By Tova Cohen and Steven Scheer
HERZLIYA, Israel (Reuters) - Inspired by its success in high-tech electronics and software, Israel is hoping to pull off the same trick in life sciences.
The Mediterranean country already boasts the world's biggest generic drug maker and a host of smaller research-oriented companies.
Now it aims to build on that foundation, offering incentives to multinationals to invest in a biopharmaceutical incubator fund, set up research centers and collaborate with local firms.
High-tech has been one of Israel's main growth engines and companies such as Intel Inc, IBM and Google Inc have major R&D centers in the country.
Such companies make significant contributions to the tech sector's advancement, says the government's Office of the Chief Scientist (OCS), which hopes to see the creation of similar R&D hubs in the pharmaceutical industry.
The OCS has increased the portion of its budget aimed at life sciences to nearly 30 percent and launched several programs to fuel the industry, such as the $220 million OrbiMed venture fund.
It also expects to announce soon the winner of a tender to operate a biopharma incubator that will include more than a dozen projects. Bidding groups must include at least one multinational with revenue of at least $5 billion.
Now the OCS is considering a program aimed at encouraging foreign companies in life sciences to conduct or support research in Israel, either by operating a local R&D centre or through collaboration with Israeli companies.
Any company which does so will find a vibrant scene.
Israel is first in the world for the number of medical device patents per capita and second in biopharmaceuticals. And its life science industry is young but growing fast, featuring firms such as Protalix, Kamada and Gamida Cell.
"That is a core from which something else can happen," said Ruti Alon, a general partner in Pitango, Israel's biggest venture capital firm.
"We don't have a big company in pharma from whom you can learn the processes required in R&D, clinical trials and regulatory, so people are finding their way on their own," Alon said ahead of an annual biomed conference that she co-chairs.
In total, Israel has nearly 1,000 life science firms, of which about 29 percent are in biopharma, developing proprietary drugs and experimenting with stem cells to treat diseases such as diabetes, Gaucher and leukemia.
Yet there are obstacles to growing these young companies, as financing for R&D and advanced clinical trials has been limited.
"There is no presence of a big mentor to support this industry," said Ora Dar, head of the life sciences sector in the OCS. "As long as there won't be such a presence there won't be companies. Critical mass is important."
Israel's biggest company Teva Pharmaceutical Industries Ltd spends about $500 million a year - a third of its R&D spending - in Israel. But since Teva is mainly focused on generic drugs, its R&D expenses are only 7 percent of revenue, compared with 18 to 24 percent at Roche Holding AG, Eli Lilly & Co and Bristol-Myers Squibb Co.
Israel has 23 public biotech companies, a total surpassed by only two countries in Europe. But these firms invested only $113 million in R&D, much less than in countries such as Britain and Sweden, a 2013 survey by Ernst & Young found.
Israel, like Europe, has struggled to compete in biotech with the United States, where most of the sector's successful firms are based.
And, despite the high level of innovation, Israel - with a population of 8 million - is deemed too small for many large firms to open R&D centers, though Roche, Pfizer Inc, Sanofi SA and Abbott Labs have invested in early-stage firms.
"It's hard to connect with customers," since many are overseas, said Uri Yaron, vice president of business development at Johnson & Johnson's cardiovascular care franchise.
Merck Serono, the biopharma division of Germany's Merck KGaA, is the first multinational in the sector to open an R&D centre in Israel, but it is small, with just 45 people. Still, its Rebif treatment for multiple sclerosis, with annual sales topping 2 billion euros, was developed in Israel.
The company has launched an incubator to host up to six firms and expects to have three signed by year end.
"I would like more and more R&D to be done in Israel," said Regine Shevach, managing director of Merck Serono's Israel R&D centre. "Without a huge centre, I don't think we can make a difference worldwide."
One area in life sciences that has succeeded in attracting multinational attention is the medical device sector, which includes Given Imaging, maker of the "pill" camera which aids in visualization of the intestinal tract.
Of the $503 million raised by the broader sector last year, 61 percent went to medical device companies, according to the Israel Venture Capital Research Center.
There are about 500 medical device firms in Israel that generated more than $1.6 billion in exports in 2011.
Oded Cohn, director of IBM's research lab in Haifa, attributed the success of the medical device sector to the country's strength in software and hardware.
Also, multinationals prefer investing in medical devices because they require less funding than drug firms.
Benny Zeevi, co-chair of the Israel Advanced Technology Industries organization, said it can take 15 years for an idea to become a drug compared with 8-1/2 years for a medical device.
J&J pioneered investments in Israeli medical devices, buying cardiac imaging specialist Biosense for $400 million in 1997. GE Healthcare then made a series of purchases and other firms followed, such as Medtronic, which bought replacement heart valve maker Ventor Technologies for $325 million.
Further acquisitions and investments in the broader life sciences sector would be an indicator of confidence in its prospects, but still seem a way off.
David Goren, president of AstraZeneca in Israel, which until now has focused on conducting clinical trials, said he expects his company to make additional spending in Israel.
"But I think those investments will take a while, until you see more companies here," he said. "A mindset shift needs to happen for big pharma, a herd mentality."
(Editing by David Holmes)