Globes, June 5, 2002
"I used to be wary of life sciences"

Today, Israel Seed Partners invests regularly in life-science companies.

Is Israel Seed Partners about to expand its life-sciences portfolio? The answer is “maybe”, depending on how one defines “soon”. Two or three companies are potential prospects says Israel Seed Partners general partner Neil Cohen, but there’s no urgency. Meanwhile, “We’re looking closely and talking. Things take time in this field.”

Israel Seed Partners has grown from $2 million to $200 million within a decade. Although the fund focuses on software and communications, Cohen personally began his investment business in biotechnology. As a young British student at Oxford University, he earned a degree in Arabic, and his ambition was to join Israel’s defense establishment. Instead, he was recruited by NM Rothschild & Sons in London. He immigrated to Israel in 1989 and entered the mire of the local venture capital industry.

Israel Seed Partners can take pride in one major life-sciences exit to date – Compugen (Nasdaq: CGEN) – and two promising holdings – Den-X and IDGene Pharmaceuticals. Cohen’s first investment at Israel Seed Partners, together with Veritas Venture Partners' Dan Tolkowsky and Yadin Kaufman, was in Bio-Dar, which was later sold to MA Industries.

“When we invested in Compugen, they already had a product and sales. The same was true for Den-X. We invested in IDGene when they were only a guy with a piece of paper, but we thought they had a basis of something with value,” said Cohen.

He continued, “When we were smaller, I was very wary about the life sciences. At the time, there was a severe shortage of money and very few foreign investors. Except for investments in Peptor and XTL Biopharmaceuticals (LSE:XTL), leading Israeli funds rarely invested in the life sciences, and the specialist funds were tiny. It’s impossible to work properly with 2-3 investments, because they might all fail. You have to be able to manage risk. You also need deep pockets and stamina, which is very hard for a small fund.”

Israeli biotechnology no longer suffers from childhood illnesses, says Cohen. “During our years of operation, Israel has made great progress in the field, in a way that couldn’t have been predicted. Foreign funds are now prepared to invest, although only in a limited fashion. But for every large foreign fund that has taken root here, such as Apax Partners, Walden International and Sequoia Capital, there are many others who won’t. They have plenty of opportunities in the US, or they simply don’t come here.

“Israeli entrepreneurs have also learned a lot. We are seeing more experienced and mature entrepreneurs. Israeli learn fast. You meet them once, and they already know what to do.”

And yet, there are still very few Israeli life science companies that have developed and sold products. “There is Teva (Nasdaq: TEVA), Teva and Teva. The other generic companies don't comprise an infrastructure,” he says, adding that the solution to the lack of seed- stage investment won’t come from the funds or companies so long as there is little government support. Israel Seed Partners life sciences advisor Dr. Ron Goshen says that relying on foreign governments is not a solution either, since the chances of an Israeli researcher obtaining a US National Institute of Health (NIH) grant are near zero.

Cohen adds, “The NIH spends billions to finance research in the US. There are numerous early and seed-stage companies and many researchers who must make progress before they reach the commercial stage. This gap must somehow be bridged, and the US knows how to do it better.”

Biotechnology hasn’t yet grasped valuation

Why hasn’t Israel Seed Partners made investments in more biotechnology companies for a year?

Cohen: “We felt uncomfortable investing aggressively in the field. If I were to devote all my time to the life sciences, it might be otherwise. We haven’t found anything with all the right conditions.”

It is not a problem of deal flow. “We have deal flow meetings, where we list not just one or two, but eight good companies,” explains Goshen, “and that is after we examined over 200 companies in the field.”

Seeing isn't enough; decisions have to be taken, too. Cohen admits that caution still dominates. “Even if I had five wonderful companies, maybe three will fail, or four, even all of them. The price must be attractive enough to balance the risk. Even companies reaching phase II clinical trials are risky,” he says. He admits the delay poses risks, and he is not alone. In these tough time, US funds invest in spin-off companies and product lines. In short, they don’t take risks. And what's the catch for Cohen? “I am very valuation sensitive.”

“Globes”: Which means?

Cohen: “In the communications and software fields, there were, and are, welcome revolutions in valuation and company development. There are enough large funds in the sector, and they give roughly the same valuations. The life sciences market is much less unified and complete in terms of pricing deals. People ask – and often get – too high valuations, because good deals are in short supply. The large funds sometimes make good deals without paying attention to valuations.”

For Cohen, this means that estimating a company’s value will be the deciding factor. “There are companies that I would examine more thoroughly if the deal seemed doable. Many of the companies are excellent, but too expensive. I’m not worried about them; they’ll manage to raise the money.”

Goshen offers a different perspective. “The problem today is company management ability, not someone to give money. A fund partner doesn’t have the time to worry about managing a company. All the funds now spend their time helping their portfolio companies. They have no choice, because experienced managers are lacking.”

“I want a sure thing”

Does this mean Israel Seed Partners is looking for companies?

Cohen: “I want deals that have a good chance of succeeding, and will make a lot of money if they do succeed. I want good entrepreneurs and scientists who can be the core of good teams. Scientists are not easy people. I want a big, mature opportunity, something no more than 18-24 months from human clinical trials. We won’t necessarily invest only in early stages. I know these things are out there somewhere, and an attractive opportunity has got to be chosen. I am looking for a company that will go far, for little money.”

In other words, you want to ride a horse that doesn't eat much.

“Some of the best companies went far with little money. Investors don’t want something that will take a lot of money before they see something of value.”

The burn-rate threat will generate innovate ways of working, such as cost-cutting on the most expensive item in a company’s life – human clinical trials. Offering unique treatments terminal conditions, such as septic shock, can generate such savings. Goshen says it is more attractive than new antibiotics for common infections. Instead of having to conduct clinical trials on thousands of patients, they can be carried out on a much smaller scale at less cost.

The most attractive sector is, unsurprisingly, drugs. Cohen says, “Everyone is working on treatments for diabetes, common cancers and cardiovascular diseases. Neurological diseases are a very tempting market, but clinical trials for cancer are simply easier. It’s very hard to ask an Alzheimer’s patient, ‘Are you feeling better?’ Nevertheless, companies in the Alzheimer’s market will become huge.”

In the medical devices field, Israel Seed Partners will be interested in orthopedic, imaging and ophthalmic devices. As for diagnostics, Cohen says, “We don’t like it. Over the past 20 years, few successful companies in this field began as start-ups. It depends on distribution systems, so if a company develops something interesting, it is acquired by a major corporation, for little money. The giant corporations dominate the market.”

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