Yet another example of Israeli ingenuity and entrepreneurship was on display this week.
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It’s an American company, but Kite Pharmaceuticals’ core technology was developed by a Weizmann Institute researcher here in Israel, and the company was founded and led by another Israeli. Between the two of them, they created a company that went from zero value eight years ago to the $11.9 billion that Gilead Sciences agreed to pay for it.
Unfortunately, just a few weeks earlier we had on display everything that is wrong with the way Israelis do business.
Teva Pharmaceuticals posted a gigantic second-quarter loss, announced big job cuts and slashed its dividend. Within two weeks, the biggest company in Israel lost $15 billion in value for its shareholders as its shares tanked.
And there we have two back-to-back stories of Israel’s greatest achievement and its biggest failure.
All brains, no brawn
Kite is not an Israeli company. It is based in California. But it has Israeli brains behind it and typifies Israeli high-tech, which remains an industry of startups that are all brains and no brawn.
Israelis have an enormous capacity for innovation and the entrepreneurial drive to turn ideas into commercial products. But everything stalls when they try to turn it into big, sustainable businesses.
Kite’s origins go back to Weizmann professor Zelig Eshhar, who pioneered the T-cell therapy, known as a CAR T, that harnesses the body’s immune cells to attack cancerous cells. Arie Belldegrun, a Hebrew University and Weizmann graduate, oncologist and Kite’s CEO, built Kite on the back of CAR T, in the process seeing off one major competitor and keeping pace with the drug giant Novartis, which are developing similar therapies.
Belldegrun is a doctor and researcher, but he is also a remarkably successful serial entrepreneur. He sold his first startup, Agensys, to Astellas Pharma for $540 million a decade ago and in 2009, sold a second one called Cougar Biotechnology to Johnson & Johnson for $1 billion.
At Kite, the prize was even bigger , both because of the technology and Belldegrun's drive and salesmanship. (Kite raised $1.1 billion in four share offerings since going public in 2014.)
In that respect, Kite fits the Startup Nation mold that goes back to the online chat pioneer ICQ 20 years ago, and more recently the navigation app startup Waze, the biotech company Neuroderm and the self-driving car tech company Mobileye. These were companies that were bought for hundreds of millions, if not billions, not because they have profits or market share but because they have the best technology.
Then there’s Teva. Its history goes back more than a century, but it made its big step forward 30 years ago when its visionary CEO Eli Hurvitz began the process of turning it into the world’s biggest maker of generic drugs. Along the way it got a big boost from another Weizmann invention, the proprietary multiple sclerosis drug Copaxone, but Teva’s forte wasn’t innovation: It was a machine for developing and manufacturing copycat drugs faster than its competitors.
Teva succeeded in the kind of things that Israelis are traditionally very poor at, namely organization, discipline, management and an eye to controlling costs. But after Hurvitz retired in 2002, the Teva machine began to sputter.
Wrong time, wrong place
The company was still turning out generic drugs, but it made a series of lackluster M&A deals that added little value to the company, and failed to find another blockbuster drug to succeed Copaxone when its patent ran out, as is now happening. Its last and biggest M&A deal was poorly timed, too expensive and left it with debt it is struggling to pay.
Meanwhile, Teva was running through CEOs rapidly and its board grew dysfunctional. Right now, it has no CEO at all, six months after the last one quit.
By the time the second-quarter disaster rolled out, Teva had been in bad shape for a long time. The market didn’t slash Teva’s market cap by half because of a bad quarterly loss but because Teva had an inexcusably long track record of poor performance.
Just like Kite isn’t an Israeli startup, Teva in many ways isn’t an Israeli company anymore. Only about a 10th of its payroll is in Israel, and most of its directors are non-Israeli, as is its top management. But just like Kite, its DNA, for better or for worse, is Israeli through and through.
The trouble for Israel is that brilliant startups don’t quite do it for the economy. They employ few people, pay less tax and have fewer knock-on effects, apart from demand for late-night pizza deliveries.
Teva’s Israel payroll alone is close to 7,000 and it uses reams of subcontractors that employ even more people. It is one of Israel’s biggest exporters. Kite has just 450 employees, which is actually quite big for a startup; Waze had 100 staffers when it was sold to Intel for nearly $1 billion.
Israelis can be proud of Kite’s success, like they can be of the whole startup phenomenon, but they don’t benefit from it. Teva’s failures on the other hand will cost everyone.