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Interview with Michael Weiss

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Keryx CEO Michael Weiss: A few changes, and Israeli biotech has a great future.

Hadass Geyfman 22 Dec 04 17:08

At the end of November, Israeli biotechnology company XTL Biopharmaceuticals (LSE: XTL) notified the London Stock Exchange that Keryx Biopharmaceuticals chairman and CEO Michael Weiss was joining the XTL board of directors. This was not a routine announcement of a director’s appointment. Weiss was recruited by a group of investors that acquired a controlling interest in XTL in order to enable the company to achieve a breakthrough. The investor group, headed by Apex-Mutavim group joint co-owner Alex Rabinowitz, was aware that with his string of successes in biotechnology, Weiss was capable of contributing a great deal to XTL’s progress in both the biotechnology industry and the US capital market.
”Globes”: How would you sum up 2004 in the global biotechnology industry?

Weiss: ”2004 was a good year in the biotechnology industry. Companies listed on US stock exchanges had their ups and downs, but it was definitely one of the industry’s best years. We saw capital raising through secondary issues, and quite a few capital raising rounds by private companies. Primary issues came to a halt in mid-year, but all in all, the Nasdaq Biotech Index performed very well.

”It was also a pretty good year for deals. Mergers and acquisitions that took place in 2003-2004 included the $2.4 billion merger between Johnson and Johnson and Scios, the $1.3 billion merger between Pfizer and Esperion Therapeutics, the $879 million merger between Chiryon and Powerderject, the $1.3 billion merger between Amgen and Tularik, and the $1 billion merger between Genzyme and ILEX.

”Major strategic partnership deals signed during the year include the $250 million deal between Forest Laboratories and Cypress Bioscience, and the $612 million deal signed by Novartis Pharmaceuticals and Idenix Pharmaceuticals.”

What do you expect in the biotechnology industry in 2005?

”I think that the mood in the industry is positive. The market consensus is that 2005 will be a good year. I believe that the stronger the US economy becomes, the greater demand will be for investments in biotechnology. When the general stock market performs well, the biotechnology market performs very well. I’m optimistic about 2005.

”At the same time, there are still risks. One is the rise in the US interest rate, which usually has an effect on high-risk investments like biotechnology. In addition, there is concern about the policy of the US Food and Drug Administration. The number of drugs to be approved and the nature of the approvals can influence the entire market. The formation of strategic partnerships also affects the market, although less than acquisitions and drug approvals.

”As I said, however, in general, 2005 looks promising for the biotechnology industry. I estimate that two or three mergers and acquisition deals during the year can support the positive trend of the whole sector. There are several interesting things in this market right now, and I predict that we’ll see at least one big acquisition in 2005.”

What do you expect for XTL in 2005?

”It’s too early to say right now. Nevertheless, the field of type B and type C jaundice in which the company operates is considered important. It’s exciting to investors and other market players. Research in type C jaundice is currently believed to have great potential. I think XTL is one of the few companies with a significant plan regarding type C jaundice. The great attention currently focused on this field should have a good effect on the company in 2005.

”There are currently only two registered drugs for type C jaundice. These drugs control the patient’s immunity system, and make it work. Today, there is actually no real treatment for type C jaundice. Treatment is by means of several drugs in the initial phases of clinical trials. These drugs attempt to focus on the effect of processes related to the disease. XTL’s advantage in this field is that it is now starting to produce new drugs for type C jaundice. I think the company is doing impressive work.

”In addition, the company hopes to complete its Nasdaq registration soon. This will give it greater exposure to the US capital market and medical community. Exposure to the medical community is essential for the development and success of the company’s drugs.”

To what degree are you involved in XTL’s management?

”I plan to be involved in XTL to whatever extent the company asks for my help. I think there are very few companies that do not need some guidance. I’ll be very glad to put my accumulated experience in the biotechnology market at the service of the company’s management, and give whatever help is needed, including helping the company to reach the next stage, help with investors, etc.”

Will you be involved in choosing a CEO for XTL?

”Yes.”

What sort of CEO are you looking for?

”I think that what XTL now needs is a CEO with a very strong background in drug development, proven experience in working with small and medium-sized public companies, and, no less important, a manager who knows how to work with the investment community in the US. I believe that a CEO with these qualifications and experience will come from the US biotechnology market.”

Cultural differences deter many Israeli companies from appointing a US CEO.

”I think that cultural differences should not be a significant obstacle in appointing an American CEO. In my opinion, reasonable people are able to work logically together, and should be capable of bridging their differences. I hope that it won’t be a problem in the long term. Bear in mind that if appointing an American CEO creates a problem, it will have undesirable consequences for the Israeli biotechnology industry.

”If you want to bring talented biotechnology managers to Israel from the US and Europe, it’s important to create a sense that there is a basis for working together. In essence, the fact that a CEO is a foreigner should not constitute an insurmountable obstacle.”

What macroeconomic factors could affect XTL in the coming years?

”On the macro level of the entire market, I think some shares will perform well, and some companies will show fairly good performance. The reason is that quite a few companies still have to achieve the milestones promised to investors. Even if most of the market shows good performance, there will still be companies that don’t achieve their milestones, and are left behind.

”Where XTL is concerned, the good economic environment gives the company a chance to prosper and raise capital. Like all biotechnology companies, the key to XTL’s success is taking advantage of the positive mood in the market to execute the company’s business plans, and meeting milestones in order to enhance the company’s value.”

