Israeli Biotech Feels Pinch as China Tightens Rules on Foreign Investment

Three companies see share prices plunge after Chinese pulls out of deals.

Employees are seen inside the "clean room" at the laboratory of Israeli biotech firm Bonus Biogroup in Haifa, Israel December 4, 2016.
Baz Ratner / Reuters

Israeli biotechnology companies were feeling the pinch this week as Beijing’s tightens rules of moving capital out of China.

Shares of BioLight, which invests in products to treat eye conditions, plunged 23% on Sunday after the company said a Chinese investment fund had withdrawn an offer to buy all of the public’s 45% stake in the company and take it private. The fund cited China’s new rules on investment abroad and said it didn’t know when it might be able to renew the offer.

BioLight shares closed on Wednesday at 9.79 shekels ($2.58), down 24% since the news.

Also on Sunday, the share price of InsuLine Medical, whose InsuPad device warms the injection site in order to reduce the amounts of insulin needed by people with diabetes, dropped 13% after the company said an unidentified Hong Kong investor had rescinded an October offer to invest $4 million in the company and form a joint venture to sell InsuPad in China.

InsuLine shares closed at 26.50 on Wednesday, unchanged since its crash.

China syndrome
Share prices for biotech companies expecting Chinese investment

A third victim this week of the tougher rules was Pluristem Therapeutics. The developer of medical treatments using stem-cell technology saw its share price drop 21% on Sunday after it was forced to raise capital in a public offering because a Chinese investor, Innovative Medical, postponed plans to buy a 17.5% stake in the company.

Pluristem raised $15 million in the public offering, half of what the Chinese investor had agreed to put into the biotech company in November. Moreover, Pluristem sold the shares in the public offering at a $1.225 each, 30% less than what Innovative Medical had agreed to pay.

Shares of Pluristem closed at 5.66 shekels on Wednesday, down 25% from last Thursday.

The setbacks comes as China has tightened its grip in recent months on individuals and businesses trying to move money out of the country, in an effort to stabilize a fluctuating yuan and stop the country’s foreign reserves from shrinking. Beijing has said its checks are meant to target money laundering, terrorism financing and fake outbound investment transactions, but business investment has also been hurt.

Yair Geva, a partner at Herzog, Fox & Neeman and the co-head of the law firm’s high-tech department, said he didn’t expect the restrictions to be eased before the second half of the year. But, he added, the rules don’t affect Chinese companies with foreign currency holdings abroad, which include big technology investors like Alibaba and Huawei.

As with Pluristem, BioLight’s Chinese investor had offered a considerable premium over the market price for the share. In a December agreement, the investor was ready to pay 16.50 shekels a share, 82% more than it was being traded for at the time. In the case of InsuLine, the offer had valued the company at $10 million, more than seven times its $1.5 million market value when the offer was made.

Like many biotech development companies with little to no revenue, all these companies need to raise capital from investors to keep their research and development programs alive, so the loss of Chinese investment leaves them no choice but to tap other sources.

Edison Investment Research said on Tuesday that without the Chinese capital it had been counting on BioLight, would have to find other ways to raise the funds or would use up nearly all its cash on hand by the end of the year.

“Given its current market capitalization, the level of dilution that would arise from an equity raise could be substantial. Hence, we believe that strategic partnerships, a sale/privatization of the company or debt financings are preferred by management to equity issuances, at this stage,” Edison said.