Assia’s management was also pleased, especially after learning that Assia’s employees had agreed to increase their output and work overtime to replace the Zori employees. This increased the output of Assia’s workers by dozens of percentage points without the hiring of even one additional worker, thereby ensuring increased profits, at least initially. They were also confident in the quality of the deal, based on their new partnership with Avraham Friedman and the CTIC. Years later, Eli confided, “Had it not been for that first successful merger and the manner in which it was executed, I have no idea if the mergers that followed would have happened.”
•••
As time passed, the wisdom of the merger that Eli brokered became increasingly evident. Since the onset of trade with Africa, Assia’s income statement had begun to reflect regular annual profits of approximately 100,000 Israeli pounds, making it similar to Zori’s balance sheet. After only one year of operations, the net profits of the merged company reached one million Israeli pounds. These profits made it possible for the company to hire a few dozen new employees and revive dormant production lines. The merger triggered a period of dramatic growth and expansion. The merger with Zori also significantly improved production quality in Assia’s plant. In Eli’s words, “They helped us climb the steps of quality…. The added value we received was immense…. From then to the present, I have always regarded the merger between Assia and Zori as a symbol and an example to emulate.”
In the end, the partners were so pleased with the deal Eli brokered that they decided to appoint him Nachman’s deputy, officially making him a major figure in Assia’s corporate management. In this capacity, from the mid-1960s onward, Eli emerged as the strongest figure in the Assia-Zori management, with the exception of the three owners. The press referred to him as the company’s CEO, although he did not officially hold this position yet. Nevertheless, it was clear to all that he was performing that job.
Chapter 8
Teva
The Assia-Zori merger was a milestone for Eli; it shaped his attitude toward the family pharmaceutical business’s future. Even before the merger, he had regarded growth as the company’s primary goal. The merger, however, set a higher standard for growth by doubling the company’s value in a single transaction. Later, he would attempt to achieve comparable growth on an ongoing basis. In retrospect, it is clear that his aim had been to double the company’s value every four years, a goal that he ultimately achieved. Teva continued to grow in this manner over the years. In the mid-1960s, however, Eli did not yet speak in such terms. All he knew was what he told his colleagues at the plant: the real growth of Zori (meaning Assia) must be no less than 15 to 20 percent a year.
In an effort to attain this ambitious goal, and because he knew that Assia’s ability to expand its sales within Israel was limited, he continued to work to increase Assia’s exports and identify other pharmaceutical manufacturers in Israel and abroad for mergers and acquisitions.
In 1965, the first year after the merger with Zori, there appeared to be few obstacles in Eli’s path to reaching his export goals. Assia had increased production by dozens of percentage points and was focused almost exclusively on exports, which were sold all over the world, including markets in Europe, Asia, and South America. Most exports, however, were directed toward Africa, where Assia was successfully entering more and more markets. During the period in question, 40 company branches were operating in Africa, with the largest in Nigeria, Ethiopia, Uganda, Ghana, Zaire (the Belgian Congo), Kenya, and South Africa. Yet Eli continued to work to expand Assia’s offerings and to market them to an increasing number of countries. The products were marketed in different ways based on the needs of each country and, in the case of some countries, such as Nigeria, of each region. Eli was visiting Africa every few months to assess immediate and long-term needs, solve urgent problems, and open new branches.
Assia’s success in Africa was surprising by all standards, especially since many other pharmaceutical companies had already marketed similar products there. Moreover, these were years when the Arab boycott of Israeli products was in full force.30 The efficiently managed boycott regularly posed difficulties for companies like Assia. Despite all this, Assia was highly successful. One factor was its skill at formulating export and marketing plans specifically for each country. For example, Assia, in partnership with Maabarot, began marketing veterinary supplies for cattle and poultry in South Africa. Assia sent a retiree from Kibbutz Gan Shemu’el to South Africa to instruct local farmers in the use of the Israeli products and arranged for hundreds of South African farmers to visit Israel to learn all there was to know about milk substitutes and bottle-feeding calves. Within three years, more than half of this sizable market had become loyal Assia customers, even though its products were more expensive than those of its competitors.
Another reason for Assia’s success in Africa may have been the quality of its products.
We really had higher demands of ourselves. We set extremely high standards for quality control. We never explicitly stated this as a goal, but it was always a precondition. If you are not the best when it comes to quality, you should not get on the playing field. You can be more expensive and search for a way to solve that, but you cannot be any less than the best…. We also entered the African market with the declaration that we were the best. The products we sold in Africa were of equal quality to the products we sold in Israel and Europe. Today, international regulations allow a plant to operate at only one quality level. Back then, you could set two quality standards, which is what many companies did in Africa. We never agreed to do this. We were not willing to have one plant producing lower-quality products and another plant producing high-quality products. No way. All the plants must work according to the same level of quality…. It was the same pill. The difference, of course, was the price. This was also true regarding the lower costs in Africa in comparison to other countries. There is a great difference between maintaining a plant in Sweden and maintaining a plant in Nigeria yet quality is a precondition that is not up for debate.
