State Aid in Life Sciences in Israel

Published by Yuval Horn. Horn & Co. Law Offices, Israël

What is the size of the market, and what are current trends in Israel?

Israel is one of the worldwide leaders in the innovation and export of technology. In 2010, Israel was ranked fourth in the world in terms of the number of patents per capita and second in Europe in terms of the number per capita of private biotech companies with products in the pipeline, as listed in Genetic Engineering and Biotechnology News, dated 8 June 2009. Israel is ranked number one in the world for the number of start-ups per capita and third in the world for venture capital availability, according to the IMD World Competitiveness Yearbook 2009. In 2010, 109 Israeli biotech companies raised an aggregate amount of approximately US$350 million, an amount that is similar to the amounts raised during the years prior to the recent economic crisis, and a recovery trend, compared to the recent years, may be detected. Furthermore, as a reaction to the growing public interest in biotech and biomed companies, The Tel Aviv Stock Exchange (TASE) has accepted many early stage drug development and device companies for trade. In 2006, the TASE lowered the threshold for research and development companies, enabling very young enterprises to seek public funding despite short track records and no sales (or regulatory approvals). Market appetite has, during recent years, supported the public funding of biotechnology companies. On March 2, 2010 the TASE launched the Biomed Index, which includes Biomed Companies that have an average market value of at least 50 million shekels (approximately US$14.5 million) 25 per cent of public holdings, valued at 25 million shekels (approximately US$7.25 million) or more. There are 50 companies categorized as biomed companies, whose securities are traded on TASE. As of November 2011, 30 companies are included in the Biomed Index.

What kind of State aid schemes for life sciences exist in Israel?

Many drug discovery projects have been supported by the Office of the Chief Scientist (OCS) at Israel’s Ministry of Industry, Trade and Labor. The OCS operates by virtue of the Law for the Encouragement of Industrial Research & Development, 1984 (the “R&D Law”), and is responsible for the implementation of governmental policies regarding the support of research and development activities in the Israeli industry. The OCS implements a wide variety of support programs aimed at encouraging entrepreneurs, investors and companies to enter into early research and development projects, which by nature are highly speculative and involve substantial risks. The OCS has announced its intention to prioritize projects in the fields of biotechnology and nanotechnology. OCS programs include: grants for specific research and development projects; repayable through royalties upon future commercialization of products resulting from the funded projects; programs for the support of development of generic technology through collaboration between industrial companies and Israeli academic institutions; support of research and development centers in academic institutions, multinational support and collaboration programs; and the OCS Technological Incubators Program, established in 1991. Technological incubators provide entrepreneurs with the preliminary support and infrastructure necessary to develop their innovative technology during the first two years of development for future commercialization. The privately held, statesupported incubators are required to provide entrepreneurs with physical premises, certain financial resources, tools, professional guidance and administrative assistance. Such support is intended to assist entrepreneurs with technological and scientific background and capabilities, who often lack relevant funding or commercial and corporate experience necessary for the establishment of technology oriented companies. Projects to be funded by the incubators are subject to acceptance procedures by the OCS professional committees, based on scientific innovation and commercial potential criteria. Project companies are subject to the provisions of the R&D Law, which prohibit the transferring of OCS-financed technologies and related intellectual property rights outside of Israel, except under limited circumstances. The R&D Law imposes further limitations with respect to the manufacturing of products outside of Israel, which may result in enhanced liabilities towards the OCS under certain circumstances. The OCS provides the incubator with a convertible loan of up to 85 per cent of the project’s authorised budget, which should not exceed US$460,000 to US$580,000, depending on specific characteristics of each incubator, for a project support period of two years. Under certain terms and conditions, projects in the field of biotechnology may be entitled to a third support year and additional financial support. The incubator is required to provide, the supplementary investment of at least 15 per cent of the project’s authorized budget.

What else could be done to promote young life sciences companies in Israel?

In the last decade the budget of the Chief Scientist has declined in a real rate of 36.3%: approximately US$408 million in 2011 compared to US$641 million (in 2011 prices) in the year 2000. According to the OCS, as a result of the budget shortage, more than 500 research and development (R&D) requests, requiring an investment of approximately US$486 million in the aggregate, are not being examined and considered. Furthermore, based on industry demand for R&D, currently, the shortage of the R&D budget is estimated in approximately US$128 million, out of which US$106 million are intended for the OCS R&D Fund and more than US$11.5 million are intended for the OCS Technological Incubators Program. It seems that though the financial benefit to the State is clear (approximately each dollar invested in R&D through the OCS grants, contributes to the economy 5 to 10 times the investment), the State dries out one the its most innovative and important economic assets. Therefore, before suggesting new and creative ways to further promote young life science companies in Israel, the OCS budget should be increased, at least in order to equalize it to the OCS budget prior to the recent economic crisis. The decrease in the grants by the State leaves a vacuum the private sector cannot fulfill, both because of its risk aversion to such highly speculative investments and also as a result of the economic crisis. Thus, in order for Israel to remain a world leader in the amount of governmental investments in R&D, it must dedicate an adequate budget to the OCS, and thereupon enable a continued growth of knowledge based companies.