When Opportunity Strikes

Veterans of the local high-tech scene and owners of Medinol, one of Israel’s leading private companies, Kobi and Judith Richter have much to be happy about − although they do still look back in anger at one chapter in their corporate history.

Jacob ‏(Kobi‏) and Judith Richter, founders of the Medinol company, had never given a joint interview to the media. That is, until two weeks ago when they both addressed invitees at the TheMarker Week’s conference of 40 promising people under the age of 40. (Their comments appear here.)

The Richters, who are among the veterans of the local high-tech scene and whose company is one of the leading private firms in the Israeli market, are not tycoons: They do not own a bank, an insurance company or a newspaper, and they do not have a television channel. What they do have is Medinol, which they founded in 1993. The value of the company, which develops stents for use in catheterizations and other procedures for treatment of coronary disorders, is estimated in the millions of dollars; its average annual profit is estimated at tens of millions of dollars. The couple is involved in hands-on management − he as chairman and deputy CEO for technologies, she as CEO.

Who are you, actually? Industrialists, entrepreneurs or executives? Or simply two crazies who never give up on anything?

Kobi: “Entrepreneurs and crazies who don’t back down [in their pursuits] are practically the same thing. In my opinion we are both entrepreneurs and industrialists. We are entrepreneurs because we go for things that are risk-intensive and opportunity-intensive.

The moment entrepreneurship succeeds, there are two possibilities: The one is to continue to manage and make an ‘industry’ of it; the other is to sell [the firm] off and benefit from its value. I think our taste runs in the first direction. To my mind it is more interesting and exciting to establish an industry.”

Judith: “I think we are industrialists, because we enjoy taking a single idea and translating it for the masses. This excites me each time anew. How could it be that Kobi sat there, made a few drawings and filed an application for a patent, and all of a sudden 200 people are working on it? It is sent in packages to every country in the world.

“In the health field, this is really fun. A person is barely breathing and he feels better the moment they put a stent in him. Really within minutes − and outside the operating room, his whole family is happy. So, we worked night and day and all of a sudden a person has been given a life, or at least quality of life − and this is a huge recompense. Opportunities like these shouldn’t be missed.”

The Richters met 40 years ago at the Ramat David air force base, where Kobi was serving as a fighter pilot and Judith as a training officer. Even before they established Medinol, each of them separately had a flourishing career. Kobi, 65, has a Ph.D. in physiology and pharmacology. He acquired his first entrepreneurial experience when he was involved as a founding investor in Orbot, which developed equipment for inspecting computer chips and eventually became Orbotech. Judith holds a Ph.D. in social psychology from Boston University, and formerly served as a personal aide to pharmaceutical firm Teva’s longtime CEO Eli Hurvitz.

How did this whole thing called Medinol − an international success − come about? Was it planned or did it all happen by chance?

Kobi: “Nearly everything that’s happened in my life has happened by chance.”

Judith: “Except for me ...!”

Kobi: “Not Judith, but Medinol − yes. It was nine years after I founded Orbot − which had just become Orbotech after merging with a company called Optrotech − and I thought I wanted to go back to something smaller. The truth is, I wanted to sell ice cream or rolls: It gets eaten, it’s done with and the customers don’t come afterward to tell you about the quality of its performance. But since I didn’t have any background in the food industry and I did have it in medicine, the decision to go in a medical direction wasn’t by chance.”

Perhaps you will tell the real story behind this “chance.”

Judith: “There is some truth in the legend that is told, but it isn’t the whole story. At the time we lived in a pilots neighborhood in [inland] Ramat Hasharon. It was Friday, a bit before dark. I was standing outside and a man walked by and asked how to get to the sea. I told him and went into the house. I said to Kobi, ‘You aren’t going to believe this but someone just asked how to get from here to the sea.’ So then Kobi says, ‘Okay, let’s invite him to come in. It’s Friday,’ and with us Friday means greeting the Sabbath and lighting candles − so I called him back. He really was on his way to the sea, but he came back to us the next day with his family.”

