DRAFT

Case studies of Israeli Medical Device Companies

IFISE Project

Dan KaufmannChen LevinEfrat Zakai

THE JERUSALEM INSTITUTE FOR

ISRAEL STUDIES

1

Table of contents

OVERVIEW OF THE MEDICAL DEVICES INDUSTRY................................................................4

1. THE MEDICAL DEVICES MARKET ........................................................................................... 5

THE MEDICAL DEVICE SECTOR IN ISRAEL AND IN ITALY...................................................6

1. ISRAEL .................................................................................................................................... 6

2. ITALY .................................................................................................................................... 10

QUANTITATIVE AND QUALITATIVE RESULTS........................................................................14

1. RESEARCH SAMPLE .............................................................................................................. 14

2. SUMMARY OF RESULTS ......................................................................................................... 15

3. ENTREPRENEUR BACKGROUND ............................................................................................ 16

4. TRIGGER AND REASONS FOR COMPANY FOUNDATION ......................................................... 18

5. SOURCES OF FINANCE .......................................................................................................... 20

6. CONTRIBUTION OF THE INVESTORS ..................................................................................... 23

7. LICENSING, PATENTS AND KNOWLEDGE .............................................................................. 26

8. PROFILE OF SUCCESSFUL ENTREPRENEURS ........................................................................ 27

CRITICAL POINTS AND POLICY RECOMMENDATIONS.......................................................30

2

Overview of the medical devices industry

A medical device is defined by the U.S. as an instrument, apparatus, implement, machine,

contrivance, implants, in vitro reagent, or other similar related article, including any

component, part or accessory which is:

1. Recognized in the official National Formulary, or the U.S. Pharmacopeia, or any

supplement to them.

2. Intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation,

treatment, or prevention of disease in man or other animals.

3. Intended to affect the structure of any function of the body of man or other animals, and

which is not dependent upon being metabolized for the achievement of any of its primary

intended purposes.

Confusion sometimes exists between unregulated consumer products and medical devices.

Products are not considered medical devices if they have general utility but are neither

dedicated to, nor intended or promoted for, medical applications.

General

While public equity markets have warmed considerably towards biotech companies during

the last year, medical device and diagnostic companies have not benefited as widely from the

genomics hype that has driven biotech IPOs and market caps. Although financing for mature

medial device companies is better than is was last year, start-up companies still face

significant problems with securing capital.

Like biotech companies, medical device and diagnostic companies also face FDA and

European regulatory processes which is a critical and time consuming step contributing to

long product development cycles. Initial approval marks the beginning of a very complex

approval process. In the United States for example once FDA approval is secured, a device or

diagnostic must be approved for reimbursement by the Health Care Financing Agency

(HCFA), which is the administrator for Medicare and Medicaid Programs. HCFA’s

judgements often influence a private insurer’s decision to provide reimbursement for a

particular device. HCFA’s reimbursement approval process is also lengthy and ill-defined and

can often make or break a young company.

These alone are often frustrating challenges for medical device companies. In addition, they

are also faced with the uncertainty of the healthcare market.

The demand for medical devices is influenced by an increasing patient population and the

focus on health care cost containment and preventative therapies. Medical devices include a

broad range of surgical devices and equipment used in cardiovascular, orthopedics,

respiratory, ophthalmic, neurology, urinary, disposable, infection and more.

3

1. The medical devices marketThe global medical device market was valued at over $100 billion, of which $43 billion was

generated from the U.S. market.

The U.S. is still the largest medical device market and leads the world in advanced medical

technologies. The U.S. medical device industry is expected to grow at a compound annual

growth rate of 9 percent between 1999 and 2004. It will continue to develop new innovative

devices in minimal invasive surgery, cardiovascular, and orthopedic implants. However, cost

containment constraints in the healthcare system have contributed to hospital cutbacks in

medical device purchases.

The medical device industry outside of the U.S. has grown significantly in recent decades.

During the 1980’s, markets outside of the U.S. accounted for less than 25 percent of the

global medical device industry. Today, it represents about 60 percent. Latin America and Asia

(excluding Japan) are the fastest growing regions in medical devices.

Western Europe is the second largest market and accounts for nearly 25 percent of the global

medical device industry. Similar to the U.S., Western Europe will continue to invest in

research and development and develop new technologies in surgical devices.

In Germany, for example, the market for medical devices is estimated at USD 12.5 billion

(2000), approximately 13 percent of total health expenditures. There are roughly 1,200 local

medical device manufacturers, which produced medical devices valued at USD 8 billion in

1999. The major consumer group is the in-patient, hospital sector, accounting for USD 7.5

billion in the year 2000, followed by the out-patient sector valued at USD 5 billion. As a

result of health reform 2000 and cost and cost-containment measures, local production is

expected to increase only moderately by 1.3 percent per year in the next years. Experts

consider medical devices a growth market with excellent potential for U.S. suppliers of

innovative and price-competitive products. U.S. medical device exporters to Germany hold a

30 percent market share and, with CE marked products, will continue to find excellent

potential in Germany and other European countries.

In Asia, the Japanese market has the highest level of advanced medical technologies and

economic development. Countries such as China and India will have greatest growth potential

due to their large population and developing healthcare system. Also, countries in Southeast

Asia will exhibit high growth as their economies and healthcare systems continue to improve.

Latin America is also one of the fastest growing markets in the global medical device

industry. Countries such as Mexico, Brazil, Argentina and Chile are becoming more

industrialized and are expected to show significant growth in medical disposable supplies and

equipment.

4

The structure of the medical device industry has been changing due to acquisitions and

mergers. Multinational manufacturers are consolidating in order to establish greater presence

around the world. Some of the largest medical device companies have a number of

subsidiaries such as Johnson & Johnson (e.g., Ethicon, DePuy, Cordis, J&J Medical,

Critikon), Boston Scientific (e.g., SciMed, Microvasive, Schneider, EP Technologies) and

Tyco International (e.g., Kendell, Shewood Davis & Geck, U.S. Surgical).

The medical device sector in Israel and in Italy1. Israel

Israel’s healthcare sector remains amid a period of uncertainty. The continual

political instability of recent years has been a marked factor in this malaise;

healthcare policy has changed frequently and often faced widespread opposition. A

major issue of contention is cost containment measures proposed in the wake of

growing expenditure levels.

