March 30 (Bloomberg) -- Israeli biotechnology shares avoided this quarter's slump in global stocks after Johnson & Johnson's buyout of a medical-equipment maker ignited takeover speculation and the government pledged money for research.
Clal Biotechnology Industries Ltd., Israel's second-largest biotech company, doubled and Bio Light Israeli Life Sciences Investments Ltd. surged 332 percent after J&J's buyout of Omrix Biopharmaceuticals Inc. Medical Compression Systems (DBN) Ltd. jumped 80 percent this month as it sold a stake to investment firm Accelmed.
"Investors are speculating which companies will be bought next," said Noa Weisberg, an analyst at Israel Brokerage & Investments Ltd. in Tel Aviv. The credit crunch makes it more likely the firms will agree to be bought as they struggle to borrow, she said.
The 92 percent average gain by Israeli biotech stocks this year outstripped the 15 percent rally in emerging-market information technology shares and trounced the 11 percent slump in the MSCI World Index. Most of the stocks still trade below their initial public offering prices and are valued at less than half of their global competitors relative to cash, according to data compiled by Bloomberg.
Herzliya-based Accelmed wants to invest $2 million to $4 million for stakes of at least 33 percent in companies, Chairman Uri Geiger said in a telephone interview. The investment firm, formed this year to target medical-device makers, will invest 8 million shekels ($1.9 million) for a 26.1 percent stake in Medical Compression Systems, which developed a device to help blood circulation, the Or-Akiva-based company said March 26.
Johnson & Johnson
"These are companies in which you can identify opportunities," said Geiger.
Israel's biotechnology industry gained investors' attention in 2007 when the Tel Aviv Stock Exchange made it easier for research and development firms to sell shares by lowering requirements for capital, minimum investments and the number of shareholders. Fourteen biotechnology companies raised almost 1 billion shekels in share sales that year.
Speculation about acquisitions was fueled after New Brunswick, New Jersey-based Johnson & Johnson, the world's largest maker of healthcare products, agreed on Nov. 24 to pay $438 million, or $25 a share, for Omrix, a New York-based developer of equipment to stem bleeding that has most of its research and manufacturing in Israel. The stock traded at $16.52 on Nov. 20, two trading days before the deal was announced, and at $10 at the IPO in 2006.
Copaxone Treatment
Biotech shares are also rising because the government pledged last month to add about 350 million shekels to the budget of the Office of the Chief Scientist, which funds research programs by technology firms. Israel set up a separate 250 million-shekel biotechnology fund in February to support start-ups through clinical trials and to encourage private investment.
The plan is part of government efforts to tackle what Israel predicts will be the worst recession since its creation in 1948. The central bank forecasts the economy will shrink by 1.5 percent this year.
Israel has patented more medical devices than any other nation per capita, according to the Israel Life Science Industry organization and the U.S. Patent and Trademark Office. Achievements include the Weizmann Institute's Copaxone treatment for multiple sclerosis, bought by Petah Tikva-based Teva Pharmaceutical Industries Ltd. in the 1990s, and Given Imaging Ltd.'s capsule-sized camera for diagnosing digestive ailments in 2001.
Rebound
Gains for biotechnology stocks are surpassed in Israel only by Petah Tikva-based Isramco Negev 2, which surged 787 percent this year after its joint discovery of what may be enough natural gas to supply half the country's energy needs for the next 20 years. Four of the 37 biotechnology stocks listed on the Tel Aviv Stock Exchange fell this year.
The rally may not last, said Steven Tepper, an analyst at Ramat Gan, Israel-based brokerage Prisma Capital Markets Ltd. "Some of what we've seen this year is a rebound as these companies dropped a lot last year," he said.
Even after doubling in the first quarter, Clal Biotechnology is down more than 60 percent from its first day of trading in June 2007, according to Bloomberg data. Israel's 10 biggest biotechnology shares trade at an average 6.8 times their cash, compared with a price-to-cash ratio of 14 for 38 biotechnology stocks worldwide monitored by Bloomberg.
'Legitimacy'
Clal Biotechnology, controlled by Nochi Dankner, who also owns Israel's largest supermarket chain, biggest mobile phone provider and largest insurer, rallied 105 percent this year after receiving approval from the European Medicines Agency for the third phase of its trial to treat skin transplants.
Shares of the Tel Aviv-based company peaked Feb. 18 when Teva, the world's largest generic drugmaker, said it will exercise options to buy $10 million of shares in the Clal's diabetes treatment unit. The shares have declined by 14 percent since then.
"The fact that a company like Teva invests in some of these biomedical companies gives them a certain legitimacy," said Idan Azulay, managing director of Epsilon Mutual Funds in Tel Aviv, which manages $386 million and owns shares of Clal Biotechnology and Jerusalem-based BioCancell Therapeutic Inc. Biocancell has climbed 222 percent this year after receiving U.S. approval to conduct tests to treat ovarian cancer.
Bio Light, which helps treat obesity, glaucoma and cancer, jumped 212 percent on Jan. 7 when the Ramat Gan-based company announced a breakthrough in identifying cervical cancer and pre- cancerous cells. Bio Light shares were last at 0.52 shekel, less than a third of the price when the stock began trading in 2005.
Merger Offers
Brainsway Ltd., Israel's third-largest publicly traded biotechnology company, jumped 213 percent from a low in November. The Jerusalem-based maker of medical devices to treat brain disorders reached an agreement with New Jersey-based Yorkville Advisors LLC in December to provide $15 million over three years. The stock last traded at 6.63 shekels, more than twice its 2007 IPO price.
XTL Biopharmaceuticals Ltd., a developer of neuropathic pain treatments, said in January that it's evaluating "several" merger offers. The stock jumped 41 percent on March 19 after announcing it will buy the rights to use a patent that will prolong life for patients with blood cancer. The shares were last at 0.06 shekel, a fraction of the price of 3.61 on its first day of trading in 2005.
"We can groom these companies until we get out of the global crisis," said Geiger. "If they don't have much debt, they can be seen as good investment opportunities."
To contact the reporter on this story: Tal Barak Harif in Tel Aviv at tbarak@bloomberg.net To contact the reporter on this story: Alisa Odenheimer in Jerusalem at aodenheimer@bloomberg.net.