Boston debacle

The man was Gregory Pinhasik, a new immigrant from the Soviet Union. The Richters “adopted” him and his family, and helped his wife find work and his daughter get into university. Pinhasik, a mechanical engineer, found work by himself, but a year later left his job.

Judith: “His wife told me then that he wasn’t working. We decided that instead of giving [them] charity, we would work on something together, develop something. At that time Kobi had ideas in the health field. We set up a factory − [Gregory] got 50 percent and Kobi got 50 percent.”

During the 1990s the Richters acquired the holdings of the Polaris venture capital fund.

Meanwhile, Kobi and Pinhasik worked together for a year on various models for a stent − Richter brought the ideas and Pinhasik the planning.

Judith: “There were lot of stories about the stent coming from Russia, but there wasn’t any stent in Russia that came to Israel. Kobi spent hours in catheterization labs. Every time he heard the doctor complain, ‘Darn it, this isn’t working for me,’ he said, ‘This is my opportunity − this is what I’m going to fix.’ That is, where there are problems, that’s where our opportunity to solve them is.”

The pair brought in various other experts, who also received percentages in Medinol, which was founded in 1992, and within a few months they had a finished product. Now the challenge was to find a company to market it. To that end Kobi went to the United States, a trip that led to negotiations with the medical supplies company Johnson & Johnson.

Judith: “They dithered and dragged us along for quite a while in negotiations, because of ego problems. Ego in business is a very bad thing. One night, at 2 A.M., they phoned to tell us they weren’t going with us. The very next morning we flew to the United States to the Boston Scientific company, which had been courting us for a long time, and within three weeks we signed a contract with them.”

Under the contract, Boston Scientific bought 22 percent of Medinol and was given the rights to market the stent that had been developed.

Judith: “When Johnson & Johnson decided not to go with us, Kobi promised them that within three months we would drive them out of the market.”

Kobi: “But in fact that took half a year.”

Judith: “Yes, he exaggerated by three months. It took half a year until Boston Scientific got organized ... From documents we saw afterward we found out they were really in despair. If they hadn’t succeeded in acquiring the rights to our stent they wouldn’t exist. We pretty much conquered the world because our stent, called the Nir, was very good.

“Incidentally, it was named after Nir Poraz, who was [killed when serving in 1994 as] commander of the team that tried to free [captive soldier] Nachshon Wachsman, and was our eldest son’s best friend and like a member of the family. We thought it was right to commemorate him with something that gives life to others. Today all the stents are derivatives of the name Nir − Nirflex, X-Suit-Nir − and they are living in people’s hearts.”

The uniqueness of the Medinol stent lies in the fact that its manner of production was inspired by a field that is not associated with the manufacture of medical equipment.
Kobi: “I came from the world of electronics, which is very efficient. I said, ‘Let’s print the stent on a metal panel, they way they do with computer chips.’ Everyone around me said it wouldn’t work. But when the production cost for a stent in the rest of the world was $100, with us it was $10. This led to especially high profit margins for the company, which have been maintained to this day, because so far none of the attempts by competing companies to imitate our technology have succeeded. We came to our technology through a combination of patents and knowledge that has remained secret. Today too, when the technology has gone over to coating stents with medication, we are still producing at a tenth of the price, but with significantly higher quality.

“When it became clear to our partners [Boston Scientific] that our profit margins were very high, they decided that benefiting from the technology wasn’t enough − they also wanted in on the profit margins. At that moment they decided to copy our machines, build a plant in Ireland, produce stents and leave us by the roadside.

“They set up a company without our knowledge and managed it in secret for three years. With great arrogance they called it BBD − for ‘Bringing a Better Deal.’ Boston Scientific’s deceit was made possible by using the one machine Medinol sent to the United States, which was supposed to have served as a backup in case the security situation in Israel forced Medinol to stop production.”

Judith: “We insisted on producing in Israel, but in Boston they said Israel was surrounded by enemies, so we agreed to send them that one machine ... [to] produce only up to 500 stents a month with it, as compared to the 50,000 to 70,000 produced in Israel. But they took advantage of the machine we sent them and copied it.”