The Israeli medical device market is the largest in the Middle East and was valued at

an estimated US$400 million in 2000 (Medistat, 2001). Despite the existence of a

vibrant and rapidly expanding medical industry in Israel, the market is still heavily

dependent upon imported goods. Market growth has been limited to below one per

cent per annum in recent years, against a background of the economic slowdown and

continued attempts by the government to contain costs.

Medical regulations

All medical devices, whether manufactured locally or imported, are subject to a

Ministry of Health directive. The registration Authority is the Medical Device

Department of the Ministry of Health.

Market for medical equipment and supplies

The Israeli medical device market is the largest in the Middle East and was valued at

an estimated US$400 million in 2000. Per capita spending on medical devices in

2000 stood at US$66. Medical devices imported from the U.S. account for over two

thirds of the market, with Israeli manufactured products contributing around a further

20%.

Both imports and exports have risen strongly throughout the 1990s (see figure),

although 1997 and 1998 saw import growth decline considerably while exports

continued to increase sharply. The growth in exports has been particularly strong

5

since 1994, with the effect of increasing Israel’s positive balance of trade in medical

devices nearly seven-fold to US$404.2 million in 1998.

Source: Meidstat, 2001.

Domestic production

Israel has a strong medical device industry, with approximately 150 companies with a

combined turnover of over US$600 million. Around 80% of domestic production is

exported.

Israel has several companies of international renown, including Laser Industries (ESC

Medical), Oridion Medical and Mennen Medical. Israel’s best known medical device

companies, Elbit Medical Imaging, and its subsidiary, Elscint, were split up and sold

during 1998.

Many of Israel’s smaller companies are characterized by their high-tech innovative

products, a result of strong government backing for R&D.

Leading domestic manufacturers include Aerotel Ltd, Agar Eletronics Ginosar, Atlas

Researchers Ltd, AVR Communications Ltd, Card Guard Scientific Survival Ltd,

CMT Technologies, Deldent Ltd, Elbit Medical Imaging, ESC Medical Systems,

Medoc, Mennen Medical Ltd, Teva Medical, Oridion Medical, Tius Elcon Ltd and

Tuttnauer Co. Ltd.

Teva Medical is a subsidiary of Teva Pharmaceuticals, one of the largest

pharmaceutical manufacturers in Israel. Teva Pharmaceuticals also claims to be the

largest manufacturer and supplier of hospital disposable supplies in Israel, through its

wholly owned subsidiary, which was formerly known as Adam Medial Products Ltd.

This company was founded through the merger of Trevenol Laboratories Ltd and

6

Migada Medical Equipment Industries Ltd. Teva Medical’s range of disposables

encompasses IV products, surgical sutures, blood bage and other products that

complement Teva’s pharmaceutical lines. Travenol also provies home services.

Teva Pharmaceuticals reported a 36.5% rise in sales in 2000 to US$1.7 billion.

Operating profit increased by 34.8% to US$244 million, with net profit rising 27% to

US$148 million. Hospital supply revenue accounts for around 6% of Teva’s total

turnover, standing at US$68.98 million in 1997.

Exports of hospital supplies only account for a limited share of total sales. They are

based largely upon the ported IV cannula, Veno-O-lit, which is sold predominantly in

Europe, and the SampLink blood sampling device for blood collecion bags, which is

sold mainly in the US.

ESC Medical Systems, incorporated in Israel in 1991, manufactures medical devices

utilizing lasers and proprietary intense pulsed light technology for non-invasive

treatment of varicose veins, hair removal, skin cancer, skin rejuvenation, and other

aesthetic applications. The company also markets surgical lasers for a variety of

medical applications including ENT, OB/GYN and neurosurgery. ESC Medical plans

to change its name in late 2001, pending shareholder approval, to Lumenis.

Corporate offices are located in Israel, where manufacturing, R&D and international

sales are headquartered. Wholly owned subsidiaries in the USA, ESC Medical

Systems Inc., Luxar and Sharplan Lasers, serve as the nucleus for direct sales in

major North and South American markets. Other subsidiaries are located in France,

Germany, Italy and the UK.

In 2000, the company had sales of US$161.6 million, an increase of 13.7% over

1999. Operating income stood at US$22.3 million in 1999, with net income at

US$17.3 million.

In April 2000, ESC Medical acquired Coherent Medical, a manufacturer lf laser and

light based technologies for medical and aesthetic applications. In March 2001, ESC

Medical signed an agreement with the Germany company Karl Storz GmbH & Co.,

for the worldwide distributin of its GyneLase, used in the treatment of menorrhagia.

Exports

Exports of medical equipment and supplies have more than trebled since 1992. Israeli

medical exports increased by 19.6% in 1998, standing at almost US$710 million.

Exports have been traditionally strong in the electromedical and medical X-ray

equipment sectors, due primarily to the presence of Elbit Ultrasound and Elscint.

7

However, exports of electromedical equipment and miscellaneous medical and

surgical instruments have surged in recent years to lessen the proportion of exports

derived from imaging equipment.

In 1998, exports of electromedical equipment amounted to US$224 million, an

increase of 81.9% over 1997 and equal to 31.6% of the total. Exports of medical X-

ray equipment rose by

21.5% in 1998, worth US4210 million and equal to 29.7% of the total. Israel exported

medical equipment valued at US$452 million in 1998, an increase of 23.5% over

1997.

The principle recipient of Israeli medical exports is the USA, accounting for 37.9% of the

total in 1998, worth US$269 million. The EU accounted for 40% of exports in 1998, with

Ireland the leading destination.

8

Exports by category, 1998

Electromedical equipment

30%Medical X-ray

equipment28%

Other8%

Miscellaneous medical

&surgical instruments

34%

Exports by leading destination, 1998

USA37%

Ireland16%

France3%

Other EU16%

Japan3%

Other16%

Germany5%

Brazil4%

c

2. ItalyMedical regulations

European regulation of the medical device market is currently in a transitional phase. Old

national regulations are in the process of being replaced by new EU medical directives which,

it is hoped, will lead to greater conformity and harmonization of the European medical

market. This is being done at present through two directives; one which covers implantable

devices incorporating a power source, and a second one which covers the vast majority of

medical devices from basic walking aids to sophisticated scanners.

