Biotech Values

[DewDiligence]

Israel’s Biotech IPOs Are Reminiscent of Dot-Com Bubble

http://online.wsj.com/article/SB10001424052748703806304576232560144660964.html

›MARCH 31, 2011
By SARA TOTH STUB

JERUSALEM—Appetite for Israeli initial public offerings of life-science companies is booming, but critics say the sector is immature and lacks the transparency for investors to make informed decisions.

The first three months of 2011 have brought four life-sciences IPOs, and several more are planned for the first half of the year. The rate so far has been far ahead of that of the past three years, with only four IPOs in all of 2010, one in 2009 and none in 2008.

Such is the Tel Aviv Stock Exchange's attraction that several European and American companies are in the process of submitting draft prospectuses for IPOs, says Eitan Akiva, senior vice president at Clal Finance & Underwriting Ltd., Israel's most active brokerage in the life-sciences sector. "They heard about the Israeli market and the potential in our market," Mr. Akiva says. "For many of those I met with, it was their first time in Israel. They weren't even Jewish."

The reason for the IPO boom is simple: Venture-capital funding has all but dried up, while the Tel Aviv Stock Exchange has established looser guidelines for research-and-development companies in recent years, exempting them from requirements about the length of time a business must have been established or the level of shareholder equity prior to listing.

Added to that is Israel's role as an innovative and technological powerhouse in the life-sciences sector. The country has about 1,000 life-sciences companies and strong collaboration between academia, the military and the marketplace, and it leads the world in the number of per-capita medical device patents. The largest high-tech acquisitions in the past few years have been life-science companies.

This environment has allowed dozens of one-product companies, which have yet to receive product approval from regulatory authorities such as the U.S.'s Food and Drug Administration, to raise money and list on the exchange, said Natali Gotlieb, an nalyst for the sector at Israel Brokerage & Investments, a Tel Aviv investment house. Relative to its size, the exchange has more companies in this sector than most others around the world, Ms. Gotlieb says.

RedHill BioPharma Ltd. saw the local stock market as the quickest way to raise money, and completed an oversubscribed offering in February that raised 51.6 million shekels ($14.6 million.)

"The market here in Tel Aviv is ripe," says Dror Ben-Asher, CEO of RedHill, which has a drug pipeline of six products, albeit none with final regulatory approval. "There is a lot of growing interest here in biotech."

There are currently 56 life-sciences companies on the Tel Aviv exchange, up from two in 2006, with most listings occurring in 2006 and 2007. In mid-2010, the exchange created an index dedicated to the sector. The past year also saw five Israeli biomed companies trading on Nasdaq add a further listing in Tel Aviv.

The listings have brought more public attention, and help attract seed money for start-ups, says Yaacov Michlin, CEO of Yissum Technology Transfer, a technology-transfer company spun off from the Hebrew University of Jerusalem.

"The excitement helps us," Mr. Michlin says. "[Seed] investors are more driven by the dream that companies will go public."

But for some, an atmosphere in which a successful IPO appears more important than a viable product evokes memories of the Internet bubble a decade ago.

Yoav Kedar, life-sciences analyst at Clal Finance and also a physician, says investors are often driven more by a dream and by the handful of Israeli success stories than by an individual company's balance sheet. This sort of attitude is risky, he says.

"There's a hype, there's a lot of talk," Mr. Kedar says. He says many are hoping to become the next Given Imaging Ltd., whose camera-in-a-capsule is widely used around the world in place of more-invasive endoscopy.

The stock market isn't the right place for every life-sciences company, especially those with only one product, Mr. Kedar and others in the field say.

"Companies that aren't fit for the public market are going public and that's a problem," says Ran Nussbaum, founding partner of Pontifax, a $125 million venture fund dedicated to the life-sciences sector. "Those companies will die."

But with a lack of analyst coverage, it's difficult for investors to know which companies are likely to survive, Mr. Nussbaum and others say.

Companies seeking to develop unique products or treatments for devastating diseases find it easy to attract money at their IPO stage, Ms. Gotlieb of Israeli Brokerage says. "They have a good story," she adds. But such companies can be "all or nothing," she says, citing the example of Biocancell Therapeutics Inc., a company seeking to develop a unique cancer treatment based on the H19 oncogene. Biocancell's share price has halved since its IPO in 2006, and its drug is still in phase-two clinical trials. Biocancell declined to respond to Ms. Gotlieb's comments.

Despite the risks of individual companies, analysts say, there isn't a general skepticism about the sector in the market. "It's a case-by-case thing," says Mr. Kedar, adding that company valuations in Tel Aviv are "modest" compared with other markets.

Mr. Kedar points out that the valuations of several large dual-listed Israeli companies are actually set in New York, where the majority of the trading takes place. In fact, Ms. Gotlieb says, many Israeli life-sciences companies are undervalued, when compared with other markets.

Mr. Kedar and others say they often recommend investing in companies that already have products on the market, or in companies that aren't based on one product.

Meanwhile, the Tel Aviv Stock Exchange sees a niche opening for itself as a global center for financing in the life-sciences sector. Ester Levanon, the exchange's chief executive, recently held an event at Nasdaq in New York to introduce U.S. investors and foreign life-sciences companies to the Israeli market.

Despite doubts and criticism, she says the role the exchange plays in life sciences will only grow. "It makes sense to also make Tel Aviv a center of trading in those companies," Ms. Levanon says.‹