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Financing of Israel’s Life Sciences Activities
There are several sources of funding for the Israeli Life Sciences research and developmental activities. Exact figures are hard to come by, however, it is reasonable to assume that the local industry and academia spent approximately $800 million to $1.0 billion in 2004. The funding comes primarily from five sources:
| Table 1 |
| Financing Sources |
|
| Financing Source |
$ Millions |
% |
| Israeli Government |
308.0 |
30.3 |
| Competitive Grants (NIH etc.) |
130.0 |
12.8 |
| Binational Government Supported Foundations |
17.6 |
1.7 |
| Venture Capital |
287.0 |
28.2 |
| Self Funding Companies |
274.0 |
27.0 |
|
| Source: ILSI Database – 2004 and Industry Reports |
Government
Over the years, the Government of Israel has strongly encouraged the growth of high-tech industries in Israel, and significant government incentives are currently available for companies in this field. The Government encourages investment in industrial research and development through support and incentive programs created pursuant to the Law for Encouragement of Industrial Research and Development, 1984.
The Israeli Government offers substantial incentives to encourage capital investment and scientific research and development. The Israeli Investment Center is entitled to grant "Approved Enterprise" status to projects which meet the objectives of The Law for the Encouragement of Capital Investments, 1959. Income derived from an Approved Enterprise is subject to reduced tax rates. High-tech companies may also be entitled to grants covering the cost of fixed assets used in production facilities in designated areas.
Much of Israel's direct economic support of high-technology is provided through the Office of the Chief Scientist of the Ministry of Trade and Industry ("OCS"), which provides royalty-bearing grants of up to 50% of approved research and development budgets for specific projects. The grants are subject to repayment in the form of royalties on sales of the resulting products. In 2004, the OCS's budget for supporting technology companies is estimated at approximately $300 million or nis1.3 million.
Below is a chart showing a breakdown of OCS grants among high-tech industries during 2003. (PWC Press Release, Kesselman & Kesselman PricewaterhouseCoopers Money Tree™ Survey for 2003)
| Figure 1 |
Companies Receiving Grants from the Chief Scientist
by Industry: 2003 |
 |
| Source: PWC Kesselman & Kesselman |
Israel’s Technological-Incubator Program encourages and fosters technological entrepreneurship by individuals who are just getting started. The program supports R&D projects based on innovative technological idea that aims to develop products with significant marketing potential. The program’s budget for each project is $320,000 - $570,000 (1.4 to 2.5 million shekels, 85% of which are granted by the government for a period of 2 years.
The Israeli government has participated in the funding of a number of technology "incubators" throughout the country, which provide facilities, management and marketing guidance to scientists and small high-tech companies with novel ideas. The incubators program operates through 23 technological incubators scattered all over the country and at any given time approximately 200 projects are being carried out. The government also supplies political risk insurance and extensive marketing to export-oriented companies. For more information please (see www.incubators.org.il).
In addition, Israel participates in a number of bi-national research and development joint venture funds with the United States, Canada, Singapore, Korea and England, designed to fund research and development in science and industry. Israel is also a party to a number of national support cooperation agreements with several members of the European Union, China, Hong Kong and others, which agreements encourage technological R&D cooperation between Israeli companies and companies that are residents of the counties which are parties to the agreements. Grants for the approved research and development plan are provided with royalties payable upon the sale of the final product. Generally, in such bi-national projects, the Israeli company provides technology with the other partner(s) providing manufacturing and marketing expertise.
A rather recent development in Government financing is the establishment of the Heznek Fund. The Heznek program was launched by the Israeli Ministry of Trade & Industry to provide an incentive for private equity funds to invest in seed stage companies that would otherwise find it difficult to secure any major capital investment (at the seed stage). According to the program, the Heznek Fund is meant to invest in seed stage companies, together with prominent private equity funds, in return for an equity stake in the subject company. The private equity fund which invested together with the Heznek Fund receives an option to "buy-out" the Heznek Fund's equity stake prior to a merger or acquisition in consideration for the Heznek Fund's initial investment - thus, providing an incentive to the private equity fund equal to the increase in value of Heznek's stake from investment to the exercise of the option. The grant of this incentive to the private equity fund is intended to encourage the fund to make the seed-stage investment by potentially increasing its upside from the investment.
The Council for Higher Education is the state institution in Israel responsible for higher education, including teaching and research. The Council for Higher Education’s Planning and Budgeting Committee, PBC, is the executive arm of the council and was established by a decision of the government.
The functions of the PBC, as delegated to it by the Council for Higher Education are:
- To be an independent intermediary body between the government and national institutions, on the one hand, and the institutions of higher education, on the other, regarding all budgetary issues for higher education;
- To propose the regular budget and the development budget for higher education, while taking into consideration the needs of society and the State, and while safeguarding academic freedom and assuring the advancement of research and learning;
- To have exclusive authority for disbursing the global authorized budgets to the institutions for higher education;
- To propose to the government and the Council for Higher Education plans for the development of higher education, including their financing;
Although specific data is currently not available, it is estimated that of the approximately $1 billion PBC allocates to the Institutions of Higher Education (IHE) $400 million or 40% is directed to Life Sciences. It is further estimated that approximately 50% or $200 million are allocated to research and development.
Venture Capital
Venture Funds invested a record $287 million in Israeli life sciences companies in 2004 a 17.6% increase over the $244 million experienced in 2001 - the bubble year (see Figure 2). This amount exceeds our earlier estimates where we believed investments will reach $200 million.
Comparison of venture investments in the life science in Israel, Europe and United States reveals that while medical device investments make of the lion share of total investments in Israel - up to 79% (see Figure 3), BioPharma is the preferred investment of the European VC - up to 85% and of the U.S. Venture Capital funds - up to 67%. The year 2002 is the only aberration in the Israeli VC funding scene with BioPharma investing making up 75% of the total. In general, approximately 60% of VC life science investments in Israel are in the medical device arena and the balance is in the biopharma sector.
| Figure 2 |
| Venture Capital Investments in Israel: 1997-2004 |
| (Mill $) |
 |
| Source: PWC Kesselman & Kesselman |
| Figure 3 |
Percent of Venture Capital Investments in
Medical Device / Biotechnology |
 |
| Source: PWC Kesselman & Kesselman |
Private Sectors
The private sector, namely Israeli companies that support their research and development out of internal resources, spent approximately $275 million. It is important to note that the largest contributor is Teva Pharmaceutical and as such there may be overestimation as the latter does receive money from the Chief Scientist Office and in addition spends a proportion of its R&D budget abroad. To counter that, one needs to assume that international Pharmaceutical companies spend money in Israel on their clinical projects, therefore increase the R&D spending in Israel.
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