Eli Hurvitz and the creation of Teva Pharmaceuticals: An Israeli Biography

by Yossi Goldstein

  To their amazement, thanks to Allenberg’s mediation, the Dutch bank immediately authorized the requested loan of $1 million. Since the financing had been provided by a foreign source, the Bank of Israel authorized the transaction without any unnecessary delays.

  With long-term considerations in mind, Eli worked to acquire the Dutch plant by means of the same method he had used in his Assia transactions in Africa: by locating a silent strategic partner to assume some of the expenses and financing. At the time, Eli regarded the Histadrut’s Koor Industries as the most suitable company for this purpose. After negotiations with its leadership, they entered into a full partnership by means of a subsidiary they had acquired: Dizengoff West Africa, which had served as Assia’s partner in many of its projects in Africa. They also established D.W.A. Pharmaceutics to manage the plant, based on their agreement that Teva would be exclusively responsible for its management. Another challenge stemmed from the fact that a portion of the Hollinghausers’ exports had been directed to the developing markets of Jordan, Saudi Arabia, and other Arab countries, so they needed to find a way to evade the Arab boycott. The Israeli company therefore set up a Dutch company that also operated in several Arab countries.

  Teva’s acquisition of the Dutch company proved to be particularly successful and the production and export of Furazolidone (which was ultimately declared to be unsafe) and alternative substances increased dramatically. However, the acquisition also had added value that no one took into consideration at the time: Holland’s relative advantage over other countries in the realm of tax law. In Holland, foreign investors enjoyed substantial tax incentives, and at the time, business people from around the world would purchase Dutch companies as tax shelters. Teva also used these incentives to its advantage and the small plant in Holland became Teva’s strategic center in Europe.

  Acquiring the Dutch chemical plant required taking steps that went beyond the walls of the plant itself, such as dealing with its sewage treatment issues. Gabi Polack, the director of the group’s chemical division whom Eli had asked to manage the plant, and his successor, Aharon Shochat, handled this. They needed to clear the contamination that had accumulated on and around the site over the past 30 years and arrange for the routine treatment of waste material as an integral part of production. This had been the chief source of problems for the Hollinghausers. Eli was aware that the authorities had already stated that if the problems were not solved, they would be forced to close the plant. From the outset, he instructed his senior management to treat finding a solution to the ecological problems created by the sewage and chemicals as an integral part of the production process.

  In the course of addressing the issue, Teva tried various methods of disposing of the waste, including burying it, burning it, and dumping it in the ocean. Although it took a few years, Teva ultimately found and implemented solutions to all the problems and the lessons learned were subsequently applied in all Teva plants. Teva’s corporate management had already committed itself to working in ways that protect the environment, but this consideration had not yet become an integral part of the production process. After taking over the Dutch company and the great lengths to which Teva went to solve the pollution problems there, the efforts to find acceptable solutions to ecological problems emerged as a guiding principle at all the group’s plants.

  Certain aspects of the Dutch plant gave rise to both admiration and ridicule among Teva’s workers and managers. The Dutch workers’ exemplary self-discipline vis-à-vis the expectations of their managers, which was unparalleled in the group’s plants in Israel, caused the corporate management to make several changes in its operations in Israel. They did not, however, consider adopting this in full due to their conviction that Israeli workers were made of different stuff than their Dutch counterparts. Among the Israelis, the phrase “Dutch worker” became a pejorative to refer to a pedantic worker who regards his work as sacred. The Dutch workers’ demand to raise their wages between one-third and one-half of a percent was also a pleasant surprise from an Israeli perspective and was enthusiastically embraced by Teva’s management. The inflation raging in Israel at the time meant that the wages of Teva employees in Petah Tikva and Jerusalem increased by a few percentage points each month as smaller increases were unrealistic. Nonetheless, the fact that some workers had modest wage demands was another message that Eli and his management sought to inculcate in the production workers of Teva, albeit with little success.

  Perhaps more than anything else, the acquisition of Orphahell symbolized Teva’s ongoing growth and expansion. Although the plant had a relatively modest balance sheet, it provided a foothold in Holland that constituted a basis for future Teva operations in Europe and for continued growth. By 1979, one year after the acquisition, the workforce employed by the Teva group had grown to more than 1,000 men and women, almost double what it had been at the beginning of the decade. The company’s turnover now stood at more than one-half billion Israeli pounds. Of this, 70 million Israeli pounds were spent on research and development, which was comparable to the research budgets of medium-sized companies in the United States.

  These figures are even more impressive when considering the state of the Israeli economy between 1975 and 1985. During the tenure of the Alignment List’s government led by Prime Minister Yitzhak Rabin35 and Finance Minister Yehoshua Rabinovitz (1974-1977), as well as of their Likud successors led by Prime Minister Menachem Begin36 and Finance Minister Simcha Erlich, Teva was forced to operate in an extremely problematic economic environment. The situation deteriorated even further under the governments of Yitzhak Shamir37 and Shimon Peres38 (1983-1989). That said, all these governments, without exception, regarded export as an economic goal of the utmost importance and sought to encourage it in every way possible. Assia, and subsequently Teva, profited from this policy. During the second half of the 1970s and the early 1980s, exports accounted for less than half of Teva’s total production, and 60% of the company’s merchandise was still being directed toward the inflation-battered local market, which suffered from other problems as well. Despite the complex economic state of affairs which did not constitute a foundation for sound economic activity, the group continued to grow and flourish.

