In February, I spoke at the World Pharma Licensing Congress in London. The following article is based on my talk.
Challenges Facing the Pharmaceutical Industry
The pharmaceutical industry today faces a variety of challenges:
- thanks to the Internet, more knowledgeable and more demanding consumers
- a longer and more costly time-to-market
- more stringent regulations
- increased competition
One way to cope with these challenges is by partnering: outsourcing research and product development to emerging markets. This allows pharma companies to capitalize on their strengths and minimize their weaknesses.
Benefits of International Outsourcing
By outsourcing some of their research and development projects pharmaceutical companies are able to better allocate their resources, which are most often better served in regulation and commercialization. Often, by outsourcing their R&D work, they are able to capitalize on local funding, including venture capital, government loans and grants, and cross-border arrangements available in emerging markets.
Large and established pharmaceutical companies may also find that smaller partners in emerging markets are more flexible, more adaptable, and have quicker development processes than in established, costly markets.
Smaller companies in emerging markets benefit from the partnership by gaining access to established sales channels, the experience of a larger partner, and better connections to regulatory, reimbursement, and other authorities in established markets.
Important Considerations
When considering an offshore partnership with a smaller company from an emerging market, an established company needs to take into consideration the following issues:
- the regulatory history of its partner
- existing intellectual property protection
- stage of progress
- optimizing the transactional structure: finance, tax, and operational
Alternative Structures
Working with a smaller offshore partner can be structured in a variety of ways:
- investment – early or late stage
- licensing
- product purchase and distribution
- merger or acquisition
Case study: Israel
Israel is a tiny country. About the size of New Jersey, it has 8.3 million people — ranking 97th in the world by population. However, it ranks fifth in the world on the 2015 Bloomberg Innovation Index, an annual ranking of countries based on research and development, technology education, patents, and other innovation-related factors. On the Bloomberg index, Israel beat out France, the UK, and even the US.
Israel invests 4.38% of its gross domestic product in research and development – the highest rate in the world. In the past ten years, four Israeli chemists have been awarded the Nobel Prize.
According to the Israeli Bio Pharma Industry Report published by the Israeli Ministry of Economy, Israel is home to 1,000 life and health science companies. These companies work in the fields of:
- pharmaceuticals
- generics and bio generics
- drug delivery and drug targeting
- biopharmaceuticals, antibodies, immunotherapy, and vaccines
- gene therapy and molecular biology
- tissue engineering and cell therapy
- bioinformatics, drug discovery, genomics, and research tools
- diagnostics and biomarkers
- research equipment
In 2013, more than sixty Israeli companies had pharmaceutical products in phase II and III trials.
In addition to home-grown pharmaceutical giants like Teva (with more than 46,000 employees), Israel also hosts R&D facilities for many foreign companies, including:
- Boston Scientific
- Merck
- Abbott Laboratories
- Medtronic
- Johnson & Johnson
In 2013, foreign companies spent $6.45 billion buying Israeli technology firms – an increase of 20% from 2012. The average deal size was $90 million.
Israel offers foreign pharma partners a number of advantages:
- a highly educated and diverse workforce
- a thriving culture of entrepreneurship
- low startup labor and overhead costs
- a strong technological base, including capital, recognized institutions (world-class universities and hospitals), and a history of innovation
- government incentives, angel investors, and early-stage venture capital money
- regulatory standards on par with the US and Europe
- clinical work conducted worldwide from the start
- a strong awareness of, and protection for, intellectual property
- a well-developed and clear legal environment with respect to corporate, tax, IP, and commercial issues
More than three quarters of Israeli bio-pharma companies have fewer than 25 employees, and over half have 10 or fewer employees. This makes them relatively affordable as acquisition targets and easy for new parent companies to integrate into their own operations.
In the US, a company hoping to develop a new compound for treating human illnesses would need to raise about $14-$15 million; in Israel, it would only take her to $5 million to start such a company.
Thirty seven Israeli bio-pharma companies have initiated initial public offerings, including five in the first seven months of 2014.
Licensing Options
A number of Israeli bio-pharma companies have used creative structures such as an “option to license” and “option to acquire” to obtain early-stage funding and partnership.
An “option to license” gives the licensee/investor the exclusive right, but not the obligation, to acquire license rights to the startup’s technologies or products, based on predetermined terms.
With an “option to acquire,” a buyer/investor gives the start up cash in exchange for the exclusive right to acquire the company or its assets in the future at a predetermined price, which may vary depending on milestones.
A recent example of this latter type of arrangement involved Novartis and the Israeli company Gamida Cell. Novartis agreed to invest $35 million in Gamida Cell in exchange for 15% equity in the company and an option to buy it at a later stage. The option could be exercised only for a limited period following Gamida Cell’s achievement of certain development milestones. In March 2014, Novartis acquired Gamida Cell for $600 million.
Recent Israeli Success Stories
Recent success stories illustrate how foreign companies have worked with Israeli partners:
- In January, 2015 Covidien acquired Given Imaging for $860 million. This was Covidien’s fourth Israeli acquisition in just over eighteen months.
- Also in January, Johnson & Johnson announced that it would help get regulatory approval for InsuLine Medical Ltd.’s InsuPatch, which reduces injected insulin uptake speed in diabetics by nearly 50%.
- In December, 2014, Novartis signed a deal to acquire 12.8% of the Israeli drug development firm BiolineRX for $10 million.
- In November, 2014 WuXi App Tec, a contract research organization, opened an office in Israel and partnered with Pontifax Venture Capital to develop Israeli biotechnology.
- In May 2014, OPKO Health, Inc. announced that it had completed the acquisition of the Israeli company Inspiro Medical Ltd.
Clinical Trials in Israel
Israel has become a leading location for both local and international companies to conduct clinical trials. Israel was first recognized as a site for FDA clinical trials in 1997, and it was the first country to accept the International Conference on Harmonization guidelines for Good Clinical Practice.
Israel is ethnically diverse for such a small country, with citizens from more than 100 different countries on five continents, providing a variety of population types required by FDA trials.
Israel’s relatively simple system of health maintenance organizations makes tracking trial participants simple.
Chinese Investment in Israel
Chinese companies and investors are increasingly active in Israel. In late January, the first meeting of the China – Israel Innovation Committee was held. At the meeting, a three-year agreement between China and Israel was signed, providing a framework for joint technology initiatives.
In November, the Hermed Fund, the venture capital fund of Fosun Pharma of China, announced that it was searching for a strategic partner in Israel and was also considering investments in Israeli companies. Fosun’s parent company is worth $8 billion, and Fosun Pharma already acquired the Israeli company Alma Lasers for $240 million and has made other Israeli investments.
If you’re considering partnering with, or investing in, an Israeli bio-pharma company, please contact us for more information about how we can help you with the process.
