Why Investors Should Avoid Israeli Biotechs Like the Plague

On Jan. 4, Feuerstein raised questions over a data readout from Israel-based Cellect Biotechnology. In his tweet, Feuerstein said "Today, $APOP – ‘Breakthrough’ safety? Guys, c’mon… No one is going to take you seriously w/ B.S. like this."

An online discussion was sparked by Feuerstein’s comment with several posters also raising concern over investing in Israel-based companies. Writing in Globes, an Israel business publication, Gali Weinreb attempted to dissect the discussion and provide some answers.

"What has led to Israeli biotech firms on Nasdaq being regarded so negatively? First of all, there isn't much with which to compare them," Weinreb wrote in her column earlier this week.

She said Israeli medical companies have been "arriving on Nasdaq regularly" since about 2000 but many of them are poorly funded, particularly when compared to established biotech companies from other countries. Weinreb said many Israeli companies are so starved for cash that they will turn to an IPO on the Nasdaq when there is no other choice. She said they tend to have small investors as backers. That’s why Israeli-based companies tend to make small progress announcements and treat them as big news. Weinreb said the managers of those Israel biotechs are speaking directly to the small investors who are "eager for exciting short-term events" and are not necessarily "familiar" with the field.

Another key difference between U.S.-based and Israel-based companies is the lack of cash on hand. Weinreb said Israeli companies tend to operate with very little cash flow. They hold just enough money to make it to the next milestone. That’s why some announcements tend to be "puffed up," she said. The importance of the data can be exaggerated in order to ensure new investments. That type of announcement was what sparked Fuerestein’s tweet last week during the J.P. Morgan Healthcare Conference.

In the end though, Weinreb wrote that "there is no avoiding the perception that clinical trials by Israeli companies really do have a higher failure rate." Israeli companies tend to carry out "cheaper and smaller trials" that put them at a higher risk of failure, she said.

For his part, Feuerstein responded to Weinreb’s article and called it a "good explanation."