Market for medical equipment and supplies

The Italian market for medical equipment and supplies is the fifth largest in the world and the

third largest in Western Europe, behind Germany and France. In 1999, the medical market

was valued at around US$3,350 million, equivalent to US$58 per capita. Despite having a

strong manufacturing sector, Italy has a large balance of trade deficit in medical devices,

exceeding US$1 billion in 1998.

Expenditure on new medical equipment is subject to government cost constraints. According

to a survey of Italy’s electromedical industry association, ANIE, public funding for new

electromedical equipment in 1997 amounted to only around US$235 million, around 20% of

1989 expenditure levels. This lack of investment has led to equipment becoming

“dangerously old”. Only 34% of all medical devices in public hospitals and clinics had been

installed in the previous five years, and18% were more than ten years old.

A combination of the recession, which affected most of Western Europe and government

efforts to constrain public healthcare spending, contributed to a sharp fall in the value of

Italian medical device imports in 1993. Exports showed more resilience, continuing to

increase, albeit at a slower rate than in previous years. Stronger growth resumed over the next

couple of years, peaking at 20.9% in 1995, before falling back to 3.3% in 1997. In 1998,

however, import growth picked up to 9.7%.

9

Domestic production

Italy has a strong medical manufacturing base with some 700 manufacturers of medical,

surgical and dental equipment and many producers of orthopedic and prosthetic aids. Few

Italian medical companies can be classed as world leaders in terms of size. The larger Italian

manufacturers are predominantly located in the industrial north of the country. Total Italian

medical manufacturing output is estimate at approximately US$2.2 billion, with around 50%

being exported.

Particular areas of manufacturing strength are in X-ray equipment, cardiology equipment,

implantable pacemakers, operating theatre equipment, anesthesia equipment, respiratory

apparatus, dialysis equipment and dental products ranging from instruments to dental chairs.

Electromedical manufacturers are represented by the Associazione Elettromedicali, affiliated

to the Italian Federation of Electrotechnical and Electronics Industry (ANIE). Established in

1996, the Associazione Elettromedicali currently represents 41 companies and 2,500

employees. According to the association, the domestic market for electromedical equipment

was US$711 million in 1997, an increase of 2.5% over 1996. Industry turnover was L926

billion, of L221 billion was exported. Imports amounted to L594 billion.

Major domestic producers include Artsana, Castellini S.p.A, Cosmed, Cremascoli Ortho

Group, Esaote Biomedica, Euronda, IGEA, Instrumentarium, Level Medical Systems, Major

Prodotti Dentari SpA, Medel Italiana S.R.L., Menarini, Remco Italia SpA. and Sorin

Biomedica.

Level Medical Systems, part of Simed (an international distributor) since 1989, manufactures

laser and magnetic therapeutic systems for rehabilitation and physiotherapy. The company’s

Levelaser range comprises the M1000 and M3000 battery-powered therapeutic laser systems

and the M300D, a high-power scanning diode laser system. Level’s product range also

includes an electro-therapy unit and a magnetic field system for home therapy, both of which

are portable.

IGEA is a privately owned company based in Modena, part Pfizer’s Howmedica until it

became independent in 1990. IGEA manufactures DBM ultrasound devices for the diagnosis

of osteopenia and osteoporosis, assessment of fracture risk and response to treatment, and

electromagnetic products used in bone repair. The DBM Sonic Bone Profiler assesses bone

density of the phalanges of the fingers for any indication of systemic bone tissue

modification. In 1999, IGEA launched Ellixia, a flexible solenoid device. Ellixia uses puled

electromagnetic fields to treat osteoarticular conditions involving cartilage degeneration and

synovial inflammation. The company is also researching other applications for

electromagnetism, particularly the use of electromagnetic pulses in cancer treatment.

The Esaote Biomedica group designs and manufactures diagnostic imaging systems and

monitoring equipment. The company is a world leader in dedicated MRI and claims to the

10

leading European manufacturer of diagnostic ultrasound equipment. The group also supplies

turnkey hospitals and distributes biomedical equipment in Italy for a number of other

manufacturers. The group’s headquarters are in Genoa. Manufacturing is concentrated in

Genoa and Florence in Italy and Maastricht in the Netherlands. Some manufacturing is also

undertaken at the group’s US site in Indianapolis.

Formerly part of the IRI Finmeccanica Group, Esaore Biomedica was the subject of a

management buyout in 1994, under the national programme for privatization. Its assets and

activities were transferred to the new company, Esaote SpA. The majority shareholder is

currently the Bracco Group, with 50% of the share capital.

Esaote has subsidiaries in Germany, France, the USA, Hong Kong and the Netherlands. In

1998, Esaote acquired Pie Medical from Philips, based in Maastricht, an established

manufacturer of ultrasound scanners. Pie Medical Group’s sales amounted to 53.7 million

guilders in 1998, an increase of 15.9% over 1997.

Esaote Group’s consolidated net sales increased by 11.6% in 1999 to 198.3 million euros,

compared with 177.6 million euros in 1998. Sales in Italy accounted for 41% of the total. A

further 19% were exports within western Europe, 17% were to the USA and 7% to China.

Ultrasound sales accounted for 57% of the total in 1999, equivalent to 113.4 million euros,

while dedicated MRI sales accounted for 11% of the total and non-imaging products for 9%.

Cremascoli Ortho Group, based in Milan, manufactures and distributes a wide range of

orthopedic implant products including hips, knees and spinal prostheses. The present

company developed from the orthopedics division of G. Cremascoli, which was acquired by a

consortium, including Hambro EuropeanVentures Limited in the UK, in 1997.

Cremascoli Ortho has developed a versatile modular product range, which includes the

Profemur revision stem and the AncaFit cup with ceramic inlay. The company also offers

customized prostheses throughout Europe. Outside Italy, the company has manufacturing

facilities in Toulon, France and a distribution network covering France, Great Britain,

Germany, Spain and Belgium.

Exports

Italian medical exports were valued at US$1,346.7 million in 1998, 1.17% less than in 1997.

Around 37% of the total comprised medical and surgical instruments, of which 6.6% were

syringes, needles and catheters. A further 10.9% was electrodiagnostic equipment.

The majority of exports are destined for European markets. In 1998, 15.3% went to Germany,

12.5% to France, 6.6% to Spain, 4.8% to the UK and a further 15.4% to other countries within

the EU. The remainder went mainly to Asia and the US, which accounted for 12% and 9.2%

of the total respectively.