How do US investors see Israeli biotechnology companies?

”One of the drawbacks of many Israeli biotechnology companies is the fact that they are private companies focusing on very early stages of research. Investors tend to invest first in public US companies, then in public European companies, and only afterwards in public Israeli biotechnology companies.

”Then comes the turn of the private companies. Among these, investors are inclined to invest first in private US companies in the advanced phases of clinical trials, then in US companies in the early phases of clinical trials. Only then do private Israeli companies get their turn. The fact that most private Israeli companies are in the very early phases of clinical trials constitutes a serious obstacle.

”There’s no doubt that these Israeli companies can raise capital, and investors are interested in them, but the supply of capital at their disposal is substantially less than for listed companies and for private US companies, particularly those in advanced phases of clinical trials. I’m optimistic, though. I believe that some investors will invest in Israeli biotechnology companies in 2005.”

What do you think about the strategic alliances signed by Israeli biotechnology companies with major pharmaceutical companies?

”Since many Israeli biotechnology companies are at the initial stages, and are immature in research, management, and performance, they are inclined to seek strategic partners early on. In my opinion, that’s a mistake. Much discussion is taking place in the US on the question of when to form a partnership with drug companies. Economically speaking, it can be said that a company should sign a partnership agreement with a drug company at as late a drug development stage as possible. I think this model is acceptable to many investors in the US.

”The reason is economic. Usually, the earlier a partnership agreement is signed, the worse the terms for the biotechnology company, and therefore for its investors. A company coming to a partnership agreement at too early a stage gives a much higher proportion of its value to the drug company with which it signs a partnership, and winds up with much less.

”The fact that many Israeli biotechnology companies concentrate on finding a partnership, instead of on developing drugs, does not work in their favor among US investors. Most investors prefer companies that come to the stage of partnership with a pharmaceutical company after they have tested the drug, and managed to show positive data.”

What advantages and disadvantages does the Israeli biotechnology industry have, compared with the US and Europe?

”Israel has a great deal of know-how, and the proportion of scientific and research talent in its population is probably one of the highest in the world. I believe that research here is fantastic, and Israeli biotechnology is given a great deal of credit around the world.

”On the other hand, the Israeli biotechnology industry still suffers from a number of substantial disadvantages, compared with the US industry. One is the fact that Israel lacks a sufficiently large reservoir of ethical drug companies. For that reason, there is no pool of managers who grew up in ethical drug companies, and who have served in management positions in drug companies.

”I’m talking about talented managers who understand how to bring a drug from the research stage to the initial phases of clinical trials, then to the advanced phases of clinical trials, and finally to market. On the other hand, there are many small biotechnology companies being founded at overly early stages, before the research achieves a degree of maturity. Research, which begins at the university or other research institutions, does not enjoy incubator conditions for a long enough time. The result is that the research project becomes a commercial corporation at too early a stage, and the company has to raise money from angels and other small investors.

”The combination of a shortage of experienced managers in the industry and the premature formation of companies creates a situation in which companies are forced into a partnership with drug companies at too early a stage, because the latter have expertise, know-how, and money. It’s a vicious circle, which makes investors lose money. After the partnership agreement is signed, those who invested in the company at the beginning must give up a large proportion of the value at which they invested in the company.”

Is there a solution?

”Certainly. First of all, it’s important to allow technology a much longer incubation period at universities and research institutions, in order to allow it to mature sufficiently, before a company is set up. Leaving technology longer at an academic institution enables a company to reach investors in a better situation, when it is more mature.

”Secondly, when research reaches a stage at which a company can be formed, an aggressive search should be made for management with expertise and a proven record in drug development and management of biotechnology companies. Since Israel lacks a large enough pool of experienced managers in this field, suitable managers should be sought overseas. Another point concerns the large number of companies in Israel. In principle, the fact that a large number of biotechnology companies are being founded in Israel shows that the country has a great store of know-how.

”The problem is that the quantity of resources, which is in any case limited, must be divided among very many players. The moment that all this know-how is confined to a smaller number of companies, resources can also be consolidated. Establishing a great many companies dilutes resources. A further important point concerns set-up costs for biotechnology companies. On the average, a US biotechnology company pays the university (or the inventor, founder, entrepreneur, etc.) very low prices for licenses to develop drugs, compared with Israeli companies. If you add to that the fact that technology in the US is allowed longer periods of incubation, and the fact that US companies pay lower average prices to universities for licenses to develop drugs than Israeli companies, it can be seen that US companies obtain a higher value, at a lower price.

”That’s another reason why US biotechnology companies are more attractive to investors than Israeli companies. Israeli companies in any case face problems of language and distance from the market. They don’t need an additional obstacle to raising money from investors. The relatively high price that many of them are paying for licenses, combined with the shorter incubation period, definitely constitutes another obstacle to raising money, and an unnecessary one. I believe that more can and should be done to encourage the formation of a biotechnology industry in Israel, and it should begin with more realistic expectations on the part of academic institutions about company value.

”The bottom line is that Israeli research is winning high esteem overseas. In order for a biotechnology industry to succeed, however, it is necessary to create hothouse infrastructure, including support for a longer time by research institutions, and importing executives with experience in the ethical drug industry. Keep in mind that the Israeli biotechnology industry is still in its infancy, and it will take time to develop momentum. I predict that within 10-20 years, Israel will be an excellent source for a biotechnology industry with unlimited potential.”

Published by Globes [online], Israel business news - www.globes.co.il - on December 22, 2004