Growth Strategies of Israel’s Burgeoning Medical Device Sector

Israeli-medical-innovation

Israel’s start-up community has gained wide recognition mainly because of entrepreneurs in the areas of communications, software, Internet and social media. Waze, a GPS application, made news because Google paid more than $1 billion for it. Trusteer — cyber security software — made similar headlines when IBM bought it for a similar sum.

Further out of the public eye, a similar flurry of activity is taking place in the field of medical devices. “Internet startups are sexy,” says D. Todd Dollinger, chairman and CEO of the Trendlines Group, a venture capital firm that focuses on medical and agricultural technologies in Israel. “It’s consumer products vs. medical products. When one uses medical products, you often don’t know their origin. Your doctor knows, but you don’t know.”

“Start-ups related to the Internet are fairly straightforward,” adds Guy David, professor of health care management at Wharton and a fellow at the Leonard Davis Institute of Health Economics. “To develop a successful [Internet] application you need an idea and programmers. But with medical technology, the matter is more complex because it involves potential structures in production.”

David notes that there are several things that make medical technology different from cellular or computer technology. “You don’t see the large global companies purchasing medical start-ups,” he says. “Besides, if you look at PillCam [a start-up in the area of capsule endoscopy] or ReWalk [a commercial bionic walking assistance system], they are brick and mortar in terms of development, not just software. They are real products.”

According to a 2012 study by Israel’s ministry of industry, trade and labor, the country was home to 656 medical device companies. Of these, 35 were publicly traded and 18 were owned by foreign companies. The global medical devices market was estimated at $322 billion in 2011. The Israeli market was $1.8 billion, but despite its relatively small piece of the pie, Israel is the leading country in terms of patents granted per capita in the medical devices field. In absolute numbers, it is fourth. “Few medical device industry executives would argue with the notion that Israel has been one of the leading sources of new device technology,” says Dollinger.

“It’s consumer products vs. medical products. When one uses medical products, you often don’t know their origin. Your doctor knows, but you don’t know.” –D. Todd Dollinger

“The industry is young” adds Eran Perry, managing director of Israel HealthCare Ventures (IHCV), a life sciences venture fund. Fifteen years ago, there was very little activity in the medical device field, he notes. At the first Biomed Conference — an annual meeting showcasing such technologies — there were a few people in a small room. Today, the conference fills an entire exhibition hall with thousands of people from all over the world.

Lean Companies

The sector has an advantage in that it can operate on a comparatively shoestring budget. Companies in Israel are very lean compared to those in the U.S., helped in part by the country’s start-up ecosystem: Clusters of similarly focused firms can share resources, meaning overall infrastructure costs are lower. Also, a singular feature of the industry is the small size of the companies in terms of manpower. About 56% have only between one and five employees. Only 3% have more than 100 employees.

“One of our recent investments is in Argo Medical Technologies, an excellent example of how a small budget can go a long way,” says Perry. Argo is a leader in the exoskeleton field; it has developed ReWalk, an exoskeleton suit that enables people with lower limb disabilities to walk. It was the first to reach the market with a U.S. Food and Drug Administration-approved device for rehabilitation centers, though the company’s investment was one-third that of the competition, Perry notes.

He also points to the success story of NanoPass Technologies, which develops micro needle-based systems for intradermal delivery of drugs and cosmetics. “When they approached us they had FDA approval, rich clinical data and impressive production capabilities. At that time, NanoPass had only one employee — the CEO,” says Perry. The company has since raised three rounds of VC funding. NanoPass has also announced several partnerships with multinationals, particularly in the area of prophylactic and cancer vaccines. But it has been hard work without support staff: “When becoming a CEO of a start-up company, or any company, one needs to be very persistent,” notes CEO Yotam Levin.

Fellow entrepreneur Uri Arnin started his company, Spine21, more than a decade back after learning that 40,000 surgeries were performed annually to repair spinal deformities on teens in the U.S. Spine21 makes bionic spinal implants. Arnin’s vision was to develop a device to correct spinal curvature over a long period, as opposed to one-time aggressive surgery. The result: the ApiFix system, a minimally invasive device. The seed capital of $500,000 came from the Trendline Group’s Misgav Venture Accelerator. Later rounds came from private investors. The potential market for ApiFix is $600 million in the U.S. and $300 million elsewhere. “We are running clinical trials in Israel, and in Hungary and Romania, where the approval process is comparatively fast. Based on these trials, some devices have already been sold,” says Arnin.

A Low-key Approach

But why haven’t these firms garnered headlines the way some of Israel’s Internet-focused start-ups have? “People who go into the medical technology field are not as hungry,” David notes. “They aren’t interested in making a quick buck. They know that it will take longer” for their efforts to pay off.

Medical products are not as global as IT, adds David. “If you think about the Intel chip, or if you develop software for Google, it will be picked up everywhere. With medical technology the ability to scale it up depends on the country.” Every product is not suitable for every market.

Recent developments in the U.S. are likely to make it an even bigger market. In 2011, the U.S. accounted for $600 million of Israeli medical device exports. Exports to Europe were around $400 million, with China and Japan at about $100 million apiece. David explains that most emerging technologies are patient-centered, and many Israeli companies have made considerable advances in these areas.

“People who go into the medical technology field are not as hungry. They aren’t interested in making a quick buck.” –Guy David

“If you look at the statistics, five years ago, less than a quarter of the companies were generating revenues,” says Perry. “Today, about 40% are selling a product. Israeli start-ups have not been strong in commercialization; they are better at development. But, in recent years, some of them have been forced to go to the next stage because finding a buyer for the company was taking too long.”

Companies’ having to prove themselves commercially is good for the industry because it is now learning how to penetrate different markets. Medical device companies also have an edge because they can break even quickly; in certain areas, the devices can reach the market in only two or three years.

What makes Israel a leader in medical innovation? “It’s the mix of people and the culture,” says Perry. “In elite technology units of the army, young soldiers learn how to work as a team and solve problems. The medical device industry is about defining problems which have to be solved.” Some immigrants to Israel from the former Soviet Union have come from key scientific sectors and have added their experience to the mix. Top-tier academia and a defense industry that continuously provides cutting-edge technologies are also important factors, Perry notes. In addition, the government has been very supportive in R&D.

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