Breakthrough Dividend: Chapter 4: Working Together

Since its founding in 1948, Israel has had a special relationship with the United States. The alliance is based on shared values and mutual interests. Both nations are democracies with expanding free market economies. Each supports world-class science and view modern technology as the key to their future. Many Israeli students, scientists and businessmen receive their advanced training in the U.S. (and vice versa), giving them a common culture and "language." Cooperation between the two countries at all levels has become routine, and collaboration in biotechnology is no exception.

U.S.-Israeli cooperation in science and technology is exceptionally strong and longstanding. Early in this century, before Israel became independent, Aaron Aaronsohn, Director of the Jewish Agricultural Experiment Station in Haifa, collaborated with U.S. Department of Agriculture scientists, sifting Israel's genetic riches for "plants worthy of introduction into the United States." This cooperation has been further stimulated and nurtured by a series of U.S. and Israeli Government-funded programs (Chapter 9), and by the continuous flow of scientists between the two countries.

U.S.-Israel Science and Technology Commission

One of the best examples of the Shared Value Initiative concept in action is the U.S.-Israel Science and Technology Commission (USISTC). This high-level body was established by President Bill Clinton and Prime Minister Yitzhak Rabin in 1993. It is chaired on the U.S. side by Secretary of Commerce Ron Brown and, on the Israeli side, by Minister of Industry and Trade Micha Harish. The USISTC seeks to identify and promote areas in which the U.S. and Israel have something important to contribute to each other. It is divided into two subgroups, one on public sector (government) initiatives, the other on private sector (industry) initiatives. This new effort is by no means a handout. It is very much directed toward mutually-beneficial coordination, cooperation and information exchange between equals, in quality if not quantity, to help both countries profit -- in dollars and cents -- from strategic partnerships. The Commission's efforts will be supported by a $15 million contribution from each government over the next three years. The USISTC identified biotechnology as one of its "key growth technologies," and formed a Working Group on Biotechnology (WGB).

The WGB has proposed several specific exchange activities for 1995, whose implementation will depend on funding. They include:

Technical conferences and an exhibition on U.S.-Israel Biotechnology Alliances (see next section);
Trade missions;
A matchmaking service to identify complementary U.S. and Israeli firms, arrange meetings and partially fund travel;
Support for the U.S.-Israel Biotechnology Council (see below), and its "partnership meeting" at BioEast '95 in Washington, D.C., in January;
A computerized databank of ongoing biotechnology research projects (as part of the USISTC/Science & Technology Center database) to provide timely access to on-line information; and
A joint U.S. FDA/Israel Ministry of Health effort to harmonize drug approval-related regulations (this is already underway);

The WGB is also considering:

A U.S.-Israel Biotechnology Commercialization Fund and
Direct funding for three marine biotechnology R&D initiatives (improving seed/egg production, searching for biopharmaceuticals from corals and symbiotic bacteria, and the genetic improvement of agar-producing algae).

The U.S.-Israel Biotechnology Council

A private, nonprofit U.S.-Israel Biotechnology Council was established in 1994 to capitalize on complementary U.S. and Israeli biotechnology strengths by promoting joint ventures -- mostly through information exchange. For example, the Council will "co-produce" a special monthly section on Israeli biotechnology with and for Genetic Engineering News. It is also sponsoring what it hopes will be an annual meeting to try to match U.S. and Israeli companies. The Council is the first U.S. organization to focus its efforts on developing relations between the U.S. and Israel in a particular industry. The board includes representatives of Bristol-Myers Squibb, Baxter Healthcare, SmithKline Beecham and a former Vice President of Cetus Corp. The President is Jonathan Cohen.

American and Israeli Views

David Jonas, Vice President for Strategic Initiatives for Baxter Travenol Laboratories (Illinois), and a board member of the U.S.-Israel Biotechnology Council, believes American companies should be interested in Israel because many new technologies and products are being developed there and because the country has a concentrated market and good clinical research possibilities. "Israel also has capable scientists who can compete on a global basis, with many of the best minds moving from the defense industry to the natural and life sciences." Jonas said it behooves U.S. companies to build relationships with these researchers so they can tap into their expertise.

