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Turning the biomed dream into financial reality

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Friday, February 4th, 2011

Hadasit Bio model is unique, as it allows investing public access to Hadassah’s medical innovations – and the start-ups based on them.

The term “biomed” has become, over the past two years, a magical word. Dozens of biomed companies have held public offerings on the local capital market and have allowed Israel’s investing public to take part in the dream of the “next Teva.”

Hadasit Bio Holdings Ltd., which became public within moments of being established, allows that same public to take part in that same dream, but in a slightly different way from what it had been used to until now.

The seeds of Hadasit Bio were planted 93 years ago, when the original version of Hadassah Hospital was set up on Jerusalem’s Rehov Hanevi’im. With time, the hospital became one of the largest medical institutions in Israel and one of its leading medical R&D centers.

About a quarter-century ago, when the local technology and venture-capital industries began to flourish, the hospital decided that the research and development center that it built could generate exits, and it set up Hadasit – the Technology Transfer Company of Hadassah Medical Organization, which today is one of the shareholders in Hadasit Bio.

The goal of Hadasit was fairly simple: to advance and commercialize the intellectual property and R&D capabilities in the medical and biotech sectors, whose source, whether in part or in whole, was the hospital and its researchers. Commercializing those intellectual property and/or R&D capabilities happened, in most cases, through granting licenses to pharmaceutical or biotech companies to use the intellectual property and capabilities, in return for receiving future royalties.

To turn an idea into a commercial product, lots of money is needed. So six years ago, Hadasit established a subsidiary, Hadasit Bio, took it public on the TASE and raised $8 million for it. Later, through convertible debt issues, private placements and rights offerings, Hadasit Bio raised another $19m. And set off.

Hadasit Bio was intended to provide an answer to an unmet financial need, which is “crossing the valley of death in the drug development process,” as the company describes it. In a first stage, a start-up needs about $50,000-$500,000 to conduct first clinical trials, register a patent with the patent office and for other expenses.

Sources of capital for that stage are primarily angel investors and academic institutions.

In the second and later stages, the start-up needs more than $50m. To conduct clinical trials. Sources of capital for those stages are primarily VC funds and pharmaceutical giants.

Between those two stages, there are substages that need more funding (such as to finance animal trials and applying for FDA approval of human clinical trials), but it is harder to find funding sources.

Hence, the valley of death.

“This is the stage where we come into play,” says Hadasit Bio CEO Ophir Shahaf.

Hadasit Bio works for its portfolio companies, which it chooses from those of its parent company, Hadasit. It looks to find financing for first human trials, and immediately afterward (on average, about a year and a half after the start), the company works to find a strategic partner – usually a pharmaceutical company that will bring the portfolio company to the next stage in its life.

Currently, Hadasit Bio’s portfolio consists of eight companies at various stages of development; four have begun Phase I/II trials, and the others will begin Phase I/II trials within a year to a year and a half. The eight companies operate in one of the three areas on which Hadasit has decided to focus: oncology, autoimmune diseases and tissue engineering and stem cells.

Hadasit Bio’s business model is somewhat unusual from both a local and global perspective.

On capital markets, and not just Israel’s, there are biomed or biopharma companies, and there are VC funds such as Teuza – A Fairchild Technology Venture Ltd. And Tamir Fishman Venture Capital. But there are no holding companies that hold a portfolio of start-ups, backed by a world-class research institution such as Hadassah.

Hadasit and VC firms are different in several ways. VC funds are limited in their investment horizon and must produce returns within a preset time frame. They have a wider capital base, which allows them to invest in many companies at the same time, but prevents them from being involved in their day-to-day management.

Hadasit Bio, in contrast, has more stamina, though as a public company it does need to show results for its investors; the ability to be involved in the day-to-day running of its portfolio companies; and no less important, a nearly infinite deal flow of start-ups, as the commercial arm of Hadassah Hospital.

“Even the best venture-capital fund will always need to work hard to convince the most brilliant entrepreneur to allow it to invest in his or her invention,” Shahaf says. “Hadasit Bio doesn’t have that problem.”

In fact, Hadasit Bio has exclusivity on any future development that arises within the hospital’s walls. But the company chooses in which developments to invest, according to preset criteria.

The promise inherent in the Hadasit Bio business model does not necessarily come from Hadassah. Global pharmaceutical giants, including Teva Pharmaceutical Industries Ltd. And Pfizer, have changed their approach in recent years, and instead of acquiring companies after they prove the effectiveness on people of their developments, they buy them or invest in them much before the clinical trial stage, with the goal of widening their product offering and reducing the damage that will hit them in the future as the patents on their innovative drugs expire.

Shahaf does not have a medical degree, and he is a lawyer by training. However, his role has given him in-depth knowledge of medical concepts that others have a hard time digesting. Shahaf is the person who decides in which developments at Hadasit (the parent) Hadasit Bio will invest.

The decisions are made based on four criteria: The development has a giant target market whose value is at least close to $1 billion; the time to clinical trial is between a year and a year and a half; the patent needs to be relatively “young,” not at a point where it has “burned” most of its years in effect (patents generally are given for 20 years); and the development has successfully passed the feasibility stage.

Shahaf is aware that investors in the capital market are quite impatient and prefer Hadasit Bio’s portfolio companies to be sold, rather than wait for the day when they receive royalties.

“I am an equity player,” he says, “and so I will always prefer to sell a company – in whole or in part – to a player like Teva.”

Whether to sell or not, Hadasit Bio still does not have a sufficient track record. But Shahaf feels comfortable enough with three out of his eight portfolio companies: Enlivex Therapeutics, which is in talks to bring in another investor; Cell Cure, in which Teva invested $1m.; and BioMarCare Technologies, which is also nearing a collaboration with a third party.

Shahaf says Hadasit Bio expects to invest in at least one other company out of Hadassah this year, and the company is considering other possible investments in the medical-device sector.

“Our investment strategy is called ‘revolving door,’” he says.

It is likely that Hadasit Bio will take leave of one of its portfolio companies this year, Shahaf says, adding, “You also have to know when to turn off the faucet.”