Health tech leaders warn judicial overhaul will lead to brain drain and funding halt

Ronit Harpaz is one of two dozen Israeli health tech leaders who take turns going to the Knesset every day to voice their opposition to the government’s proposed judicial overhaul. They appear before the Constitution, Law, and Justice Committee, bringing the latest data to illustrate what they believe are severe dangers the reforms pose to their industry.

According to Harpaz, it has been like shouting into the wind.

“We feel there is absolutely no listening. I sat opposite [committee chair Simcha] Rothman. I screamed my heart out and nobody listened… We bring so much data, all the latest details… but they just mock us. They called me privileged and told me I was wasting my time and my company’s time,” she told The Times of Israel.

There has been much discussion of the potential fallout for Israeli tech in general. However, Harpaz and her colleagues believe the health tech subsector deserves particular attention. Its need for massive amounts of long-term foreign investment, top Israeli scientific brainpower, and international academic and commercial collaborations make it especially vulnerable should Israel lose its perception as being among the world’s liberal democracies. Health tech leaders told The Times of Israel they are already seeing funding drop and Israeli researchers eyeing positions abroad.

Health tech (covering digital health, medical devices, and pharma and biomedicine) constitutes 20 percent of the Israeli tech ecosystem. The sector has nearly 1,600 active companies employing some 30,000 people. In the last two years, health tech has attracted more than $4.6 billion from foreign investors.

Among those worried about the judicial overhaul are the board and members of 8400 – The Health Network, a non-profit organization established in 2017 to create a coordinated and thriving health tech ecosystem in Israel. Its 320 members come from the top echelons of academia, biotech and med-tech entrepreneurship, healthcare, government, and venture capital.

The 8400 board issued a statement in late February saying it “foresees with great concern the expected negative implications for the high-tech and biotech industries in Israel of the government’s current legislative steps to make changes to the judicial system.”

“As a volunteer organization aimed at advancing and developing health technologies in Israel, and turning them into local and international economic growth engines, we are already aware of worrying signs in terms of companies moving intellectual property abroad and funders hesitating about making further investments in Israel,” the statement continued.

A full-page open letter with a similar message signed by more than 200 of the organization’s members was published in the Haaretz newspaper on March 3.

In the short term, the financial impact of the proposed judicial overhaul is of primary concern

According to 8400 co-founder and CEO Daphna Murvitz, health tech is more vulnerable than tech in general, even as both have faced a tough 18 months due to global economic conditions.

Start-Up Nation Central, which tracks the tech industry, reported that only 159 health tech deals (19% of all tech deals) were closed in 2022, representing a decline of 27% compared to 2021. The number of funding rounds was the lowest since 2016, with the second half of the year seeing the lowest since 2014.

According to the Israel Innovation Authority, health tech attracted $2 billion, or 6%, of investment in private Israeli tech companies in 2022. By comparison, enterprise software, fintech and cyber came away with a combined 56%.

“The challenges are greater in health tech than in other tech industries because of the science, the cost and time frame of development, and the regulations. Health tech talent has to be very dedicated for many, many years — longer generally speaking than it would take talent to create a groundbreaking technology in cyber, for instance,” 8400’s Murvitz told The Times of Israel.

“Funders are much more reluctant to invest in health tech because of the revenue cycle, although the potential for pivotal returns are significantly higher once a breakthrough is achieved and a treatment product reaches commercialization,” Murvitz explained.

Not playing for peanuts

The amounts of money that must be funneled into biotech research and development are enormous.

“I mean, you’re talking about millions of dollars for early-stage projects —just to get to some sort of inflection point where the technology might be of interest for additional investments,” said Ron Lahav, executive director for research and development at the National Institute for Biotechnology in the Negev.

The proposed judicial overhaul occurs at a highly inopportune time for Harpaz, co-founder and CEO of Endoron, a company that developed an endograft fastening solution for patients undergoing abdominal aortic aneurysm repair. Her company is in the midst of a fundraising round.

Previously, she had been able to win over the largest medical device and biotech VC fund in Europe and the European Innovation Council, which backed her company via equity and grants, respectively.

“It took us a while to convince international investors to invest in us in the first place. Our funders are very regulated and they have very strict guidelines as to where and in which countries they can invest. When they do their due diligence, they look at governance, at the country and whether it’s a democracy,” Harpaz said.

