Israel Biomed follows promise of new government angel lawMay. 12, 2012 | by Medical Device Daily
Israel¡¦s biomedical community is now gearing up to its key annual event ¡V the Israel Life Science Industry (ILSI) Biomed 2012. More than 6,000 industry players converge on Tel Aviv for what the coordinators claim is the largest non-U.S. biomedical startup extravaganza. ¡§The celebration of innovation in medical device, diagnostics and pharma, as presented at this Israeli exhibition, has a dual goal,¡¨ explained Ruth Alon, General Partner at Pitango Venture Capital (Herzliya, Israel), and veteran chairperson of the conference. ¡§We have a duty to ensure that the world benefits from our powerhouse of biomedical and pharma technology,¡¨ Alon told Medical Device Daily, ¡§but equally we embrace ¡V and need ¡V the friendship and proximity of the world biomedical community. In Israel, we are developing world-class products/services, and we need far greater alliance with the world¡¦s key payors, regulators, strategic players and physician end users. The ILSI Biomed conference is a great watering hole for this critical ecosystem.¡¨
This symbiotic learning is valuable as Israel Biomedical, perhaps now reaching corporate adolescence, has much to give and much to learn. This year¡¦s conference plans to share both sides of the equation, with 1,000 foreign guests learning about the Israeli companies and environment, and teaching this startup nation about the outside world and contacts therein. Key elements of the conference will include hearing from some of the world¡¦s corporate leaders: Johnson & Johnson (New Brunswick, New Jersey), Teva Pharmaceuticals (Petah, Tikva, Israel) as well as Medtronic (Minneapolis), Life Technologies (Gaithersburg, Maryland) and Goldman Sachs (New York), will all speak in the plenary sessions. Additionally, a new session on how the delicate Israeli startups might dance with giant emerging economies such as China and India, will be discussed by WuXi AppTec, a large Chinese-US CRO that embraces both cultures. And from the Israel perspective, the podium will offer presentations from over 70 Israeli startups across medical devices and biopharma, including a specifically designed Cardiology Corridor addressing this traditionally active field in the New Jersey-sized State of Israel.
The biomed conference comes just as Israel is at the inception of a new law that aims to encourage angel investment in startup companies. In an earlier MDD article (Medical Device Daily, August 23, 2011) we described the newly approved Israeli Law that aims to encourage angel investment in fledgling companies. The new law, dubbed the ¡§Angel Law,¡¨ aims to attract small private investors to consider equity investment in ¡¥qualified¡¦ companies, in exchange for tax benefits to the investor.
Amos Ephrati, Deputy Chief of the Office of the Israeli Chief Scientist, spoke at a business event in Jerusalem, coordinated by the Jerusalem Business Networking Forum. Ephrati described the goal of the law as a further encouragement for potential angel investment into churning our more Israeli success stories. Later, he shared with MDD that even with only a few months having passed from the release of the official documents, there had been a plethora of applications, and already about five investment approvals, with many more in the pipeline.
The novelty of this new investment arrangement is the private investor can now invest in shares, and get Israeli tax benefits directly from such investment. To date, government financial incentives have focused on indirect incentives to investors, using state-matched investment in a company¡¦s R&D efforts and/or tax holidays (Chief Scientist funding, Government Incubators and similar schemes) giving leverage to their own investment. Now the government is offering the local angel opportunity to select a promising investment, and have it treated for tax purposes much like a charity donation.
The statute was approved as law in December 2010; but only a year later, the ruling was passed from the Tax Ministry to the Israeli Office of the Chief Scientist (OCS). The OCS¡¦ role in this case is as the expert arm of the tax authority, to approve the ¡¥innovativeness¡¦ element within the project, and to validate that the quality of R&D planned (and then executed) justifies such tax breaks. This due diligence is regularly carried out today by the OCS ¡V in a highly proficient manner ¡V for the hundreds of companies currently supported by Government R&D grants, with an army of top-quality experienced examiners acting as gatekeepers to the State¡¦s R&D funds.
