Israel's life sciences and medical devices market has begun 2024 out of step with the international mood. While worldwide there is optimism about the level of activity and even predictions about the return of IPOs, in Israel companies are trying to prove that they are part of "Resilience Nation", which no tragedy can stop. But this is facing a strengthening headwind.
"Concern about production in Israel"
"I don't know if we could do the InspireMD deal today," says LifeSci Capital managing director and head of investment banking Hany Awadalla, part of the LifeSci research and consultancy group, which underwrites in life sciences. In that deal in May 2023, InspireMD (Nasdaq: NSPR) raised $113 million. The Israeli company has sales in Europe and is looking to break into the US market. Awadalla says, "Today investors are concerned about production in a war zone with a development center that they can't even fly to."
In recent years, Israeli companies have been making efforts to make themselves more attractive to American investors. They establish marketing and sales activity in the US that serves as a showcase, create early contacts with investors and hire managers who will speak to them in their language. But now it may not be enough.
"I myself am Egyptian but I have been working with Israel for years," says Awadalla. I speak with American Arabs and I am surprised how much their opinions lack nuance and a factual basis, even though they are educated and smart. Those born in the 1990s only know the Israeli story through the lens of occupation and these 'children' are decision makers about small and medium-sized companies on Wall Street."
At the J.P. Morgan Annual Healthcare Conference, the schedules of Israeli managers were full of meetings with leading and quality investors, as in the past, but now these sentiments might harm Israeli companies behind the scenes. Awadalla hints that perhaps they should stress the non-Israeli side of the company, and even take core activities out of Israel until anger passes.
Israel's problems side, the field of life sciences actually looks promising this year. "Biotech does not work in a vacuum. The recovery at the end of 2023 was due to the expectations of interest rate cuts. Now it seems that the cuts will not happen in the immediate term, so there is a local correction, but the general enthusiasm is still there, also thanks to several large deals that were signed at the beginning of the year."
2022 was the year when the dream companies of 2020-2021 met a market that was more interested in reality and real clinical data, and the companies' shares went down even without bad news. "Now," says Awadalla, "Some of these companies are a year away from trial results, and this is fueling their increases. This year they are expected to continue to rise ahead of these results, and the rest will depend on the results themselves."
The hot sectors according to Awadalla are: cancer, which is again interesting investors after certain disappointments after dream IPOs that did not yield results quickly enough: stem cells, with one interesting deal bringing other companies back to center stage; and the obesity market, the hit that investors can't get enough of. In the inflammatory and autoimmune sector, major patents are about to expire and create new opportunities.
Growing appetite for mergers
And what about IPOs? "The market is very choosy," says Awadalla. "We saw an interesting phenomenon in 2023. After the sharp drop in IPOs, the number of reverse mergers into stock exchange shells rose, and the return on investment with these mergers was also much better than the return on IPOs. The merging companies were not better, but were priced realistically. The appetite of investors for these mergers is high now, perhaps more than for IPOs. Three more mergers are expected to close in the first quarter."
This is apparently good news for Israeli companies, which in the past had more difficulty with IPOs than merger deals, but Awadalla warns, "You have to come in advance with money and good investors for the merger deal as well. Otherwise the market will understand that you owe the money and will offer you deals with very low values."
Secondary offerings by companies already traded have also recorded successes. "They produced good returns, and this is also a negative incentive to invest in an IPO. There are so many companies that are already traded, and their pricing contains the wisdom of the markets on them. Why take a risk on an unknown company?"
On the medical devices market Awadalla says: "It really does not exist. Zero IPOs, and only $1.5 billion in follow-on fund raising. The fields of diagnostics, remote medicine and digital health, which benefited from the Covid pandemic, have fallen behind. In the field of classic medical devices, the innovations are not exciting enough.
"It's a negative feeding cycle, because a sector with IPOs of $1 billion yields investment banking commissions worth, say, $90 million for the entire sector, so it's not worthwhile for investment bankers to specialize in it."
Despite this, he says, "There is always room for a company with fast-growing sales." In medical devices, diabetes, cardiology and neurology are the hot areas.
Published by Globes, Israel business news - en.globes.co.il - on January 25, 2024.
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