“If Israel is not going to be a democratic country, they are worried about whether their intellectual property here can be protected in the Israeli courts. The risk is so high for them now that I’m not sure what’s going to happen in the next six to 10 months. We feel their fear. They aren’t yet commenting directly on the political situation, but they are starting to give excuses when we speak to them,” she said.

Vague fears translate into big money

Tuvik Beker, CEO of Pangea Biomed, which operates in the precision oncology sphere, has heard from colleagues that in the last couple of months, nearly-closed deals were abruptly dropped. The reasons given by the funders were vague.

“We already heard from two significant investors that they have put  investments in Israel on hold as part of a ‘strategic re-evaluation.’ In addition, I’ve heard several very alarming stories from fellow founders and CEOs about funds that were already in diligence stages that were just pulled back,” he reported.

Efrat Shefer, former president of Israeli operations for a major multinational health tech company, warned of possible peril as important credit rating companies cast a nervous eye on the current turmoil in Israel.

“When [potential investors] look from outside, they listen to J.P. Morgan, Moody’s, and Fitch. Those very important financial institutions are all pointing in the direction that the judicial legislation is going to hurt Israel’s credit profile,” she said.

According to Shefer, such a scenario would add insult to injury at a time when European funders are already investing less in Israeli startups than in prior years.

Beker noted that Israel, with its excellent science, normally gets disproportionate funding from the EU by way of grants for academic and commercial research and development. He said that there is a unanimous view among Israeli entrepreneurs, venture capitalists, and consultants that this funding will significantly drop as the EU looks unfavorably upon the political controversy in Israel.

Draining the brain, ‘the main resource we have’

A significant brain drain is a real possibility as researchers in the life sciences in Israel are starting to look around for positions abroad. Likewise, Israelis doing postdoctoral studies internationally are hesitating about whether to come home.

“I know there’s a lot of people that are looking for jobs outside of Israel now. They’re keeping their options open. I think that if, God forbid, we come to that situation [where the judicial legislation passes] there will be an efflux of highly talented scientists who will find positions or shift the focus of their work elsewhere. This would have a very strong detrimental effect on Israel,” Lahav said.

Prof. Chezy Barenholz, head of the Laboratory of Membrane and Liposome Research at the Department of Biochemistry of the Hadassah Medical School at the Hebrew University, is a world-recognized expert in the field of drug delivery and inventor of widely marketed medications. He told The Times of Israel that he finds the current situation “frightening.”

“To me, without academia, there is no Israel. The brain is the main resource we have,” he said.

It’s no secret that Israel’s leading minds could make more money and live more comfortably in other countries. Those who stay in Israel or return after advanced training or work abroad do so for a variety of reasons, including Zionism and their desire to live in a Jewish and liberal democracy.

“I think the current changes are alienating a significant portion of these people… if they start to leave because the country no longer aligns with their ideals, that would be catastrophic [for Israel],” Beker said.

He also believes that over the long term, the judicial overhaul would dampen the diversity that is critical for innovation.

“I think diversity is one of the major forces that drive the startup economy anywhere in the world, and Israel is no exception. I think that the proposed legislation would severely impact equal opportunity for women and minorities,” he said.

The news coming out of the country now is hurting what Shefer calls “Israel’s brand,” which took many talented people decades to build. This brand is critical to Israeli health tech entrepreneurs, who are strong on research and development but rely on partnerships with investors and companies around the world to bring Israeli products to market.

“[The judicial reformers] are hurting the brand name of Israel as an innovative, very tight ecosystem. We are known for being quick, efficient, and effective. And that comes together with being part of a democracy and being like our outside partners,” Shefer said.

Barenholz shared that in recent conversations with many international colleagues and collaborators lately, they made it abundantly clear to him that they are following the news from Israel and are not pleased with what they are seeing.

“If they are no longer happy to interact and partner with me, it will not be because of me. It will be because of what is happening here,” he said.

Harpaz told The Times of Israel that for now, she is planning to stay in Israel and keep her company here, but things may change.

“I’m a Zionist, so I am going to fight for my company to stay and be successful here. But of course, we have an obligation, a legal commitment to our shareholders and our investors. We have to do what’s best for the company,” Harpaz said.

“So if push comes to shove and we can’t raise any funding, and we need to move the company and the legal entity to a different country to be able to raise funds, we’ll have to do it,” she said.

“Of course, it’s my last resort.”