11

Export summary, 1998 (US$000s)Total %

Medical Supplies 80,663 6.0Medical X-ray film 84,100 6.3Electromedical equipment 96,054 7.1Syringes, needles and catheters 88,273 6.6Dental instruments and appliances 104,709 7.8Other medical and surgical instruments 409,277 30.4Therapy apparatus 106,236 7.9Orthopedic and prosthetic appliances 118,106 8.8Medical X-ray, alpha, beta, gamma ray equipment 146,645 10.9Medical furniture 75,433 5.6Other 37,171 2.8Total 1,346,667 100Source: Medistat 2001

12

Exports by destination, 1998

USA9% Asia

12%

France12%

Spain7%

UK5%

Other EU15%

Other25%

Germany15%

Quantitative and qualitative results1. Research sample

There are approximately 150 firms operating in the medical devices sector in Israel. The 10

companies selected for the sample do not necessarily represent accurate industry trends, but

do provide case studies that illustrate more general trends. The companies in the sample were

selected according to specific criteria. Out of all medical devices companies, some of the

selected firms began their development in technological incubators and some were supported

by venture capital that originated in Yozma funds including Polaris, Nitzanim, Apax, Walden,

Vertex, Medica, Star and Gemini.

During the company selection process, emphasis was placed on mature companies at least

three years old that were founded during the 1990’s. The companies selected operate in

several fields included in the FDA medical devices definition. The companies selected are

(company names have been changed):

Healtech: Founded in 1996 in a technological incubator by a new immigrant, the company is

developing a product for tissue repair. Today, the company is in the human clinical trials

phase and has recently raised 7.5 million dollars from a specialized Israeli venture capital

firm. The company employs 15, 10 of which are new immigrants.

Rimo: The company is developing natural products for treating heart conditions and aging

symptoms. The company was founded in 1999 by a doctor in a technological incubator. The

company completed its incubation phase and continues to operate in the incubator on a rent

basis. There are 3 employees in the company.

Ramed: The company is developing a product for cardiac muscle failure and is currently

engaged in animal clinical trials. The company was founded in 1999 by a cardiologist with a

wide technical background in a technological incubator. The company employs 5 permanent

employees and specialized consultants as needed.

Or Sense: The company is developing a device for measuring blood sugar levels. This private

company was founded in 1996 by an entrepreneur with an advanced degree in the life

sciences who previously founded another company in a technological incubator. The

company recently raised 2 million dollars and is in the clinical trials phase. The company

employs 23, 9 of which are PhD’s.

Discure: The company is developing unique implants for orthopedic surgery, and was

founded in 1997 as a private company by two entrepreneurs experienced in the medical

devices field. The company employs a total of 80 and has branches in the United States and in

Germany. The company is currently negotiating a 20 million dollar venture capital round.

13

Visen: The company was founded in 1998 as a private company by a graduate of a military

development unit, and is developing a three-dimensional endoscope for operating rooms. The

company raised 6 million dollars and is currently conducting animal clinical trials. The

company employs 25, 3 of which are situated in the United States.

Prostech: The company is developing a device for prostate treatment. The company was

founded in 1990 as a private company and was later affiliated with a U.S. company. The

company employs 54 and has branches in both the United States and Germany.

Teleguard: The company develops and markets tele-medicine communication systems. The

company was founded in 1990 as a private company. The company employs 500 worldwide

and recently became public with a market valuation of 100 million dollars.

Obstetrix Intelligence LTD: The company was established in 1995 in a technology incubator.

The product being developed is a bedside computer-based system that will supply real-time

quality documentation and clinical management to hospital staff.

Biocomp: The company was established in 1998 as a subsidiary, private company. The

company is developing products and applications for 3D acquisition, reconstruction,

measurements and visualization of ultrasound data.

2. Summary of results The research pointed to two main start-up types; companies established in technological

incubators, and companies established independently. In analyzing the characteristics of the

sample companies, several main differences were identified between these two company

types resulting in different entrepreneur profiles. Diverse backgrounds and preferences

differentiate the paths chosen by the entrepreneurs to establish their companies. Three

entrepreneur profiles were identified:

The academic with an idea - a person with extensive academic background who

conceived an idea realized by establishing a start-up outside the university.

The employee who starts a company – a person with high level industrial background

who was formerly an employee of another company and chose to start a new company.

The serial entrepreneur – a person who has gained both industrial experience as well

as experience in establishing at least two different start-ups before turning to the present

venture.

Main characteristics

14

Entrepreneurs with academic experience were more likely to start their companies in

technological incubators, mainly due to the lack of industrial experience. The technological

incubators and the VCs provided these companies with the necessary guidance and assistance

including administration, management and business development expertise. In contrast,

entrepreneurs with industrial experience tended to establish their companies independently

relying on their own personal experience. Accordingly, these companies did not use the

technological incubators program, and tended to view the VCs as instrumental to securing

additional capital, strategic partners and key personnel and not as mentors.

Although the sample does not allow for statistically certain findings, it was suggested that as

of the mid 1990’s there is a more of a tendency for diverse entrepreneurial teams, as opposed

to lone entrepreneurs in earlier years. This could be a result of the maturing VC industry in

Israel. Whereas there was little VC in Israel in the early 1990’s, in phase II of the VC industry

development in the late 1990’s (see Israel VC report), the VC’s evaluation process included

the entrepreneurial background and experience, and it became much more important to

display diverse expertise. Companies established in technological incubators remain one-man

ventures despite the benefits of a wider entrepreneurial team, and this can be attributed to the

incubator rules restricting payroll and also to the entrepreneur profile (coming out of the

academia with no industrial networking experience).

3. Entrepreneur background In the analysis, companies founded in technological incubators were distinguished from

private companies founded by entrepreneurs with different sources of funding including self-

financing and venture capital.

Entrepreneurs of companies founded in technological incubators:

Entrepreneurs who chose to found their companies in a technological incubator had several

common characteristics:

Extensive academic background – all of the entrepreneurs interviewed have advanced

life sciences degrees in diverse fields of specialization. Among the entrepreneurs

there was a cardiologist with degrees in electrical engineering and bio-medical

engineering and a doctor with a first degree in physics, a second degree in biophysics

and a doctorate in biology.