Assia’s expansion in Africa was implemented in accordance with the policies of Israeli Foreign Minister Golda Meir and the entire Israeli government, which worked intently to cultivate diplomatic relations between Israel and the countries of the continent. In 1966, Prime Minister Levi Eshkol and his wife, Miriam, even embarked upon a three-week visit with extensive media coverage to seven African countries: Senegal, the Ivory Coast, Liberia, the Republic of the Congo-Léopoldville (formerly the Belgian Congo), Madagascar, Uganda, and Kenya. Israel had become a patron of sorts for these countries, the media in Israel, Africa, and Western Europe reported during the visit. Eshkol’s visit was consistent with the strategy that Eli was attempting to implement, of expanding Assia’s operations in these countries by catering to local needs. Indeed, all the countries Eshkol visited already had company branches, enabling the prime minister to boast to his hosts, “Israel is attempting to help the African countries in various ways…. Take healthcare, for example. Our company [Assia] brings relief to the people of Africa. Here [in Liberia], as in dozens of other countries…. It makes us proud.”
Although the goals of Eli’s business activity in Africa were purely financial, it is no coincidence that they were consistent with the Israeli policy at the time. Indeed, he made skillful and effective use of this policy. In retrospect, there is no doubt that this policy played a role in pushing Assia to increase its exports, which in itself was a component of the ever-evolving relations between Israel and the nations of Africa.
•••
Eli succeeded in achieving the first goal he had set for himself: increasing Assia’s exports. However, the second goal – finding a pharmaceutical company that Assia could merge with or acquire – would have to wait. Among other reasons, in late 1965, the wheels of the Israeli economy began to slow due to the onset of the worst recession Israel had experienced since 1951-1952.
Since 1954, Israel’s economic policy had been based on the premise that rapid economic growth was vital. The ultimate aims were to generate employment for Israel’s citizens, who included many new immigrants; to make it possible to allocate a relatively large portion of the state’s resources to defense in order to maintain Israel’s deterrent capability; and to raise the standard of living. Between 1952 and 1963, during Eshkol’s tenure as minister of finance, Israel’s gross national product rose at an average annual rate of almost 10 percent. This dramatic growth was primarily the result of the government policy of allocating a large portion of the country’s economic resources (between 17 and 19 percent) to investments. Most of these resources were invested in industrial development and some in infrastructure, agriculture, and construction. Even though this was a great success (on an international scale), in 1961-1962, Israel encountered formidable economic problems manifested in an increased disparity in the balance of payments and rising inflation. Although the measures implemented under Eshkol’s “new economic policy” halted these negative phenomena, a number of indicators within the Israeli economy continued to fuel concern.
In the winter of 1964, the country’s economic leadership, led by finance minister Sapir and prime minster Eshkol, took steps to stabilize the country’s economic activity. Half a year later, it became clear that this had not been done at the correct pace and the situation had worsened. Inflation was continuing to rise and, more seriously, the balance of payments worsened. During the first half of 1965 alone, the gap grew at an annual rate of eight percent. In response, Eshkol, Sapir, and Bank of Israel governor David Horowitz resolved to take the drastic measure of orchestrating a recession. This established the foundation for what later came to be referred to as “the policy of recession,” which resulted in mass firings and rising unemployment, among other phenomena.
The process began with a drastic budget cut, a tax increase, and the halting of new development projects. The severe reductions in government funding slowed down various sectors of the economy. Meanwhile, unemployment continued to rise to three times the average in previous years. Unable to create new jobs, the economy began to spiral downward. The first sign of deepening crisis was the stormy demonstrations of unemployed residents of Dimona and Ashdod on May 1, 1966. Another indication was the almost complete halt in immigration to the country and a rise in emigration.
Israel started to emerge from the crisis caused by the recession in late April 1967; within a few months, the economic crisis had changed dramatically. During the summer, the trends in national indicators completely reversed. Unemployment began to fall, inflation stabilized, the gross national product increased dramatically (particularly in industrial production), and the disparity in the balance of payments began to decline.
•••
Paradoxically, the recession had almost no effect on Assia’s profits, even though it caused a downturn in sales within Israel prompting the freezing of several production lines. With one third of the company’s products now destined for foreign markets, workers could be shifted from lines producing locally consumed products to other lines that were designated for exports and still working at full steam. As a result, Assia’s finances paradoxically improved during this recession. Not only did the company avoid a decline in turnover and profits, but it also grew substantially. This is also why Assia launched a computerization process during this period that greatly improved its operations.
Eli took the lesson of the 1964 recession to heart in his increased advocacy of an export-focused economy for Israel. When the Israeli daily newspaper Yediot Aharonoth asked Eli what should be done to increase economic growth in the country, his unequivocal response was, “Exports should be increased…. On principle, the government must make sure that exporting is more worthwhile than [sales in] the local market.”
Eli ascribed some of Assia’s success to the changes in government policy, such as the increased exchange rates for foreign currency that exporters received. He recognized that government policy was working to encourage exports, publically acknowledging that “the government has improved the administrative tools for exports.” However, he thought the government could have done more.