Baxter has done just that, having started doing business in Israel more than 25 years ago. The company originally owned an Israeli subsidiary (established in 1969), but sold it to Israel's Teva Pharmaceuticals in 1988. Baxter now sells its products in Israel through Teva.

Baxter's interests in biotechnology include organ transplantation, blood substitutes, cell therapy (Chapter 16) and immunotherapy (Chapter 15). Because the Weizmann Institute has a scientist who is a leader in developing a type of gene therapy that has applications for the treatment of colon and breast cancer, the company entered a technical alliance with the Institute. Similarly, a Hadassah researcher is a pioneer in immunotherapy as it applies to bone marrow transplants and was recruited to work for Baxter. As both cases illustrate, according to Jonas, Baxter only enters technical alliances with world leaders in their field.

Israel also has a competitive advantage over the U.S., Jonas noted. "Research and development costs about a third of what equivalent quality R&D would cost us here." In biotech, he adds, Israel is unique in having a particularly close relationship between its research laboratories and clinics. "It's much easier to do clinical studies in Israel because the country is smaller and the regulations are more flexible. For example, the protocols for our gene therapy study at Hadassah were much easier to arrange and follow, and this is a big advantage."

Jonas' upbeat assessment was reinforced by other Americans interested in biotechnology. Allan Retzky, Executive Director of the New York-Israel Economic Development Partnership, said there is "a wealth of interest" in Israeli companies and researchers and the potential for significant cooperative relationships to be developed. He gave the example of a $2 billion food cooperative in the State interested in biotechnological innovations such as increasing the shelf-life of fruits and vegetables, something Israeli researchers have accomplished. The State University of New York at Stony Brook and Cornell both have biotech incubators, and several other research institutes in the State are involved in biotech-related work, which, Retzky suggested, could be partners with Israelis in the field.

Dr. Rick Gildersleeve of Embrex (North Carolina) indicated his company was quite interested, in principle, in Israeli biotechnology as it related to poultry and animal health, the company's main focus. He was particularly interested in vaccines, other immunoactive agents (cytokines) and somatic-cell gene transfer technologies and said Embrex was open to ideas for joint R&D and partnerships in these areas.

Dennis McNamara of APEX (North Carolina) confirmed his company would also be interested in learning more about Israeli biotechnology companies and academic R&D. APEX's major biotechnology interest is therapeutics, based on the modulation of reactive nitrogen and oxygen species, to treat shock-induced hypotension, cancer and auto-immune diseases. According to McNamara, APEX would carefully consider strategic partnerships with Israeli firms. Israel's main appeal, he said, would be providing "access to new markets and an opportunity to accelerate clinical development."

Intergen (New York) produces proteins, enzymes and reagents for the diagnostics, biopharmaceutical and cosmetics industries and already sells its products in Israel. Ed Chait, Vice President of Business Development & Sales, and a member of the Science and Technology Commission, said his company buys human interferon from an Israeli manufacturer because it is high quality and no American companies are flexible enough to manufacture it.

Chait believes Israeli R&D, manufacturing costs and salaries are indeed lower than in the U.S., but noted Israel has yet to fully exploit its biggest advantages: clinical studies (Chapter 21) and medical research. The ability to do clinical trials in Israel quicker and more easily than in the U.S. is a major advantage to American companies, according to Chait, but "it does little good if the tests are not accepted by the FDA." He therefore believes harmonization of U.S. and Israeli drug testing requirements should be a high priority for the U.S.-Israel Science and Technology Commission.

Chait says Intergen is interested in an Israeli partner for joint projects, but has not yet found an appropriate match. One obstacle for Chait, and other Americans interested in doing business in Israel, is the average Israeli's lack of marketing acumen. "Israelis don't understand customer service," Chait observed. "It's frustrating not to be able to get even simple information about price and delivery."

Finally, Jonathan Cohen, President of the U.S.-Israel Biotechnology Council, echoes and strengthens this consensus. According to Cohen, U.S. companies are "interested in Israel because of its innovative proprietary technology, its opportunities for cost-effective contract R&D and its world-class science." He lists Israel's particular strengths as: agricultural biotechnology, genetic engineering, immunology and therapies for cancer, central nervous system diseases and bone-marrow diseases. Cohen says the Council will be taking a proactive role in bringing potential U.S. and Israeli partners together and several initiatives are already underway.