Lack of industrial background – all of the entrepreneurs interviewed came into the

incubator directly from the academia without any prior industrial experience. One of

the entrepreneurs, a new immigrant from the former Soviet Union, was a laboratory

15

manager in both Russia and in Israel, but never managed a viable business.

Contracting, finding investors and pay-roll, were completely unfamiliar. Another

entrepreneur did not leave his academic position and continues to keep his tenure

while managing his company.

“The lone entrepreneur” – All of the incubator start-ups were initiated by a single

entrepreneur, who conceived the idea, developed it alone and only got other

personnel involved at a later phase during incubation.

A representative example is of Obstetrix. The entrepreneur finished his specialization as an

obstetrician and came up with the idea of creating a software-based tool to follow the birthing

process and provide the doctors with a tool to help in decision making. The entrepreneur had

several years of work experience as a Gynecologist before starting his company up with no

business experience. In many aspects choosing the framework of an incubator was a natural

decision, as he expected to get substantial business assistance from it. During the incubation

period the entrepreneur succeeded in forming a good managerial team and in raising money

from leading VCs.

Entrepreneurs of privately founded companies:

Entrepreneurs who chose to found their companies privately also had several common

characteristics:

Extensive industrial experience – One of these entrepreneurs was the CEO of a

similar company for several years before moving on to found his own company. Two

of the entrepreneurs had experience in the security industry and others had worked in

mature industrial companies or start-ups, where they gained relevant experience

before founding their own companies.

Experience in entrepreneurship – These entrepreneurs had experience in setting up at

least two companies and were wealthy from selling their previous ventures. Three of

the selected companies displayed this trend.

The two entrepreneurs that founded Discure became financially capable after

founding and selling two medical devices companies in the last ten years. The

accumulated capital helped these entrepreneurs in the first stages of the new

company’s development and in raising capital for later phases.

Or Sense was also founded by an entrepreneur who began by founding a company in

an incubator and decided to start his next venture as a private company.

16

Other distinguishing characteristics were identified among the companies founded in the early

1990’s and those established as of the mid 1990’s:

“The lone entrepreneur” – The companies founded in the beginning of the 1990’s

were started by single entrepreneurs that forwarded the venture on their own.

“An entrepreneurial team” – The three companies in the sample that were founded as

of the mid 1990’s were the initiative of a team from different complementary fields

such as a urologist and an engineer, an engineer and an economist and a medical

doctor and an entrepreneur, when at least one of the entrepreneurs had previous start-

up experience.

4. Trigger and reasons for company foundation As in the analysis of the entrepreneur, differences between incubator companies and

independent companies were found in regard to the entrepreneur background. While

reviewing the different triggers of entrepreneurs to set up new companies, a distinction was

made between entrepreneurs who chose to set up their companies in technological incubators

and those who chose the independent way. The triggers mentioned by the interviewed

entrepreneurs were diverse:

Companies founded in technological incubators:

The factors that influenced entrepreneurs to found companies in technological incubators

were common to all interviewed companies. The entrepreneurs came from the academia,

where they conceived an idea during their work, developed it to a point where they felt it

could be commercialized and decided to set up a company for further development. Different

personal reasons also played a role in the decision to found start-up companies:

Frustration from the academic world: One of the entrepreneurs, a new immigrant,

worked in academic research for six years. When he realized the chances of

becoming a faculty member were minute, he decided to develop an idea related to his

doctorate thesis. He then turned to the business world, outside the academia, for

further development.

Personal decision, self-fulfillment, satisfaction: One of the entrepreneurs, a doctor

who began to take interest in holistic medicine, was tired of his work as a doctor and

searched for a way to implement results from a study he conducted in the academia

that he believed had great potential.

An idea that can bring about significant change that could not be implemented in the

academia: One of the entrepreneurs came up with an idea that could potentially solve

a complex problem in body systems failure and thus save thousands of patients. The

17

entrepreneur could not forward this idea in the academia, which focuses on pure

research and he therefore left the academia to start his own company.

Companies founded independently:

The independent entrepreneurs are individuals with industrial background and experience

who are accustomed to a productive and creative working environment. Different factors

brought this type of entrepreneur to found a start up company:

An entrepreneurial lifestyle : An entrepreneur who is occupied with finding an idea,

founding a company, establishing the company and moving on to the next idea. As

the entrepreneur gains more experience, it becomes easier to found other companies.

Three out of the interviewed entrepreneurs have adopted this entrepreneurial lifestyle.

The entrepreneurs who founded Discure for example, are veteran entrepreneurs who

set up three different medical devices companies in the last ten years, one of which

recently became public, and two others were purchased by large companies. The

economic success of the companies, as well as the accumulated experience and the

reputation gained helps the entrepreneurs to continue and found new companies.

It was found that experienced entrepreneurs were able to raise funds more easily. One

of the entrepreneurs got another reputed entrepreneur involved in his company in

order to advance the company using his reputation and experience.

Layoffs and self-fulfillment: differing opinions in the workplace or the need for self-

fulfillment drive entrepreneurs to start companies. A person who feels they are not

developing in their position or that they are not sufficiently valued, sometimes

reaches the conclusion that setting up a new company will allow them to realize their

full potential.

One of the interviewed entrepreneurs was previously the CEO of another

medical devices company. Following some personal confrontations, he

decided to leave the company and start up another company in the same field

that tackles the problem from a different perspective.

VC takeover: Two of the entrepreneurs interviewed were forced to leave the company

once venture capital firms became involved. Board members from the VC decided to

replace the entrepreneur with an experienced manager. The reaction of one of these

entrepreneurs was to set up another new company.

Coincidental identification of a need and finding a practical solution: Exposure of

someone with technological background and experience to an existing need brought

two of the interviewed entrepreneurs to found their companies. The identification of

18

the problem originated in a personal need that proved to have no available solution on

the market.

A communications engineer came up with an idea following an operation he

underwent to remove a brain tumor. The existing equipment did not enable the best of

the field to remove the tumor due to perspective limitations during surgery. Following

this incident, the entrepreneur started to develop a three-dimensional endoscope for

operating rooms.

One of the other interviewed entrepreneurs, an experienced engineer, came up with

his idea during an EKG examination when he noticed a need for improvement.

