Analysis

Teva Relied on Perks From the Israeli Government, and Now It’s Done For

Israel's political and corporate leadership keeps saying they want a capitalist economy, but when a crisis erupts, everyone clamors for a return to kibbutz socialism

At Teva's plant in Hungary: Sign white letters on green background, says "Teva Recept Nelkul". In the background we see a large glass-fronted green and white building that is part of the Teva complex there.
Akos Stiller/Bloomberg

In all the fuss over the general strike that the Histadrut labor federation called for Sunday in solidarity with Teva employees, all the anger over Teva executives’ salaries and cars and all the criticism of the tax breaks the pharmaceutical giant received from the state, too little attention has been paid to the economic analysis of the company’s situation and the prospect that the recovery program it unveiled on Thursday will succeed.

The recovery plan’s chances of success appear to be quite slim. Aside from questions about whether Teva’s management is even capable of implementing the program, the American pharmaceutical market already sees the company as “done for.”

>>The fake news about Teva and some true facts | Analysis

The global pharma market is divided between giant companies with huge financial resources and small niche companies. Yet Teva found itself in the middle, with enormous debts, no cash and no drugs that could create high profits in the future.

American experts on the industry, one of the most competitive and aggressive that there is, say there’s almost no chance that Teva can return to the place that it occupied in 2015, when its share price reflected a market value of over $60 billion. Its shares have already fallen by 70 percent from that peak; when the current crisis ends, Teva will evidently no longer be a giant corporation, since parts of it will have either been closed or sold off. Alternatively, it might get merged into another company and cease to exist altogether, or it could return to being a niche company that is small by international standards.

An economic analysis would show that the current round of layoffs that are part of Teva’s streamlining plan is just the first in a series of steps that will include selling off parts of its operations, shrinking business activity, reorganizing its debt and diluting its shares. There will also be further rounds of layoffs beyond the one announced last week.

In the world of big pharma, there have been almost no successful comebacks after a crisis of the magnitude Teva is suffering.

Such a crisis in itself is an extremely rare event. There’s no reason to think that Teva, which is less experienced than the biggest companies, will be the one to achieve the incredible and make the comeback that no company like it has managed before. In stock market terms, a company with a market value of $19 billion and $35 billion in debt and is like buying an option of sorts on the chances of its recovery program succeeding – and those chances don’t look good.

It’s only natural that the 20 billion shekels ($5.7 billion) in tax breaks that Teva received from the Israeli government over the last decade would be the focus of public discussion. But this discussion is mere populism that misses the main point. The view of Teva as the flagship of Israeli industry and the public stature of its founder, the late Eli Hurvitz, and its other executives and board members – people like Dan Propper, Galia Maor and Erez Vigodman – enabled it to obtain bigger tax breaks than any other Israeli company has ever received, including a full tax exemption for 10 years in exchange for setting up plants in the country's outlying areas.

And this is precisely how Teva “scammed” the state: It built a few plants that employed a few thousand workers; in exchange, it received benefits worth several times the amount it invested in these factories. That enabled it to go on a buying spree, pay huge salaries to its executives and to grant them very generous benefits.

It’s true that Teva’s plants in the outlying areas would probably never have been built without those tax breaks. But the economic bottom line is that they were built based on taxpayer funds rather than solid business considerations, and they served as a smoke screen for the billions that flowed into the pockets of Teva’s shareholders and executives.

That’s also why proposed changes to the law that encourages capital investment, which would require shielding workers from layoffs, are also misguided. Structuring industry in this way is not profit-making. It again creates a situation in which businesses get a shekel from the government to employ workers at half a shekel – and it’s not subject to oversight. It creates an economy based on government subsidies rather than professional excellence and the ability to compete in the global market. It’s an economic structure that is ultimately doomed to collapse.

Surprised? You shouldn’t be. As far back as 2013, State Comptroller Joseph Shapira laid out this issue in his annual report, writing: “Providing benefits of unlimited scope without considering costs vs. benefits, and without considering other alternatives, is conduct that is not economically [sound] and harms the public interest.”

It should be stated clearly that it was appropriate to give Teva a measure of benefits so that it actually would grow in Israel and not abroad – but not of tens of billions of shekels.

Why Olmert lauded Teva’s Hurvitz

In Israel, ties between big business and the government have been associated with the sell-off of companies to tycoons and the influence that big business has exerted on regulators and legislators. This was seen in shaping of government policy on Israel’s offshore natural gas reserves, and perhaps also in the envelopes of cash that mayors received in return for concessions to developers. But the rise and fall of Teva is also one with government-business links at its core, including the involvement of Teva’s legendary late chairman and CEO, Eli Hurvitz.

In March 2009, about 100 industrialists organized a farewell event for Prime Minister Ehud Olmert, who was being forced to resign after he was indicted for fraud. Erez Vigodman, Dan Propper and Israel Makov, all of whom had a role to play in the tragedy that Teva was to become, were in attendance.

At the event Hurvitz took the stage and declared: “I’ve known a lot of executives in my lifetime. You’re being wasted as prime minister. I would have given you the highest marks in management.” Calling the prime minister “a true friend of Israeli industry,” he also badmouthed the prosecutor’s office.

Why take the prime minister’s side? When Olmert had been minister of industry and commerce, it was he who assisted industry, notably Teva, in securing huge tax benefits, now estimated at over 20 billion shekels ($5.7 billion at current exchange rates). That’s not exactly a smoking gun, but it is evidence that Teva was a company that grew and rewarded its executives thanks to ties to business, excessive tax benefits and control of the Israeli drug market.

Many people chafed when reading about the conversation that Netanyahu held last week with Teva’s new CEO, Kare Schultz, over the cutbacks. The prime minister said he was concerned about the situation at the company and asked Schultz to minimize the damage to Israeli workers, particularly for those in the outlying areas of the country. Schultz, in turn, expressed his personal apology on behalf of Teva’s former management for the situation that the company was dealing with.

What’s astonishing is that the country’s political and corporate leadership keep saying they want a capitalist economy without government intervention, but when a crisis erupts, everyone clamors for a return to kibbutz socialism and social solidarity.

And at this point, it’s too late and too populistic to turn Teva into a company with different DNA and a business model that is not based on tax perks.