Kobi: “But then something very surprising happened. Boston Scientific tried to get U.S. Food and Drug Administration approval for the stents they made, and in order to obtain it they had to falsify authorization of the machine. This aroused the suspicions of the FDA, which involved the FBI and the Justice Department.”

‘About to blow up’

In the wake of the investigation, the deputy U.S. attorney in Boston came to Israel and asked the couple whether they were aware that Boston Scientific was developing a new production line.

Kobi: “We said to him, ‘You are mistaken. It’s a backup machine we sent them.’ The deputy U.S. attorney replied, ‘No, it’s a line that’s producing tens of thousands of stents.’ And then Judith said, ‘The U.S. Justice Department just doesn’t know how to count’ − and with that the story ended as far as we were concerned.

“When they realized in the management [of Boston Scientific] that everything was about to blow up, Judith and I were called into the CEO’s office in Boston and given a document describing everything they had done: how they had worked in secret for three years, how they called upon three English companies to take apart our machine, how they did ‘reverse engineering,’ and how only then did they bring it back to the production site and so on and so forth ... And we are sitting there in front of him not saying a word. We believed there was still a way to fix it, if they would throw out all the people involved or if they would buy the company.”

Judith: “At the time there were a lot of slanderous comments published on the Yahoo! Finance website, along the lines of ‘Anyone who sleeps with Jews shouldn’t be surprised if there are fleas,’ or ‘Adolf Hitler, too bad you didn’t finish the job’ and suchlike.”

After a year, the couple suspected their U.S. partner was simply stalling for time: In 2001 they filed a $1-billion suit against Boston Scientific. Boston Scientific filed a countersuit for $2.5 billion. The Americans also hired a public relations company in Israel to badmouth the couple in the Israeli and American media, says Judith: “They denigrated us and our stent, saying it was killing people and all kinds of things that never happened. Their CEO even said, ‘We will badmouth you in your own country so that you won’t have any friends.’”

One of Boston Scientific’s weapons in the fight was the use of an image of Kobi Richter as reflected in his dealings with other, former partners in Medinol − Prof. Benad Goldwasser and the Polaris venture capital fund − as being uncompromising and argumentative.

Kobi: “The tactic was definitely to defeat us because our resources were limited. The owner and chairman of Boston Scientific, Pete Nicholas, told us explicitly, ‘Don’t you dare sue me.

I will drag you through the mud. I will blacken your name.’

“We risked tens of millions of dollars. And that was exactly their calculation − small, private companies don’t usually do this. They estimated that a private company would take the money in the coffers and take it elsewhere so as not to be at risk. And then it would remain without any money to conduct the legal battle. This is usually a correct assumption, but they chose the wrong people to fight with.”

At that time a suit was filed against Kobi Richter in Israel for registering a patent called “Improving Flow in Narrow Channels” in his own name and not in Medinol’s.

Kobi: “Their lawyer asked me in a triumphant tone, ‘Was Patent No. 704 registered in your name or in the company’s?’ And I replied it was in my name. ‘Is this the patent entitled “Improving Flow in Narrow Channels”?’ Yes, I replied, that is the patent. ‘Could you please explain to the judge how you dared register this in your name and not the company’s?’ I said I would gladly explain − and I took out copies of the patent request.

“The judge looked and said, ‘Just a minute, there’s a drawing of a flute here.’ True, I replied. ‘This is a patent I am very proud of. It’s a patent that improves the sound quality in a flute.’ The lawyer buried himself under the table and they pleaded to stop the trial.”

Ultimately the couple’s suit for damages came to a U.S. court in 2005, four years after they filed it. The court ordered the two companies to try to reach a compromise arrangement.

Boston, which had despaired of winning the case, agreed and paid Medinol damages of $750 million.

Kobi: “The judge said to them, ‘All the stents you have sold − it’s as though you have sold the Medinol stents. You must pay them according to contract.’”