5. Sources of finance The sources of finance available to the entrepreneur are diverse, and differ according to the

stage of the company beginning with pre-seed funds, followed by seed funds and venture

capital, and finally IPO or M&A. The type of capital sought by the entrepreneur depends not

only on the company’s development phase, but also on the experience of the entrepreneurs

themselves. Thus, there were observed differences in the type of capital raised between the

different entrepreneurs and the different company development phases:

Pre-Seed phase:

Finance for the pre-seed phase was usually followed by government support

programs. The pre-seed funds was important in order to initiate a company and

develop an idea to the point where investors can be found. Several sources of pre-

seed funding were identified:

Self financing or raising capital from family and friends: This form of capital raising

was pursued by four of the companies in the sample.

Angels: Wealthy individuals who invest relatively small amounts in start up

companies in return for a percentage of ownership. This form of capital raising was

pursued by two of the companies in the sample. The participation rules in the

technological incubators program require the entrepreneur to raise matching captical

of 30K in return for up to 20% ownership. Entrepreneurs who lack financial

capability are commonly left to seek out such angels.

“Tnufa” program: Tnufa is a government program that assists beginning

entrepreneurs by providing them with grants of up to 30K per year for two years,

19

intended to cover approximately 80% of the costs of writing a business plan, patent

registration and market studies.

The entrepreneur of Or Sense searched for a way to found a company other than

through the technological incubators. Although only one of the entrepreneurs

interviewed used the Tnufa program, it showed a great success as winning the Tnufa

grant exposed the entrepreneur to an American investment company which invested

350K in the company.

Seed Phase:

During the seed phase, the entrepreneur has several other sources of finance available, such as

venture capital funds, the incubators program, initial self-finance, and personal bank loans.

The following sources of finance were identified in the sample companies:

Venture capital funds: Two of the independent companies turned to venture capital in

their seed phase. Funds raised at this phase were between 350K and 2 million dollars.

The technological incubators program: Three of the selected companies chose to

locate in an incubator during their seed phase. The program provides the companies

with administrative infrastructure and 150K per year for two years. The entrepreneurs

are required to raise an additional 15% of the approved budget.

Self financing: The entrepreneurs of Discure chose to set up their company privately

using their own capital. They set up an investment fund of their own with capital

gained from the acquisition of their previous ventures.

Personal bank loans: This option was selected by both of the independent companies

founded in the beginning of the 1990’s. There was still no venture capital available in

Israel in this period, and the banks therefore served as an alternative, where the

entrepreneur was personally liable for the loan. The entrepreneur who founded

Teleguard took out a million dollars in personal loans to start the company.

The Chief Scientist of the Ministry of Industry and Trade: Most of the companies

took advantage of the support offered by the Office of the Chief Scientist (OCS) in

order to leverage their seed money towards further development. The OCS grants

offered cover 66% of R&D costs of up to 250K for two years, and 50% of R&D costs

as of the third year.

Capital beyond seed:

20

At this phase, the companies turn to investors for capital. The state minimizes its support, and

companies that began in incubators must also seek out venture capitalists and other strategic

investors.

Capital raised by companies founded in incubators:

Capital raised by these firms amounted to some 0.1 – 7.5 million dollars each:

Rimo initially raised 112K from strategic investors and in the end of the year 2000

succeeded in raising an additional million dollars from a group of local angels.

Healtech raised 7.5 million dollars in 1999 from a venture capital specializing in the

medical field.

Ramed raised 1.8 million dollars from a joint investment of strategic investors and a

venture capital firm.

Capital raised by companies founded independently:

Capital raised by these firms ranged from 1 million dollars to IPO at a company valuation of

100 million dollars.

Differences were observed in the amount of capital raised by older companies established in

the beginning of the 1990’s:

Prostech raised 10 million dollars in 1999 and is currently negotiating a similar

investment.

Teleguard became public in 2001 at a market valuation of 100 million dollars.

In contrast, the younger companies raised smaller amounts:

Visen raised 6 million dollars in 2001.

Or Sense raised 1 million in 1997 and an additional 2 million in 1998.

Discure was founded in 1997 and raised 9 million dollars a year and a half after its creation.

Today the company stands in front of a large investment round of 20 million dollars. The

excellent reputation of the entrepreneurs facilitated the capital raising process and helped

them raise such large sums.

6. Contribution of the investors The added value created by the investors in addition to financing, varies from company to

company. Several factors account for this variation:

21

Different sources of finance, strategic investors or specialized venture capital funds,

general VCs and incubators.

The number of ventures supported by the investors and the time available for

involvement in the portfolio companies.

The entrepreneurs, how experienced they are, how they react to advice and

suggestions, etc.

The added value mentioned by the entrepreneurs can be classified according to the different

sources of finance:

Technological incubators:

The technological incubators program is a government program supporting ventures from

diverse technology fields. The incubators also accept high-risk ventures that are still incapable

of raising funds independently. In addition to the financial support, the entrepreneur also

receives administrative support and is closely mentored in managerial issues. The incubator

provides a good start-up environment for researchers coming out of the academia. There are

no complex regulatory issues, and the entrepreneur receives support on a regular basis. A

researcher, who wishes to leave the academia through the university licensing authority,

encounters complex negotiations regarding ownership, IP and other crucial issues. Academic

researchers are usually unfamiliar with such procedures and it is therefore much easier for

them to become involved in a clearly defined program suitable to them such as the incubators

program.

The technological incubators host high-risk ventures that are not consistent with market

trends and are therefore not capable of raising venture capital. One of the entrepreneurs

recounted approaching some 20 different VCs but was unable to raise capital for a non “high-

tech” start-up.

Benefits of incubator specialization:

Administration: the entrepreneurs mentioned that the administrative services offered

by the incubator allowed them to concentrate their efforts and their capital on product

development.

Experience and expertise: the support offered by the incubator creates a learning

environment for inexperienced entrepreneurs in management and company

development. The entrepreneurs are thus able to start their companies in an organized

fashion, closely followed by the incubator team which includes experienced

personnel in accounting, law, working with suppliers, etc.

22

The founder of Or Sense mentioned that setting up his first venture in an incubator

provided him with the necessary experience and skills to successfully found Or Sense

independently.

Benefits of incubator professionalism

Management: all of the interviewed entrepreneurs stressed the importance of

professional incubator personnel, especially the incubator manager. The incubator

manager takes an active role in the daily management of the companies, is an active

board member, takes part in company decisions and provides the company with

advice and mentoring.

