Israel's Medtech Market Evolution: Seeking The Next Big Thing

Medtronic’s multi-billion-dollar acquisition of Mazor Robotics in 2018 marked a record-breaking milestone for Israel’s life sciences industry as the largest amount ever paid for an Israeli company in the medical sector, beating Mitsubishi Tanabe Pharma’s $1.1 billion acquisition of Neuroderm in 2017. In Vivo investigates how aMoon II, a new VC fund, aims to produce the industry’s next big giant.

Following a $1.65 billion mammoth acquisition by Medtronic PLC, Mazor Robotics Ltd. now tops the list as Israel’s most richly valued company in the medical sector. The blockbuster deal, which should help Medtronic carve out a competitive position in spine surgery robotics, was welcomed in Israel as proof of the country’s growing leadership in health care innovation.

Caesarea-based Mazor Robotics first attracted the attention of Medtronic in 2016 when the companies forged an agreement to make Medtronic the exclusive global distributor of the Mazor X spine surgery system. The device giant also secured an 11% stake in the Israeli robotics maker. A full takeover was completed in Sept. 2018 with Medtronic paying $1.34 billion to acquire the remainder of Mazor, its biggest spend since 2014 when it agreed to buy Covidien Ltd. for $42.9 billion. (Also see "Medtronic Buys Mazor Robotics For $1.3Bn" - Medtech Insight, 21 Sep, 2018.)

The billion-dollar buy marked a record-breaking milestone not only for Israel's medical device industry but for its health care sector overall. Although the country has developed a reputation as a center for innovation and the “Start-Up Nation,” health care companies have often struggled to evolve into high value companies. Faced with capital limitations and few life sciences funds active in the market, Israeli start-ups usually find themselves having to compete for the same cash, which in turn restricts their growth.

However, the region is determined to create the health care giants of tomorrow. Earlier this year, the Israeli government announced a digital health initiative focused on turning the sector into a major economic growth engine for the country and placing Israel at the forefront of medtech innovation. Hoping to drive the growth of Israel's health care innovation is new venture capital fund aMoon II, which is focusing on mid- to late-stage companies. Marius Nacht, the billionaire co-founder of Checkpoint – Israel’s cybersecurity multinational – first set up aMoon as a life sciences venture capital fund for investment in early-stage, innovative health technologies.

Seeing how Israel’s cybersecurity industry had experienced huge success globally, Nacht and co-founder Yair Schindel developed a strategy to replicate that success in the health care industry. Schindel, who now acts as the fund's managing partner, told In Vivo aMoon II is aiming to address the problem of capital availability in Israel and build the next generation of health care heavyweights. “One of the problems for the biomed industry in Israel, for a long time, was that people used to sell really early and often just because they didn’t have a big enough check to take it to the next level," he said during an interview at the MIXiii Biomed conference, held in Tel Aviv, May 2018. 

aMoon is not the only VC player in Israel’s life science sector; other VC firms dedicated to the space include OrbiMed Israel Partners, Pontifax Venture Capital, Arkin Holdings and Israel Biotech Fund. However, access to cash is still more limited than it is in other countries, such as the US and Europe, where life sciences VCs are a dime a dozen in comparison. But aMoon has big plans to grow life science firms within Israel and create large companies that are able to compete on a global scale. 

The current situation in Israel sees companies get to the mid- to late-stage level, where they need $10 million to $20 million to run their premarket approval (PMA) study, or do a Phase III clinical trial, or drive commercialization for their digital health solutions. Often they are unable to find any players in Israel who can write these checks, so they cannot progress, Schindel explained. These companies then sell earlier in the development stage, for a value which is significantly lower. This is where aMoon II is trying to bring in a solution. “We’re able to fund them through the late stage and many of the strategic companies prefer it that way – they don’t want to bear the risk,” he said.