That same year the Richters bought out Pinhasik’s share in Medinol.

Where, in your opinion, are the most exciting things happening in the realm of medical equipment?

Kobi: “They are happening in medical devices and less in medication, because of the tremendous price of developing new drugs. Cardiology has been the ‘queen’ in this field for the past 20 years, both because [coronary disease] has been the major cause of death, and because − let’s admit it − it is the thing that threatens men in their 60s, and they are the decision makers in most of the institutions that fund research and development.

“As a result of the increased life expectancy that exposes more people to brain disease − like Alzheimer’s, Parkinson’s and ALS [amyotrophic lateral sclerosis]− there has been a move to those areas. I think the point to which investments will move in the future is between medication and devices: fields involving stem-cell work, tissue engineering and biological implants.”

Where is Medinol heading?

Judith: “Medinol has set the goal of dealing with blood vessels. Until now we have dealt mainly with the channels that bring blood to the heart. Now we are developing a product to be used with other vessels and are hoping we will again have a revolutionary product, aimed at treating blockages of blood flow in the legs. This is a very common disorder in a population that is growing older; we think we have succeeded in overcoming the common problem today of stents that break along this route. We are also working on sophisticated stents for the arteries that carry blood to the brain.”

Toward the end of the 1990s, Medinol’s second stent was used for the first time in a hospital in Washington, D.C. Judith, who came to watch the procedure, saw there were a lot of bodyguards present but did not ask any questions. When she was in the room, the patient’s daughter, who had a complaint, turned to her.

“The surgeon promised he would put three stents in my mother, and in the end only put in two,” she complained. Judith laughed and said that as a Jewish mother, she understood that one wants as much as possible for one’s family members − but in this case, the fewer stents, the better. They shook hands and Judith left the room. Upon leaving, she learned that the patient was a member of the Saudi Arabian royal family. Back at the hotel, a beautiful blue-and-white frosted cake sent by the daughter arrived at her room, with a thank-you note for the successful implant.

This story exemplifies the complex interface encountered by an Israeli businessperson and entrepreneur, navigating between the market reality and his or her country’s political-diplomatic reality. However, most of the points of encounter are not so positive. “It’s important for entrepreneurs to understand that there’s a price for anyone who insists on manufacturing here in Israel,” Judith says, for the benefit of the young audience at TheMarker Week conference.

The Richters say they make a point of manufacturing their products in Israel; indeed, they employ a total of 200 to 300 people in the five companies they own ‏(in addition to Medinol they have four additional start-ups, one of which is managed by their son Yoram‏).

Two months ago we met by chance and had a conversation about high tech and the education system. You weren’t very optimistic, to say the least.

Kobi: “‘Not very optimistic’ is an inaccurate definition. I was very worried and I am still very worried: I think being in an ongoing state of war is preventing the country from moving forward.

“My father, a founder of Kibbutz Ramat Yohanan, told me when I was 14 that the kibbutz is a wonderful thing, but the members − they should all be kicked out and only those who really work should be let back in though the gate. And then there would be a small and excellent kibbutz. I asked him: ‘Okay, Dad, why not?’ Then he said to me: ‘Kobileh, I’m not sure I will be the one standing at the gate. What if someone else is the gatekeeper?’

“That’s the thing: I am not sure I’m the one who will be the gatekeeper. In other words, it worries me that I don’t have an idea about how to create a new system that on the one hand will be democratic and on the other will bring talent and rationality to the country’s leadership. In this sense I am worried. I would very much like for my grandchildren to enjoy this country and to want to be here just like me, but I’m not 100 percent sure this is the way it is going. And I very much hope a solution will be found. I am not pessimistic. I am worried.”

Judith: “As usual, I am much more optimistic. I see the problems, but I am always surprised to the good, to see what positive energies there are among young people [in this country].

I’m a member of the board of the Hebrew University of Jerusalem, and I have criticism from here until tomorrow. At the same time, when I look at the final product − I am always thrilled.”