In one case, the entrepreneur blamed the incubator manager for jeopardizing the

future of the company while pursuing self-interest projects and abandoning the

incubator companies.

Two other incubator managers were described as exceptional people who

tremendously benefited the companies and did everything in their power to help them

succeed.

Attracting investors: the incubator managers helped the entrepreneurs attract strategic

partners and complementary funding. One of the incubators accepted a promising

company that was unable to raise complementary funds on its own. The company

stayed in the incubator without the complementary funds, and managed to raise the

required 20% capital from angels during this period.

The three incubator companies interviewed continue their stay in the incubators after the end

of the defined incubation period on a rent-basis. That these companies chose to stay in an

incubator displays the benefits associated by the entrepreneurs with the incubators.

Contribution of strategic investors

Strategic investors who invest in companies operating in related or complementary fields

provide the company with added value other than just the capital itself:

As a door-opener: When a reputed strategic investor such as J&J decides to invest in

a company, a positive reputation is immediately created since the product is assumed

promising. Companies that received such support expressed its importance in creating

opportunities for them and in attracting further investments.

Accessibility to information: Through collaboration with a strategic international

partner, a small company increases its accessibility to information. In the case of

23

Ramed, the strategic investor allowed the company access to its databases and

updated market studies.

Strategic partnership: A strategic partnership between the investor and the venture.

For example, the strategic investors of Rimo function as the company’s suppliers of

raw materials, as customers and as the marketing agency of the company’s products.

Contribution of venture capital firms

The contribution of the VCs to the entrepreneurs varies among the different VCs and firms.

There are significant differences resulting from the various models of interaction between the

firm and the VC. These include, the type of VC, is it a specialized fund? How many

companies make up the VCs’ portfolio? The experience of the entrepreneur? Etc.

The entrepreneurs in the sample gave differing perspectives on the contribution of the VCs.

The most apparent differences were between experienced and non-experienced entrepreneurs.

Management: representatives of the VC are members of the board and are involved in

the decision making processes of the company. The VCs help the companies solve

daily problems and provide business and marketing consultation.

The meticulous requirements of the VCs in proper company management

processes, and in regular reporting and updating, cause the companies to

function as an international company with clear and organized operating

procedures from a very early stage.

Inexperienced entrepreneurs tend to rely more heavily on the VCs. The

entrepreneur of Visen, for example, recognized his limitations stemming

from lack of managerial experience and is therefore very cooperative with the

investors. The company is in close contact with the investors, on a personal

level and on a day-to-day basis.

Experienced entrepreneurs however, tend to regard the contribution of the

investors as minimal. It was claimed that a VC company that is invested in

some 50 firms, cannot possibly contribute significantly to each and every one

of its portfolio firms.

The entrepreneurs who founded Discure and Teleguard mentioned that the

VCs did not contribute anything but capital, and this since the entrepreneurs

are more experienced in the medical devices field than the VCs themselves.

24

The entrepreneur of Prostech mentioned that even though the representatives

of the VC had ample experience in financial matters, they don’t always have

the best interest of the company in mind since for them the exit is the

immediate target.

Human resources: most of the entrepreneurs mentioned the fact that the VCs assisted

them in locating professional personnel for key functions such as a CEO in Israel and

abroad, and helped them in locating international experts.

In one of the cases, the VC pressed to replace the company’s CEO, who was

one of the entrepreneurs, with an American CEO.

Finding strategic partners and strategic investors: companies that have reputable VCs

as investors have an easier time raising capital. Several of the interviewed

entrepreneurs recounted that the VCs helped them find investors and strategic

partners and that this form of assistance is of particular importance in times of

financial crisis.

7. Licensing, patents and knowledge The licensing process for medical devices is very complex and requires expertise in

procedures for proper patent registry, knowledge of laboratory and chemical

standards, etc. Making a regulatory “error” in the beginning could potentially hold

back years of research and prevent rapid approval and commercialization of the

product. The entrepreneurs marked many difficulties encountered due to complex

procedures and non-conformity with FDA and European standards. Due to the

complexities of IPR, most of the interviewed companies employ the services of

consultants specializing in regulatory and patenting issues.

8. Profile of successful entrepreneurs Three types of entrepreneurs were identified:

The academic with an idea:

The entrepreneur is 45-55 year-old scholar, with no prior industrial experience, that

conceived an idea during academic laboratory work and decided to develop it

commercially by starting a company.

25

The “exhausted” employee with an idea:

The entrepreneur is a 45-55 year-old former employee of an industrial company. The

entrepreneur decided to leave the workplace, after feeling fulfilled or unfulfilled, and

start a new company based on a new idea.

The “serial” entrepreneur:

The entrepreneur is 30-55 year-old and has created over two new start-ups. This type

of entrepreneur puts a lot of effort into finding new ideas for implementation and as

soon as such an idea is found, a new company is set up to develop it. In this manner,

the entrepreneur moves from one company to the next, always on the lookout for the

next venture.

Analysis of successful entrepreneur profiles

In order to illustrate the different entrepreneur profiles, we chose to present a detailed

example for each type.

The academic with an idea: Healtech

The company was founded by a new immigrant from the former Soviet Union, an

academic with a first degree in physics, a second degree in biophysics and a doctorate

in biology. The entrepreneur arrived in Israel in 1990 and received a research grant

from the Chief Scientist. He worked as a guest researcher in a reputable academic

institution on a grant basis for six years before realizing his chances of attaining

tenure were slim.

Belief in the potential of his idea, along with the need to make a better living and

become more independent, drove the entrepreneur to realize the idea conceived

during his years of research by starting his own company. At this stage, he had

already proved the efficiency of the product on rats and received approval to proceed

with human clinical trials.

26

The entrepreneur chose to found Healtech through the technology incubators

program, but as he did not manage to raise the required complementary funds, the

incubators he approached turned him down.

In July 1996, with the assistance of a local government official, the entrepreneur was

matched with an incubator manager who realized the company’s potential. The

project was accepted into the incubator without the required matching funds, and

during the first year of activity, the funds were raised from angels in the food and

beverage industry. Whereas most investors the entrepreneur encountered demanded

60-80% ownership, these angels were not greedy and agreed to invest in return for

20% ownership approved by the program.