Schindel, who trained as a medical doctor before serving in senior positions in Israel’s Defense Forces, was formerly the CEO of Israel’s National Digital Bureau, responsible for digitizing governmental services and stimulating economic growth. It was here that he got the idea for 8400, a non-profit organization aimed at promoting medical industry company leaders into ecosystem leaders. The plan is to create a cross-sector health network of 400 people over eight years (hence the name 8400) who can share knowledge and collectively advance Israel’s mission to become a “HealthTech powerhouse.”

Investor Strategy

According to Schindel, investors favour companies that show the “three L’s – late-stage, low risk, large checks.”

(Also see "Spotlight On Israel: Accessing Private Cash For Novel Technologies" - Scrip, 26 Apr, 2018.)

“If we can show a company’s technology or solutions really work then investors will pay a hell of a lot more to acquire it,” he believes. “Obviously if there’s an opportunity to take a company public and keep it independent that’s good in our eyes too. Both solutions are good for the economy.”

The investment strategy of aMoon II focuses on three major things, which Schindel described as “the big killers.” The group is focused on investing in technologies in cancer, cardiovascular disease and influenza. “We are also focused on the biggest cost drivers,” Schindel noted, “so the things that maybe don’t kill patients, or kill them very slowly, but kill health care systems. For example, diabetes, neurodegenerative diseases, Parkinson’s disease, or orthopedic problems like osteoarthritis, immunology conditions and back problems.”

In June, the fund secured a $250 million investment from Credit Suisse, the Swiss bank’s largest ever investment to an Israeli fund. “Credit Suisse did deep research into super trends and they selected a few areas where they think innovation is going, and as a bank and group of investors we want to take a stand. Health tech and digital health was one of the major super trends they defined.”

Credit Suisse raised their own fund for digital health and another for robotics and then joined up with aMoon. The investment from Credit Suisse helped aMoon II reach its fundraising target and surpass OrbiMed, Israel’s leading life science investment fund. The target of aMoon II is to be a half a billion-dollar fund with a cap of $750 million. “We don’t want to go too far too fast, we want to build a capacity and see good returns,” said Schindel. “We first want to prove this is successful, we are a global fund but with a focus first and foremost in Israel.

Big Potential

Schindel highlighted two portfolio companies, Zebra Medical and CartiHeal, as some of the fund’s most promising opportunities. CartiHeal, a wound-care company and developer of an implant for the treatment of joint surface lesions, is conducting a major IDE study in the US, EU and Israel, aiming for an FDA PMA application next year. Schindel believes the company has huge potential in the market. 

“CartiHeal received offers to be acquired earlier, but we said we could create more value if we actually took the technology and did a big PMA and demonstrated the efficacy. We know the technology works as they have some long-term results from a large group. If the interim analysis is successful, they’ll be worth a lot,” he said. CartiHeal's technology originated from Ben-Gunion University. 

Zebra Medical, a medical imaging start-up that uses machine and deep learning to build tools for radiologists, has secured $30 million from aMoon II and other investors to develop and launch AI-based tools for radiology. The company already holds CE marking for seven of its products across various medical conditions including bones, cardiovascular disease, liver and lung indications, and breast cancer. It has also received FDA clearance for an algorithm that helps physicians quantify a patient’s coronary artery calcification. The approval could launch the Israeli company onto the lucrative US market.

Government Support

The Israeli government also continues to play an important role in encouraging research and development in the life sciences but according to Schindel, a key factor that will lead to Israel’s success is the strong interdisciplinary connections among its people. Cross-sector coalitions such as 8400 will promote collaboration and the exchange of ideas, and Israeli people are familiar with this style of working. Much of this stems from shared army experiences, as every Israeli goes through a two or three-year mandatory military service where they form networks and learn skills that provide benefit for entrepreneurial endeavors.

“Israelis collaborate to innovate; our work is very interdisciplinary and inter-sector,” Schindel highlighted. “People in Israel are used to working in teams and not just thinking about themselves. This type of culture means you can bring together people from different disciplines and create amazing health care companies.”

This article is part of the Outlook 2019 series – an annual collection provided exclusively to subscribers of Informa Pharma Intelligence publications. MIXiii-BIOMED is the main annual meeting place for Israeli and international life science industry.