  •••

  Eli had serious complaints regarding the two governments that presided over Israel between the mid-1970s and the early 1980s. Neither Rabin’s government nor Begin’s was sufficiently supportive of industrialists or exports. The benefit of hindsight indicates that the criticism was exaggerated, at least as far as Teva was concerned. After all, these were years when the company expanded and hired many new workers. It was also a period during which Teva’s profits climbed at a staggering pace in comparison to other pharmaceutical companies in Israel and abroad.

  During Rabin’s first term as prime minister (1974-1977), the economy grew at a relatively reasonable pace, but was beset by serious problems. Personal per capita expenditures increased sharply and monthly inflation rates reached new highs. In addition, the deficit in foreign currency continued to climb at an unreasonable pace in comparison to the reserves that Israel held.

  The reasons for these serious problems, particularly the growing deficit and rising inflation, undoubtedly had more to do with the impact of the Yom Kippur War than the functioning of Rabin’s government. The war, which removed tens of thousands of young adults from the workforce for approximately three to five months, resulted in a major decline in Israel’s gross national product and, at the same time, a marked drop in tax revenues. As a result, the government was forced to print more currency. This, in turn, stimulated inflation, which stood at 54%, 23%, and 38% respectively during Rabin’s three years in office. In order to halt inflation, Rabinovitz was forced to make major cuts in the national budget.

  In addition to its inflationary woes, during this period the Israeli economy was beset by another troubling phenomenon: the gradual depletion of its foreign currency reserves. Due to the massive gov
ernment outlays and concurrent rise in the standard of living, the US dollar became a necessary commodity that was in high demand. The continuing depletion of reserves left Rabinovitz and his associates in the Finance Ministry convinced that they had no choice but devaluation. On November 8, 1974, the US dollar was devalued vis-à-vis the Israeli pound to 6 Israeli pounds to the dollar instead of 4.2. This devaluation of 43% was meant to stop foreign currency from flowing out of the country and, in the long run, to help curb inflation. But the measure missed its mark, leaving the next government to introduce additional devaluations. The devaluations carried out by the governments were lower than the rate of inflation and therefore resulted in real appreciation of the Israeli pound, ultimately damaging Israeli foreign currency reserves and exports.

  Unsuccessful economic policies thus became a stumbling block for the incumbent political leadership. The results of the parliamentary elections in 1977, which placed the leftist labor parties in the opposition for the first time in Israeli history, stemmed in part from these economic issues. Upon entering office, the new government under the leadership of Menachem Begin declared its intention to carry out an economic revolution and to promote a free market in Israel. Finance Minister Simcha Erlich therefore attempted to implement a policy that would facilitate free competition and minimize government interference. Slowly but surely, however, it became clear that inflation, which Erlich had promised to eliminate, continued to rise on a monthly basis, reaching a new high of 111.4% for 1979, with monthly averages of more than 8% during the second half of that year. In addition, unemployment rose dramatically and labor relations began to deteriorate. Within a relatively short time, the measures that the Finance Ministry had introduced to curb inflation had proven themselves ineffective.

  That said, after two years in office, the Likud government could point to a number of economic achievements, such as a substantial increase in growth and savings. Now, in addition to the objective reasons enumerated by Erlich and his supporters to explain the rising pace of inflation, such as their “troubling inheritance” from the Alignment government, a new factor emerged: the current and future cost of the Israeli-Egyptian peace process. The public was not convinced by these explanations, often viewing them as excuses. During the second half of 1979, inflation continued to rise at a feverish pace, posing a threat to the country’s economic structure and causing major disruptions to its economy.

  •••

  Under Eli’s leadership, Teva implemented an array of measures to protect itself from the inflation-based economic crisis.

  “Only [the government] stopping it [the inflation] can bring about the longed for salvation, the redemption toward which the eyes of all exporters are now lifted,” Eli waxed poetically to a newspaper reporter.

  Eli was not convinced that the government was doing enough to contend with inflation and he therefore took measures of his own to safeguard the profitability of his enterprise. On the one hand, he continued to increase exports, generating income that was truly greater than the return on comparable products in the Israeli market, boasting to one newspaper reporter, “The group sells its products on world markets for prices that are 20% higher than the local market price.” At times, however, like many other manufacturers in the country, Teva was also compelled to regulate and even reduce exports because the exchange rate on the dollar was not commensurate with inflation. This led him to complain to the same journalist: “These days [April-September 1978], the average exchange rate is 57%, and 39% for exports. The Israeli pound is up. The dollar is down. How can we work like this?” Under these conditions, his solution was precisely the opposite of what he had been preaching all along: reduced exports and enhanced domestic marketing.

