When the American biotechnology company MannKind registered to trade on the Tel Aviv Stock Exchange in October, more than a few investors were worried.
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A midget by Wall Street standards, where it is traded on the Nasdaq, MannKind was big enough to earn a place on the TA-100 index as well as on the TASE’s Biomed index. It became the second-biggest company by weighting, which means investors tracking the funds would have to buy the stock like it or not.
Their worry was that MannKind has just one product – an inhaled insulin powder called Afrezza – and it was not selling well.
The worst fears were realized. On January 5, less than three months after its TASE debut, shares of MannKind plummeted 30% after the company’s marketing partner, the European drugmaker Sanofi, said it was ending the tie-up. When the bloodletting was over, MannKind shares were down 70% from their October price and they have yet to recover. They ended up 2.6% Wednesday but were trading at just 4 shekels ($1.02).
Compared to most of the other biomedical shares traded on the TASE, MannKind is a mature company. It still invests most of its capital in research and development, but Afrezza had U.S. Food and Drug Administration approval and it was being sold commercially. Most of the other companies that make up the Biomed index are still at the development stage.
The TASE Biomed index comprises 28 stocks, some of which, like MannKind, trade in the United States as well. In many cases their Israel connection isn’t at all clear. Some are developing drugs and others medical devices, some are involved in genetic engineering and a few invest in other biomed companies.
When the index was launched, in 2010, the hope was that it would allow investors to get a piece of the biotech action within Startup Nation. But with the exception of a small run-up in 2014, the Biomed index has never traded above its opening level. It closed at 403.12 points Wednesday, down about 67% from its launch.
One reason for the index’s lackluster performance of late is the negative sentiment globally for biomed. The Nasdaq Biotechnology index is down about 20% so far this year as investors pull away from riskier sectors. But before that biotech had been a big success story, with the index up 180% over the last five years versus a 60% drop for the TASE index in the same period.
The difference is the kind of companies that trade in the United States, as opposed to Israel. Only two of the 28 companies on the TASE Biomed index – Capital Point and Elron – earned a profit in the last year, and both of them are biotech investment companies. By comparison the Nasdaq index counts 190 companies, including Angen and Gilead Sciences.
“On an emotional level, I want the sector to succeed,” said Michael Ben-Yaacov, a fund manager at the investment house Analyst. “But professionally, until these companies show profits they’re not interesting. At this stage, they’re nothing more than speculative investments.”
Their business model requires big investments over many years in research and development. When for whatever reason – a successful clinical trial or government approval – comes and the share price rallies, the typical biomed company will exploit the opportunity to issue more shares and raise extra capital to finance the next stage of research and development, Ben-Yaacov said.
“Successful biomed companies can generate nice returns, but beyond the technology risk that comes during the development stage and the uncertainty of regulatory approval, there is a lot of dilution along the way, because these companies don’t have any revenue,” said Sabina Levy, an analyst at Leader Capital markets.
Some companies can generate good returns. Coplant rose 5% in the past 12 months, Allium Medical climbed 13% and Capital Point 53%. Bonus Biogroup surged 135% and Kadimastem 218%.
But people in the market say these returns, rather than reflecting a business breakthrough, constitute speculative trading that could head south as likely as it heads north.