Eli drew a conclusion regarding the recession that differed from the conventional wisdom of decreasing production at the outset of a recession. Eli resolved to expand his company’s production lines because of the economic downturn in Israel. His goal of increasing exports could only be reached through “production for export,” as he referred to it. Nonetheless, he had no doubt that as long as the economic situation remained unclear and the economy continued to deteriorate, he could not implement the next phase of his plan: expanding Assia through mergers and acquisitions.
Eli was not deterred. After the Six Day War31 and the recession ended, Eli understood that in order to expand Assia’s production lines and the scope of its exports, he would first have to expand Assia. Therefore, he began planning a large plant on Har Hotzvim in Jerusalem. The plant would make it possible to launch new production lines and expand existing ones. The idea of building another pharmaceutical plant in the nation’s capital, which had just been reunified due to the war, also accorded with government policy, which Eli sought to utilize to Assia’s benefit. He understood that government ministries and the Jerusalem municipality, as well as their joint institutions such as the Jerusalem Economic Corporation, would do everything possible to attract industry to the city, particularly in eastern Jerusalem. He also knew that they would be willing to allocate land for this purpose and to subsidize expenditures on production workers and the move to the city. After arduous negotiations and the determined encouragement of the Ministry of Trade and Industry, Assia was assured that it would receive the same terms that Teva had been promised.
Teva’s plant was located in the residential neighborhood of Bayit Vegan and many of its neighbors constantly complained that the plant emitted disagreeable odors. To remedy the situation, a new location for the plant was found elsewhere in the city: Friedlander was allocated 4.2 acres in an industrial zone on Mount Tamir (today the cemetery on Har Menuchot). In the wake of this allocation, Assia was promised an even larger plot of 6.4 acres, with an option for three additional acres, on Har Hotzvim in northwest Jerusalem near Sanhedria. The city’s energetic mayor, Teddy Kollek,32 sought to establish a special park for scientific industry on Har Hotzvim.
This was another reason why Eli was interested in gaining control of one of Israel’s two remaining large pharmaceutical companies. One possibility was Ikapharm, which was controlled by Koor, a Histadrut-owned company established in 1944 as part of Solel Boneh (whose business activities included building materials and heavy industry) and which served as its main industrial arm. The other option was Teva, which was based in Jerusalem. In addition, Abic, another family pharmaceutical business that Dr. Yoel Ben-Tovim founded with the help of his three sons, also began to attract attention. In 1939, using funds he brought with him from his home country of Italy, Ben-Tovim had established a small company that became a thriving business venture in the years to come, particularly during the 1960s.
To Eli, Ikapharm and Teva remained as problematic as ever. The owners of Ikapharm were not willing to have their company become part of Assia. Dr. Gunter Friedlander, who was the dominant figure at Teva even though he did not control most of its stock, refused to even consider the matter and succeeded in convincing the other stock holders to do the same to some degree. The same was true of Abic; the family that owned it was absolutely unwilling to relinquish control of the company.
“We told ourselves that we greatly needed to expand our array of products on the international market,” Eli explained, shedding light on his considerations at the time. “We looked around and saw Abic and Teva. Abic was a medium-sized company that commanded a great deal of respect and Teva was a company that did not enjoy much respect but produced good products.”
In the end, he resolved to acquire Te
va, even though he knew he would face immense opposition from Friedlander. As far as he was concerned, Teva was the ideal company for his purposes at the time: it was big enough to be worthwhile to take over, but not so big that Assia would have difficulty doing so; its products were marketed in Israel but also had markets abroad; and it was based in Bayit Vegan in Jerusalem and its employees lived in the city, which would make it easy to integrate them into the new plant he sought to open on Har Hotzvim. Most important of all, however, Teva was Assia’s major competitor in the local market. It produced high-quality products, particularly Optalgin, a pain reliever that had become one of the most popular products on the pharmaceutical market.
“We had Assialgan, which no one wanted to buy,” Eli explained.
It would give me ulcers to travel through Nigeria and see that Optalgin was selling there, while we were unable to sell our own product…. Why was Optalgin selling there? Because it was better. It dissolved in the blood in the optimal amount of time. Very few companies produced such a high-quality product.
In addition to pain relievers, Teva had other products that competed successfully with Assia products.
Despite Teva’s market prominence, a quick glance at the public reports of the company’s finances, revealed a notable inconsistency between the quality and sales of its products on the one hand and its profits on the other. Teva’s profits amounted to less than one-tenth of those of Assia, which had a much less extensive product line. It was clear that the company was being run inefficiently and that the management approach that Eli had successfully implemented during the merger with Zori had the potential to boost Teva’s profits substantially. Moreover, according to Eli’s estimates, the potential to sell Teva products abroad was very high, yet its export activities were much smaller than Assia’s in both volume and turnover. All this led Eli to seek to acquire Teva.
Eli Hurvitz and the creation of Teva Pharmaceuticals: An Israeli Biography Page 13