Tuesday, 17 July 2012

Why Israeli Life Sciences are an Undervalued Opportunity






For a small country which boasts a biotechnologist for its first president, Israel has certainly lived up to its high-tech reputation.  

Statistically speaking, you won't find quite the same abundance of ingredients necessary for commercial success anywhere else in the world, with perhaps the exception of the bustling Boston Metropolitan area. Israel has the highest number of scientists per capita in the world, and is considered to be the world's "start-up nation", competing with the likes of Switzerland, Denmark and Japan in innovative developments. 

More than 1,100 life science companies currently operate in Israel, with 40 to 60 new companies established each year. 46% of all Israeli life science companies are less than 5 years old, with a further  34% of these  young companies already generating revenue.  On the Tel Aviv Stock Exchange, life sciences represent the largest sector, with 57 listed life science companies; several other companies are also listed on foreign stock exchanges. 

Technology is on everyone's lips in Israeli media and politics, and the country's scientific fixation hasn't eluded even the president: Pres. Shimon Peres's profound interest in Neuroscience has been well-documented, and was recently showcased at the 4th Israeli Presidential Conference in Jerusalem, a substantial portion of which the President allocated to the latest Israeli developments in the sphere of brain technologies. 

Despite the plethora of encouraging facts, Israeli companies remain gravely under-funded in comparison with their US counterparts. Per capita, Israeli life sciences actually attract more venture capital dollars than the ones state-side, and Israel currently ranks 4th in the Global 2012 Venture Capital Confidence Survey conducted by Deloitte. However, particularly in the bio industry, deal sizes are on average smaller and less meaningful in Israel than in the US. 

Development-stage Israeli companies are also generally characterized by early IPOs: by number of public life science companies, Israel competes only with the likes of the UK and Sweden, and significantly supersedes Switzerland, Denmark and Germany. Companies on the TASE are characterized by rather low trading volumes, and despite slightly better performance on foreign markets, are still often overlooked on the NASDAQ. 

Are Israeli technologies simply not good enough?

Some would argue that, given the country's intellectual and academic predisposition (Nobel Prize winners  have become somewhat of an annual occurrence in Israeli academia), the life science industry is over-hyped as a result of immense inductive expectation. Following the example of global corporations who lavishly profited from the successes of the Israeli hi-tech industry, large pharma and other multinationals have begun to set up shop in Israel with noticeable tech-scouting funds and R&D centres throughout the country. But does the infantility of the industry imply that these companies and investors are still embarking on a gamble? 

Recent bio-exits in Israel demonstrate the cost-benefit of Israeli bio, and suggest that the odds are strikingly in favour of the acquirers. In the US, the average bio-M&A deal size was nearly US$ 800 million in 2011, whilst in Israel, some of the biggest bio-exits of the past decade--Omrix Biopharmaceuticals and Taro Pharma, have only amounted to just over half that price. 


For multinationals, Israeli bio remains cheap, cheerful and profitable, and on aggregate, continues to yield solid returns for those who dared to invest in the industry here.

So why is the industry, in particular the publicly traded sector, still so under-invested?

We think the answer is Analyst Coverage.

Many investors agree that, having been plagued by consistently insufficient analyst reporting, public companies in Israel are seriously under-valued. After all, much of the value of previously unknown companies is created by the publicity and confidence which follow valuation reports. 

For instance, the relatively well-, but sadly not well-enough-known Israeli drug development company BioLineRx was recently valuated by a Roth analyst in the US, which almost immediately caused BioLine stock to jump nearly 25% on the TASE - and we still believe its upside is greater than that stated by the analyst (see the full story on SeekingAlpha here)

The Tel Aviv Stock Exchange has not been oblivious of these issues. In an attempt of confront under-reporting, TASE is working to introduce more accurate valuation and to raise awareness of the public life science sector. As part of these efforts, the stock exchange is co-sponsoring a novel study program at Tel Aviv University’s faculty of management, titled “The Analysis of Healthcare Companies”. In addition, a number of high-profile investor conferences have been organized by TASE in the U.S., in conjunction with NASDAQ. The Stock Exchange is also looking to partner with reliable independent valuators to cover all publicly traded life science companies. 

With these changes taking place, we at Bioassociate are confident that, in the long run, a wealth of value will be created in the Israeli Life Science sector as analyst and investor awareness of the industry grows. 

After all, from the point of view of a foreign investor, all the ingredients for great returns are already here: great science, enthusiastic and vibrant entrepreneurs and sub-intrinsic-value trading. With elementary and effective elimination of the limiting reagent--the mere lack of global awareness--the TASE Biomed Index is likely to witness better times ahead.

Thus, anyone taking note of these changes now is likely to benefit from forthcoming developments in the near future. 

See the Bioassociate report "Investing in the Israeli Life Sciences 2012" for a detailed look at recent developments and current state of investment in the Israeli Life Science arena.