These American views coincide with how many Israelis in the field view their own strengths and weaknesses. For example, Gadi Riesenfeld, Vice President of Pharmos, cited as Israel's advantages its high R&D quality, 30 percent lower clinical research costs (a $40,000 Israeli M.D. would cost $100,000 in the States), high employee loyalty and ease of communication (almost all Israeli R&D is done in the 20x50 mile area between Haifa and Beersheva). He sees Israel's disadvantages as a lack of business expertise, less-developed toxicology and an inability to meet FDA Good Clinical Practices (GCP) regulations. Of course, these disadvantages offer unique opportunities for U.S. strategic partners to both contribute and benefit.

Another Israeli industry source, who asked not to be named, also cites Israel's highly-motivated and skilled workforce as its main advantage. "It's not just a matter of no absenteeism or drugs," he says, "workers in Israel's small biotech companies are really dedicated. They don't just work 9-to-5; they work at home, work nights, work holidays. They have a sense of belonging." Their salaries are also about 50 percent below the U.S. average for technicians, and 70 percent below the U.S. average for senior managers and executives.

This source feels, however, that all the advantages and chemistry are overshadowed by the relentless plunge in the U.S. biotech capital market and biotech stocks. Israeli efforts, indeed all international efforts, can't escape the effects of U.S. domestic woes. "We have no trouble reaching all the top U.S. pharmaceutical companies," he says, "that is a university problem. On the other hand, they express interest, study our business plans and then put it on hold. They are busy restructuring, retrenching and trying to survive. This is no time for U.S. companies to take on new initiatives and risks thousands of miles away. Despite all our efforts, we have yet to clinch a U.S. strategic partner."

This source largely blames the proposed Clinton health care reforms, and the failure of biotech companies to deliver on their overstated promises, for the "atmosphere of suspicion" that now surrounds biotechnology in many financial circles. "The [Clinton reform] bill, for better or worse, won't pass, but the damage has already been done."

What about the future? Will pent-up demand create a rebound effect? "Biotech will certainly pick up again," the industry source said, "but I expect that U.S. investors will be more cautious this time. In particular, large U.S. pharmaceutical firms will probably continue to want to see successful Phase I, and, if possible, Phase II trials, not just interesting pre-clinical data." Reaching this stage will be particularly difficult for Israel's undercapitalized university commercialization units (Chapter 20).

Who Benefits?

The U.S. Government supports a variety of joint U.S.-Israel R&D efforts (Chapter 9), many U.S. and Israeli companies have partnerships and subsidiaries in each other's countries and four Israeli biotechnology firms are already traded in New York, with more to follow. Who benefits most from such U.S.-Israel R&D partnerships in biotechnology? Although the obvious answer is that both sides do, it is important to realize that the distribution, nature and significance of benefits are quite different in the two countries.

The most obvious reason for these differences is the tremendous disparity in size between the two countries. The U.S. has 56 times the population of Israel, 450 times the land area, 180 times the GNP and 70 times the agricultural production. Consider, for example, a series of biotechnology-related agricultural advances that increased both countries' agricultural productivity 1 percent. That would add a handsome $1.7 billion to the U.S. economy, but represent only a $0.025 billion benefit to Israel. Similar disparities in absolute benefit apply in almost all other areas. In short, Israel cannot garner equivalent benefits from its R&D.

Does this mean Israel loses out? Not at all. First, the impact of even moderate absolute benefits on Israel's comparatively small economy can be great in local terms. Second, although Israeli inputs have only a small impact on the giant U.S. system, American inputs can have a great impact on the Israeli system, especially in critical areas and technologies. Third, access to U.S. markets through licenses, subsidiaries and other relationships multiply Israeli commercial opportunities and sales many-fold. Finally, contact with the U.S. and competition in its markets, although often difficult, is essential to maintaining Israeli international competitiveness. In this sense, cooperation can be more important to Israel.