Analysis

What Israel Can Learn From Teva's Collapse

The Israeli taxpayer forewent over $5 billion in taxes from Teva, but that didn't save either the company from implosion, or Israeli jobs

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

Do generous tax breaks assure a company of survival, and Israelis of jobs? Do they assure that exports will flourish? Not necessarily, it seems. Teva Pharmaceutical Industries received enormous tax breaks for a decade, until two years ago, which did nothing to halt the downward spiral of the company’s financial status or share price, and layoffs could well loom in Israel as the bruised company retrenches.

The Tax Authority itself says that from 2006 to 2014, Teva received 18.3 billion shekels in taxbreaks (around $5.2 billion). Put otherwise, by the letter of the law, it would have paid the taxman that much more than it did.

For the sake of comparison, Israel Chemicals, another corporate giant, received about 3 billion shekels worth of tax breaks in the same period of time.

Teva began receiving the benefits in 2005, when Ehud Olmert, then the economy minister, and Benjamin Netanyahu, then the finance minister, wooed multinational companies by amending the Investments Encouragement law. If companies like Finland's Nokia (pre-implosion) or Korea's Samsung opened up shop in Israel, they would be eligible to pay zero tax for ten years.

The objective had been to draw foreign investment, but in practice, the main beneficiaries of the policy shift were Israeli companies.

Teva, which in those days was earning about a billion dollars a year, was the first. “Right after the law passed I called Teva's chiefs and told them that the company could benefit," an official at the Economy Ministry said at the time. (Teva might have to slightly beef up local investments in order to meet the terms of the law, he added.)

Even after it emerged that Israeli companies were the main beneficiaries of the policy, the belief was that the tax breaks wouldn't amount to more than about 4 billion shekels a year, in exchange for which Israel would be assured that these companies would stay at home. which would keep these companies in Israel.

In practice, the tax breaks cost more than 5.5 billion shekels in lost tax income each year.

In 2010 the cabinet abolished the tax breaks idea in favor of tax breaks outside central Israel. A Finance Ministry study showed that the tax breaks given to the 10 largest companies in the decade after 2005, first and foremost Teva, bring no more jobs to outlying areas, although that was the law's stated goal.

If anything, the companies continued to employ workers from central Israel, even in far-flung plants. At the companies that got tax breaks, in 2010, the proportion of their employees living in the south was just 21 percent and the proportion of  employees living in the north was 7 percent.

The only story in town

Being a true multinational, Teva's shareholders have long since not been mostly Israeli. However, the company remains the darling of the Israeli investor, not least because for decades, under the stewardship of the late Eli Hurvitz, it dependably continued to grow. Investing in Teva had been considered money in the bank, and its implosion was unthinkable. Until it happened. By now it's clear that Hurvitz's departure in 2005, and death in 2011, were the first steps in the company's reversal.

Whatever its management problems, Teva is still responsible for 13 percent of Israel’s industrial exports, say industry sources. Out of total drug exports, about $7 billion in 2016, Teva is responsible for 80 percent.

Utter collapse is still not a likely scenario for Teva. Even if it's sold to a competitor, its research and development will likely stay in Israel, and perhaps also manufacturing, which based on skilled labor.

Locally the fear is that Teva will massively lay off staff. In August the company announced it was firing 7,000 people, of whom 350 are Israelis. Government sources argued fiercely that after the company had enjoyed generous tax breaks precisely in order to preserve jobs. "Teva employees shouldn't have to pay the price of the company's bad investments overseas," said the economy minister at the time, Eli Cohen, who called on the company to focus its layoffs on other countries.

Meanwhile, Teva's problems showcase the problem of over-concentration of Israeli exports - meaning, heavy reliance on a handful of companies. The Exports Institute has been warning of this problem for years: 10 companies are responsible for 50 percent of exports, it has noted - including the chipmaker Intel (which of course isn't an Israeli company per se, but has massive local operations), Adama (chemicals; formerly Makhteshim Agan), Elbit (defense systems), Oil Refineries, Paz Oil, Iscar (blades technology, bought by Warren Buffett), the Aerospace Industries and of course Teva.

One problem is that the exports sector is skewing the entire picture of industrial output. During the last ten years, says the Exports Institute, exports by the 10 big companies increased by more than all other exports. Its solution, especially in light of Teva's woes: the government should direct much more investment and support to smaller firms, helping them grow, rather than continue to help the behemoths of business to become ever-larger.