  During most of the period in question, Eli worked unswervingly to achieve the goals he had set many years earlier: increased production at Teva plants, the profitable sale of products in the Israeli market, and entering more and more markets abroad. He also continued to seek out additional plants to take over as fuel for Teva’s expansion. By pursuing these goals, he managed not only to effectively navigate Teva’s path through the stormy waters of the Israeli economy, but also to steadily increase its targeted annual growth in the process. He initially made due with annual growth of 5-10%, but would subsequently come to expect a great deal more, calling for, “a 100% growth every four years!”

  Some characterized Eli’s goals for Teva as insane and disproportionate, while describing Eli with words such as unrealistic and megalomaniac. Eli held his course and maintained faith in his goals. During the 1979-1980 fiscal year alone (at that time, fiscal years began and ended in April), Teva’s total sales rose by 80% (from 720 million to 1.3 billion Israeli pounds), while its pre-tax profits increased by 109% ( from 110 to 230 million Israeli pounds) and its per-share profit by more than 68% ( from 95% to 160%). True to form, Eli regarded these extraordinary achievements not as an end in themselves but as a basis for future growth, or, to use his own words, as only “a beginning.”

  Chapter 12

  A Palace in Kfar Saba

  The Orphahell plant in Holland was the first plant Teva purchased after the merger. Eli viewed its successful integration into the expanding pharmaceutical group as a clear indication of the direction Teva would take in the future. He was also now certain that expansion would be even greater in the future than it had been in the past. He did not acquire the Dutch plant for having a unique product line, but because it specialized in manufacturing a chemical product that competed with Teva.

  After the Orphahell acquisition, Eli had two options: either expand and diversify Teva’s catalogue of pharmaceutical products through another acquisition or expand and diversify the chemical products that the group sold. The first option could be accomplished by the acquisition of one of the two remaining pharmaceutical companies in Israel: Koor’s Ikapharm or Yoel Ben-Tovim’s Abic. The latter also competed with Teva in the chemical market’s nitrofuran sector, making it an even more attractive target for Eli. The second option, on the other hand, could be pursued in Europe by purchasing chemical plants in Italy or Hungary. As neither option was clearly preferable to the other, Eli and his team began exploring all the possibilities.

  Ben-Tovim had indicated that he was interested in retiring and wanted to sell the plant. He had grown weary after 40 years of struggling to make Abic a large, well-known pharmaceutical company. Israel Discount Bank, whose subsidiary Discount Investments had acquired a substantial portion of Abic shares, was also convinced that selling the plant was the right move.

  Eli began by conducting negotiations with Dan Tolkovsky, a former Israeli air force commander who was now representing the bank. Eli did not conceal his desire to take over the competing company, primarily because it was making things difficult for Teva in the nitrofuran market. Tolkovsky was willing to sell the bank’s shares in the plant; at every meeting with Eli, he expressed the bank’s dissatisfaction with the manner in which Abic was being run, primarily due to Ben-Tovim’s lack of consideration for his partners, that is, the bank.

  “If you acquire our share, how will you get along with Ben-Tovim?” Tolkovsky asked Eli, who actually thought highly of his rival from Abic.

  Eli had not expected any problems to emerge during his negotiations with Tolkovsky, but in the end, the two were unable to find common ground on the question of price. Eli felt the price the bank was asking was too high. Eli warned Tolkovsky that both he and the bank would regret this.

  At the same time, Eli was negotiating with Koor to acquire Ikapharm, which had expanded its operations and recently built a massive production facility in Kfar Saba to replace its old, dilapidated one in Ramat Gan. The new facility and Koor’s Netanya-based Plantex plant, which the huge Histadrut-owned company purchased from Baron Edmond de Rothschild in early 1973, together made Ikapharm into a significant pharmaceutical company. Ikapharm later continued its expansion by constructing an additional chemical facility at Ramat Ho
vav near Beersheba. From Eli’s perspective, Ikapharm’s 400 employees, extensive array of pharmaceutical products and patents, production of raw materials, and FDA approval to manufacture several products that were exported to the United States (an accomplishment that was still out of Teva’s reach) all made it a company that could threaten Teva’s hegemony in Israel, particularly if it took over Abic.

  Eli’s negotiations for the acquisition of Ikapharm were successful and an agreement was reached. That same week, Tolkovsky invited Eli to lunch.

  “I’ve had enough!” the frustrated deputy CEO of Israel Discount Bank said in exasperation. “Abic is hardly turning a profit. We invested a great deal of money and we are not seeing results. I’m willing to sell you the Abic shares at the price you proposed.”

  But Eli refused.

  “I can’t say anything more about it,” he told Tolkovsky cryptically, “but I don’t think we can purchase the shares of Abic right now.”

  Soon after that, when Teva’s Ikapharm-Plantex acquisition became public knowledge, Tolkovsky scheduled an urgent meeting with Eli to attempt to persuade him to take over both of them at once. Eli pondered the matter and momentarily considered bringing the proposal before his board of directors. In the end, however, he decided not to. The task was simply too daunting, at that point in time at least. Eight more years would pass before Eli would take over Abic.