A Hard Cold Look at Teva

The drugs company has fallen from a pedestal it shouldn't have been placed on to begin with.

There was a time – until about a month ago – that Teva Pharmaceuticals could do no wrong. That was the case even when it made mistakes, , like engaging in a poorly-engineered acquisitions strategy, or failing to wean itself from its Copaxone dependency.

It's just that nobody was paying attention to the missteps until the company announced it was cutting the payroll, and then embarrassingly lost its CEO after his public tiff with the board of directors.

Teva has fallen from its pedestal, but that fact is it shouldn't have been there to begin with. Not that it doesn't deserve to be admired, but like any business – or for that a matter a sports hero or great artist – it should be admired for what it's achieved, period. Ascribing greatness that doesn't show up in profitability (for companies), batting averages (for athletes) or great literature (for authors) is asking for trouble

Here are three myths about Teva to be shattered.

1. Teva as national icon: Through its many years of glory, Teva came to be regarded as Israel's flagship company – not just a major employer but one that never ordered layoffs or moved plants overseas where labor costs were lower. Its global spread (operations in more than 60 countries and products sold in 120) rivaled the Foreign Ministry's (83 embassies).

As a major component in nearly everyone's investment portfolio, it helped pay for the bat mitzvas, weddings and pensions of countless people. Its legendary leader Eli Hurvitz was showered with honorary doctorates and in 2002, he was awarded the Israel Prize itself. In one poll Hurvitz was voted the 85th greatest Israeli of all time.

If anything, that ranking understates his contribution to the state. But it's hard for businessmen to complete with generals, statement, artists, fashion models and celebrity chefs for public adulation.

Mother Teva vs the Warrior Queen

It's dangerous business for any company to become regarded as anything but as a business. Yes, it is nice to be routinely lauded, but at the end of the day it is a business subject to the same pressures as other, non-iconic companies. Moreover, it is a global company, which unlike many of those operating in the Israeli domestic market, faces real competition in an industry that is in a constant state of flux. It is unfair and unrealistic to expect the company to be Mother Teva at home seeing to her children's welfare while playing Warrior Queen against its rivals overseas. The two roles aren't compatible. The unfortunate thing is that Teva's recent history it hasn't been swinging its sword so effectively.

2. Teva as an Israeli company: Teva's roots are in Israel and it wouldn't have gotten to where it is today without an Israeli CEO - Eli Hurvitz - who had the vision, foresight and leadership to turn into the world's biggest maker of generic drugs. There was also the Israeli innovation of Copaxone, a multiple sclerosis treatment developed at the Weizmann Institute that turned into a blockbuster drug.

But look at Teva today. Of its payroll of just under 46,000 people at the end of last year (the last time the company published official numbers), just 16% were employed in Israel and the proportion has been shrinking as the company made acquisitions in the United States, Germany and Japan. Far more European and Americans are employed by Teva.

Top management is also mostly foreign. Even with CEO Jeremy Levin gone, half of the company's top 18 managers were non-Israelis. Five of the top nine people are non-Israelis, including the head of research and development, the field where if nothing else Israelis are supposed to excel. More Teva shares are traded on the New York Stock Exchange than on the Tel Aviv Stock Exchange. English is the company's lingua franca.

Ironically, the one part of Teva that remains distinctly Israeli is its board -- 11 of its 15 directors are Israeli citizens and another one is an Israeli living abroad. But if we are to believe the media scuttlebutt, it was the Israeli board that advocated full-scale personnel cuts while it was the foreign CEO advocating a softer approach.

In all events, it would unfair to compare Teva to all those Israeli expats in Berlin who earned the wrath of Yair Lapid, Israelis chasing after mammon and good times abroad instead of building the Zionist enterprise back at home. The fact is that it would be impossible for a multinational on the size and scale of Teva to be an Israeli company. Whether we come to praise Teva or to bury it, as may be its fate if it doesn’t recover, we should look at it with cold eyes.

3. Teva as piggish capitalist: Was it right for Teva to fire the 800 or so Israelis on its payroll as part of its global cost-cutting plan?

Many see the job cuts are an outrage to the Israeli taxpayer because Teva has enjoyed some NIS 12 billion in tax benefits over the years. In return, the company should have been ensuring job security. National icons aren't supposed to betray us.

But the trade-off isn't so clear. Israel is not exactly a manufacturing paradise – labor costs are high, as is the security risk; it is distant from major markets, raising transportation and logistics costs; and business regulations are, according to the World Bank, onerous. Both the Office of the Chief Scientists and the Bank of Israel have found that Israeli productivity ranks near the bottom of the world's developed countries.

The one area where Israel enjoys relatively high productivity growth is in manufacturing, though it lags behind the average in the Organization for Economic Cooperation and Development. The reason for the high growth is that is because the industrial companies make big capital investments that enable workers to work more efficiently

Why is investment so heavy in industry? Because manufacturers have no choice, argues the Bank of Israel. Unlike, say the local construction industry, manufacturers export and have to remain globally competitive.

But why should they bother if they can be just as competitive, spending less on plants and equipment in another country with lower costs and greater productivity?

The answer probably is because the government provides investment subsidies and tax benefits. Only a lowish 18% of Israeli gross domestic product comes from manufacturing, but the country's private sector manufacturing giants – Teva, Intel and Israel Chemicals – all enjoy the state's bounties. In other words, without the tax benefits, Teva might not have had any Israeli employees to fire.

Bloomberg
Illustration by Ayala Tal