The law intends to direct investors towards early stage high-risk high-reward initiatives. It therefore specifies a variety of elements that guide the suitability for such investment: (i) the investment must be primarily spent on R&D (that includes clinical studies & IP maintenance); (ii) the company must retain its private status for 3 years from the investment in order to qualify for the tax benefit. No short term exits as M&A or IPOs would justify the tax break. (Feel the pain, get the gain).
Some additional criteria make the law imperfect to say the least, suggest critics. If revenues are too high in the year of investment or the following year, the tax benefit is revoked. And high-net-worth investors will not be pleased with a new tax burden, just because an illiquid share of theirs is selling too well. Many say that while the biomedical environment will have little difficulty with this issue, any hitech or internet startup will not want to meet this criterion.
Attorney Joel Stein, Partner at Pearl Cohen Zedek Latzer, was clearly a maven in the law. ¡§It needs refurbishment before we start using it widely¡¨ he told MDD. ¡§The investment strategy today, in hi-tech,¡¨ he insisted, ¡§is to get a company through to market-testing as quickly as possible, and to limit losses ¡V particularly market expenses ¡V if the product does not appeal to the market. To tell an Israeli entrepreneur that he will be penalized for selling too well or too soon is against the interest of the company, the investor and the country.¡¨ Stein conceded that the biomedical community will be largely unaffected by this, but ¡§a greater euphoria from the hi-tech community embracing the (Angel) Law would have major spillover effects to biomed too,¡¨ he added.
In spite of the law¡¦s hitches right now, Stein told MDD that he believed that these matters would be solved in time. He mentioned that his firm was involved in establishing an Angel Fund: a group of local investors who are setting up a vehicle with which to invest in suitable companies that fit this Angel Law model. The fund will leverage the firm¡¦s core competence in due diligence, company mentoring and board management, to offer the lone private investor the potential of sector expertise, peer support and risk diversification ¡V and all with government tax breaks. After the short investment horizon, the Fund plans to transfer the shares back to the individuals (Limited Partners) to allow each investor to decide on his own preferred next steps with his portfolio companies: follow-on investment, and more/less active participation. The Angel Fund is submitting a request to the tax authorities to be approved as an accepted vehicle for such investment effort.
One analyst raised a key issue for the biomed community: A significant section of any medical startup is clinical studies, often performed in Israel and either in parallel, or thereafter, in Europe and/or the U.S. The chief scientist office has a policy of recognizing these expenses as R&D expenses, but the tax authority seems to have ruled out these particular critical (and costly) expenses. This is currently under review, the audience was told. Another expert explained to MDD how a fund-type model described above might, in the future, offer advantages for foreign investors too: in order to increase the fund size, some funds may offer improved terms to foreign ¡¥strategic¡¦ individuals or groups, even if the tax discount would be reduced for the Israeli investors.
One of the speakers additionally explained the background to the Israeli government¡¦s proactive encouragement of investment in small business. He expanded on two other incentives recently approved by the tax authority: The Foreign Employee Investment Initiative, encouraging non-Israeli scientists (especially those who had been previously residing in Israel) to receive many years of tax reductions if they revisited their homeland; and the Israel Corporate Investment Initiative, aiming to encourage the larger Israeli corporation to invest in purchasing IP-rich Israeli companies.
It appears that the Israeli government ¡V having experienced GDP growth every quarter since 2004 ¡V has every intention to further introduce novel approaches to maintain its position as a creative macro-manipulator in cultivating medical startups. Haim Shani, the previous CEO of the Israeli Treasury, is recognized by many as the architect of many of these novel industry-government incentives. At a recent Tel Aviv conference organized by the law firm Yigal Arnon and Co (Tel Aviv) celebrating entrepreneurship, Shani was applauded when he said, ¡§This new Angel Law is a very good law, with a few small points that will be ironed out in due course.¡¨
In addition to existing initiatives, Shani also told the audience of another plan to offer companies an additional competitive edge in the economy: green technology companies often need to show a beta-site in their home territory, in order to generate interest across the world. The government was now incentivizing Israeli companies to partner with these green technology startups. If only this model were extended to the medical devices community, it would motivate the use of this small Israeli market as a test site, which ¡V together with improved speed of regulatory approval in Israel ¡V would be an attractive bonus to local development. ƒ?