Teva Wins Allergan, Israel Loses Teva

Israel's Teva paradox: Israelis are cheering the victory their home team won in the M&A wars, but they don't realize the drug company has grown too big for the country that nurtured it.

Odysseus and Penelope by Francesco Primaticcio (1563) / Wikimedia Commons

It had all the elements of a Greek epic. There was a warrior hero (Teva Pharmaceuticals) in battle with a bitter enemy (Mylan). There were women they were determined to capture (Perrigo and Mylan again, in a deliciously post-modern role as both male and female protagonist). There were plenty of put-downs from Mylan, enough to do a Trojan warrior proud and worry the reader that there might be enough truth in it to cast doubts about his hero. Then Allergan appears deus ex machina to bring the story to its happy conclusion. 

Okay, the action took place in executive suites, conference rooms and in the media rather than outside the walls of Troy. The protagonists – except for the Teva guys – wore expensive suits instead of bronze armor. They wielded smartphones instead of golden shields and their loyal men in arms were lawyers and bankers. Robert Coury, Mylan’s combative chairman, spoke in early 21st-century corporate press release instead of dactylic hexameter. “For the sake of your current and future shareholders, employees, patients, customers, communities and other stakeholders, I do hope you find a way to eventually change Teva’s culture and establish credibility in your business dealings,” Coury snarled last June in about as trashy a talk as a CEO can muster.

But you can’t deny that there was real drama and that it came to an epically successful conclusion for our hero Teva, and left Mylan bleeding in a plunging share price. 

A Homer run 

Until Monday, the prospects of Teva’s $40 billion attempt to take over Mylan had been looking increasingly dim. The Israeli company had shelled out $1.4 billion amassing a stake in Mylan, but Mylan was mounting a stout defense, trying to buy Perrigo to make itself too big for Teva to buy it. It also announced that a Dutch foundation tied to the company would acquire a blocking majority of stock. 

The fact that Allergan, which had once spurned Teva’s advances, suddenly two weeks ago agreed to a friendly takeover of its generics business solved all of Teva’s problems in one blow, by extricating itself from the Mylan mess and giving it the portfolio of generic drugs it needs to bulk up in an industry where mergers and acquisitions are creating ever bigger giants.

For Teva it was a Homer run. But how about for Israel, who like Odysseus’ wife Penelope, has been waiting for its hero to come home?

That depends on where home is. Post-Allergan Teva will be a much bigger company, a pharmaceutical juggernaut that won’t just be the world’s biggest maker of generics but the ninth biggest drug company in the world, just behind GlaxoSmithKline and one notch ahead of AstraZeneca. No Israeli company has even come close to making such a big splash on the global scene in a major business sector. 

In fact, Teva is about to become so big it will barely be Israeli any more, and may soon not be Israeli at all.

Teva in Egypt 

As it is, Teva isn’t nearly as Israeli as we like to think. The CEO’s office, after a brief stint under South African-British-American Jeremy Levin, is now occupied by Israeli executive Erez Vigodman. But dig a little deeper and Teva’s Israeliness is in short supply. Of its 43,000 employees at the end of last year, only 16% work in Israel. Of 25 principal manufacturing sites, three are in Israel. Only four of its nine top executives are Israeli and a bare majority of seven of its directors is (although one other is an Israeli living abroad). No one really owns Teva any longer – the biggest single shareholder is the U.S. fund manager Fidelity with just 5.6% – but its shares are traded mainly in New York, not Tel Aviv. 

That is Teva today. Combined with Allergan, the New Teva will be even more global and less Israeli. Allergan has 16,000 employees, none in Israel, and operations in scores of countries, including Egypt, but not in Israel.

As time goes on Teva will inescapably become less loyal to its roots. Not that it’s an ingrate, but let’s face facts. As a giant multinational, the company can’t limit the pool of top management and directors it draws from to a small country of eight million people. It will need the expertise, knowledge and networks of the best global talent. 

From there, it won’t be long before the American, Brit or Indian who gets the CEO’s job correctly fails to see the logic of working in Petah Tikva. He won’t be committed to manufacturing in a country distant from Teva’s key markets, with relatively high labor costs, and politicians and media that look at the company as a son of the state rather than a business (recall the opposition Teva encountered when it tried to lay off employees in 2014). Vigodman made clear this week that more overseas acquisitions are on the way, which will further dilute the company's Israeliness.

CEO Erez Vigodman restored Teva's predatory ways. (Credit: Reuven Kopitchinski)

Child of the world

The global drug business is stateless, cacophony of companies with wandering domiciles and top executives. Just look at the three drug names in the news these days. Allergan's official headquarters, for instance, is in Ireland but the real executive suite is in New Jersey. Mylan is registered in the Netherlands, it lists its official headquarters as Britain and its administrative headquarters as a Pittsburgh suburb. Perrigo is incorporated in Ireland but CEO Joseph Papa works in Michigan. 

All three companies operate in scores of countries. They domicile themselves, set up their headquarters, hire talent and build factories where it makes business sense. They buy and sell companies with little concern about national interest or loyalties. 

It’s the unfortunate lose-lose logic of a small economy in a big world. Teva can only get bigger by getting more global, and eventually becoming too big for the town it was born and nurtured in. But the alternative, expecting to keep the company tethered to Israel, would be a formula for letting Teva slowly die – too small and constrained to compete overseas, and eventually driving it into the hands of giant multinational. 

Before Vigodman turned it into a predator, Teva seemed to be approaching that fate. Herzl would be disappointed perhaps by the Teva paradox, but there’s nothing Israel can or should do to stop it.