutical, biotechnology and life sciences companies in their search for lead compounds that could act as the basis for new and more effective pharmaceuticals. Its customer base includes international pharmaceutical concerns Eli Lilly, Merck, SmithKline Beecham Pharmaceuticals, novartis and Millennium Pharmaceuticals.

Keryx Biopharmaceuticals, founded in 1998, uses its KinAce bioinformatics drug-discovery platform to target protein kinases, thereby generating potential new pharamceutical therapies. By targeting specific portions of protein kinases, the company has produced 14 lead drug compounds. One drug currently under development is KRX-101, which will treat diabetic nephropathy, a condition which leads to kidney failure and is one of the most common complications of type-II diabetes. Another is KRX-123, which is targeted at hormone-resistant prostate cancer, a condition for which there is no effective treatment today.

Medical Advances

Academic research funds in the 1970s and 1980s tended to fund pharmaceutical and biotech-oriented research, but a few companies developed medical equipment. The 1990s saw the emergence of many such companies and a growing amount of private equity capital to invest in it. Elscint developed medical imaging tools and Lumenis grew to be the world's largest maker of laser instruments for cosmetic skin surgery, as well as for those used in surgery on the teeth, ears, nose and throat.

The industry is also seeing an influx of second-generation entrepreneurs from the software and telecommunication industries who are looking to apply their skills in other places. Given Imaging has developed an encapsulated miniature camera that is swallowed by the patient. The capsule travels down the small bowel, sending images to a screen from which doctors may accurately diagnose gastrointestinal disorders and diseases, without the need for invasive exploratory surgery. TransScan's patented technology detects breast cancer using non-invasive methods, and Odin Medical Technologies has a unique MRI (magnetic resonance imaging) platform using small, movable scanners. Applied Spectral Imaging combines coventional imaging and spectroscopy to reveal information not normally visible by conventional imaging systems.

There have also been significant advances in non-invasive medical procedures. Glucon is developing a technique for measuring blood components that could lead to a home-based, continuous monitoring of glucose for diabetics, while OrSense's sensor technology measures parameters like blood glucose, hemoglobin and cholesterol by means of a finger probe. Inventis has a device for the non-invasive treatment of male impotence.

In the area of cardiac surgical devices, InStent - manufacturers of devices which hold open previously blocked heart arteries - merged with the American company Medtronic; Medinol, another cardiac stent company, was acquired by Boston Scientific; and Biosense, a maker of cardiac electrophysiology mapping and ablation systems was acquired by Cordis, a division of America's Johnson & Johnson.

NESS (Neuromuscular Electrical Stimulation Systems Ltd.) develops and manufactures unique systems for the rehabilitation of impairments resulting from disorders of the central nervous system. It recently received FDA approval for its noninvasive, neuro-prosthetic device, the Handmaster. This medical device helps activate the impaired or paralyzed hand of a person who has suffered a stroke through low-level electronic pulses that stimulate the neuromuscular system and activate the muscles of the hand and forearm to restore natural movements to the hand.