The incubator proved very helpful to the entrepreneur, who recounted close

mentoring with company management issues, the organizational structure and the

assistance provided by consultants, lawyers, and accountants. The incubator manager

was especially helpful in finding investors, in negotiations, signing contracts, payroll

and different management aspects. In addition, the entrepreneur gained practical

experience by attending conferences and seminars, and by being referred to relevant

literature.

At the end of the incubation period one of the Venture Capital firms made the

entrepreneur an offer whereby six months of human clinical trials would be funded

and closely followed by international experts in order to assess possibility of future

investment.

The entrepreneur chose to stay in the incubator and continue to benefit from its

services. The budget was used sparingly and he managed to continue activities for

another full year. In the end, the entrepreneur turned down the VC offer, which was

too low in his opinion, and continued to search for other opportunities.

The incubator manager found a group of accountants interested in the company and

also brought in an expert for evaluation. One of the leading specialized VCs in Israel

relied on this evaluation, and in the beginning of 2000 invested 7.5 million NIS. The

company relocated to a specially designed building after four years of operation in the

incubator. The company employs 15, 10 of which are new immigrants, and is

currently in the human clinical trial phase. To date 10 experiments have been

conducted and 60 others are planned.

The “exhausted” employee with an idea: Teleguard

27

The entrepreneur of the company is an engineer with twenty years’ experience from

one of the leading electronics firms in the country. At one point, the entrepreneur

underwent standard medical examinations, which included an EKG examination, and

noticed that a nurse was measuring deviations using a ruler. At that instant, he came

up with the idea to perform the analysis using a computer and he left his job at the

age of 40 to start a new company.

In the beginning of the 1990’s there was still no venture capital available in Israel.

The initial funding was raised through personal bank loans. The bank manager was

very impressed by the entrepreneur’s charisma and ample experience and agreed to

grant a loan for the new company. Altogether, the loans amounted to about one

million dollars.

During the first year of operations three people worked in the company and they

managed to produce and sell a product within one year. Initial sales were made in

1992, prior to securing approval from the FDA. The instrument was sold at this point

to institutions in Australia and South Africa that did not require the FDA approval as

a pre-requisite. After securing FDA approval in 1993, the company raised 1.5 million

dollars from a VC. The company continued to grow and develop until it became

public with a market valuation of 60 million dollars. The entrepreneur was the one

who pushed the company forward to IPO, wishing to exit the VC’s, as well as to

allow for the growth and development of the company, increased marketing and

R&D, the hiring of more personnel, and to be able to begin negotiations with new

strategic partners from a higher starting point.

In 2001 a second IPO round was successfully carried out, despite the crisis, at a

market valuation of 100 million. The entrepreneur told of big plans for the future of

the company, and is currently concentrating his efforts on keeping the investors

satisfied.

The “serial” entrepreneur: Discure

The company was founded in 1997 by two veteran entrepreneurs: an engineer and a

urologist. The two founded their first company ten years ago and was sold for over

200 million dollars. A second company founded by this pair was sold a year ago to an

American company.

Part of the capital accumulated was reinvested in starting new ventures. The found an

idea and decided to start another company. In 1996 they hired a person with a rich

28

background in the security industry, with a first degree in law and economics and a

second degree in business management as the CEO. During the first year they worked

together on feasibility tests as well as patenting. In 1997, office space was rented and

the company began hiring personnel.

During the first year and a half, the entrepreneurs themselves funded the venture.

Once the feasibility studies were complete, they succeeded in raising 4 million dollars

from private investors they were acquainted with from their previous ventures, and an

additional 5 million dollars from three VCs.

The contribution of the VCs to the firm was solely financial. The entrepreneurs had

more experience in the medical devices field than the VCs, and they looked for

investors who would fund the company with as little involvement as possible in daily

affairs.

The company’s first product received CE approval followed by FDA approval a year

later. Another full year passed until the company was granted a permit to sell its

product in Israel, restricted to 5 medical centers.

The company employs 80, 60 of which are in Israel, 10 in the United States, and 10

more in Germany.

Today the company stands before a 20 million dollar round from an international

investment bank or from one of the large companies that will enter as a strategic

partner.

Critical points and policy recommendationsThe medical devices field is a difficult one for raising capital. Unlike other high-tech

companies, an engineering degree is not necessarily enough and it usually takes 7 years of

medical school to understand the ideas behind the ventures. For this reason, many of the start-

ups begin in technology incubators.

The core team

There is tremendous importance to the talent and experience of the entrepreneurs in founding

and managing companies.

Experienced entrepreneurs understand this need, and after years of experience in the field

they know the people who will help them recruit the best in the field to form the core start-up

team.

29

The venture capital firms have also undergone a learning process and have begun to evaluate

the quality of the leading team before making an investment.

In technology incubators, the situation is somewhat different. In an incubator the entrepreneur

starts operating alone. The strict rules governing payroll in the program do not allow the

entrepreneur to hire top level specialized experts. This keeps incubator start ups from the

benefits associated with an excellent core group.

Recommendations:

Emphasis must be placed on the importance of forming an excellent core group

Incubator rules governing payroll should be changed to enable start-ups to hire top-

level experts when needed.

Incubator management

Tremendous importance is attached to the expertise and character of the incubator

manager and other support personnel. The vast differences in performance between

the different incubators are directly attributed to the incubator manager and the

supporting staff. Thus, thought should be put into developing a profile for the

successful incubator manager.

Incubator structure

The technological incubators are presently technology oriented. The strict rules of the

program do not allow for the use of government grants in a more business-like way.

Recommendations:

A different incubation model could be conceived that would enable the companies to

reach the market more rapidly by focusing not only on prototyping, but also on

market studies, regulations and patenting issues, marketing and securing investments.

This model could simulate the “Tnufa” program which gives a grant to entrepreneurs

to cover expenses incurred by market studies, patent registration and business plan

development.

Regulatory process

30

The regulatory process is complex and requires many skills and expertise in order to

understand all of the guidelines and clauses in the laws and become familiar with the

processes. There are significant differences in the demands, procedures and time

frames between the European and the FDA approval processes.

In addition, a shortage in personnel experienced in the bureaucratic procedures and

regulatory procedures in the field has been identified in Israel. There is therefore a

need to support companies taking consultancy both in Israel and abroad.

31