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

by Yossi Goldstein

  Eli now began to work determinedly toward the acquisition of an American pharmaceutical company to serve as Teva’s strategic center in the United States. Even then, he had clear intentions, which he voiced aloud during the wide-ranging discussions he conducted with his management: a multi-year plan for Teva that would take three to five years to complete and that would result in an increase in sales to the United States from $15 million in 1985 (out of Teva’s $87.5 million in total sales that year) to twice that amount the following year and to “no less than $150 million within three or four years.” Since Eli was convinced that the chances of increasing Teva’s sales in Israel were nonexistent, his goal was for Teva’s exports to the United States to double the group’s sales within a relatively short time. These aspirations were unfathomable for other senior Teva officials at the time.

  “They called me a dreamer,” Eli said later of this period.

  Characteristically, Eli regarded his own forecast as a living reality, although some members of the corporate management labeled his projection “a nightmare.” As usual, once he decided on something, he worked toward it without paying much attention to the skeptics. He had already taken the first step toward achieving this goal by initiating activity on the NASDAQ. This was the only place he could mobilize the credit needed by the group, which was in the midst of a major development drive. He therefore began planning a major issuance on the NASDAQ, to be carried out in or around 1987, and he sent Susskind off to work toward this goal.

  At the same time, it was also necessary to establish a strategic center in the United States. The agreement signed between Grace and Teva also stipulated the construction of a joint plant. Known as TAG (Teva and Grace) Pharmaceuticals, the resulting company was meant to serve as the Israeli pharmaceutical corporation’s entry into the boundless US market. Moreover, it was also clear that, in the future, this dependable, reputable American company would help acquire the necessary certification for the marketing of medicine around the world. Eli did not conceal these aspirations, which found their way into the media. As a result, the press was already referring to the group as “the largest drug concern in the Middle East.” Eli, it turned out, had already drawn up a complete, consolidated plan for entering the US market, which, in his mind’s eye, had already been implemented. However, to make his goals a reality, the plan still needed to be implemented.

  To this end, after signing the deal with Grace, Eli asked a local New York attorney named Eliot Fisher to quickly find him a company that would be well suited for the task. After a few months of looking into the matter, Fisher submitted a list of 11 recommendations. Eli and Susskind, in consultation and coordination with Terry Daniels from Grace, selected one of them: an unprofitable, medium-sized, Pennsylvania-based generic pharmaceutical company named Lemmon Pharmacal Company that had been founded in 1945. The company had 55 medical advertisers who marketed its products throughout the United States and Europe, approximately 200 employees, and exclusive rights to market a number of medications. Lemmon’s German owners had invested in various projects in Europe, some of which had encountered difficulties. Because laws were about to take effect in Germany that did not recognize overseas losses as tax exempt, the company’s owners needed to sell the plant as quickly as possible. Eli and Susskind were certain that they would be able to purchase the company for less than its actual value if they could find the cash demanded by the German owners. In December 1985, after negotiating over the price, they offered Lemmon $23 million, which was less than the company’s actual value. Lemmon’s owners accepted the offer on the condition that the sum was paid in cash by the end of the year.

  Eli knew that Teva’s coffers did not hold enough cash to pay for half the company, but Grace’s leadership did not see this as a problem. They agreed to Eli’s proposal that Teva invest $1.5 million in the joint venture immediately and another three million in the future. Grace would provide the remaining $18.5 million as a loan. In return, Teva would run the plant and at any point that Grace wished to leave the partnership, it would be repaid in full, including regular interest. Eli’s somewhat presumptuous proposal was based on the fact that Grace had a great interest in entering the pharmaceutical market and that the purchase price proposed to the owners of Lemmon had been lower than the plant’s actual value. It was also influenced by the fact that for Grace – a company with a turnover of eight billion dollars per year – it was a relatively small investment and that it was a decent loan, considering the market conditions at the time.

  •••

  Lemmon, a relatively minor company, now became of dramatic strategic importance for Eli and Teva. By 1990, five years after its acquisition, its sales had tripled and approximately one-quarter of the drugs manufactured by the group were made on Lemmon’s production lines. This was unprecedented even within Teva. Eli implemented a three-part strategy for maximizing Lemmon’s growth. The first step was to increase the marketing of generic products that Lemmon was certified to manufacture and to find new markets. During the next phase, company agents supported by Teva personnel and new agents introduced to the company’s workforce began to try to obtain authorization to market generic products. It did this in two ways: by using the original name of the manufacturer or by using the name Teva along with the product’s generic (chemical) designation. In 1987, Teva registered its first generic drug in the United States (Tegretol) and has been adding new ones ever since. During the third phase, new drugs developed by Teva were introduced to the US market. Although this niche was still in its infancy, it held great potential for growth.

  For example, one drug that Teva developed facilitated calcium absorption in the intestines. This drug, which was developed for people suffering from kidney problems, was specifically designated for approximately 200,000 patients in the United States. Because of its relatively small number of potential buyers, it was classified as an “orphan drug,” enabling it to enjoy eased registration regulations, tax incentives, patent protection during clinical experimentation, and exclusive rights for a period of seven years. The medication was in advanced stages of development at the same time as two similar Teva-developed drugs that were slated to be marketed by Lemmon. Lemmon, which changed its name to Teva Pharmaceuticals USA in 1996, served as the vehicle through which Teva introduced additional non-prescription drugs to the US market to be sold primarily by the large chains. For example, the traditional Teva standby Acamol was introduced to the US market via pharmacies throughout the United States with relative success.

  Entering the US market was Teva’s most significant step since 1976, when it became the largest pharmaceutical group in Israel. As a result, not only did its annual exports rise dramatically to meet its target of $150 million two years ahead of schedule, but the group also grew massively in all areas. In a prospectus that Teva submitted to the NASDAQ in the fall of 1987 to raise capital for further expansion, it was already portrayed as a medium-sized pharmaceutical company according to American standards. In this fund-raising drive, Teva issued the American public $42 million dollars in shares, which was an astronomical sum according to Teva’s standards at the time. The shares were snapped up almost immediately.

  Beyond the capital that Teva mobilized for its regular operations, Teva’s 1987 public issuance on the NASDAQ held added significance for Eli and the founding families. This was because it included Teva shares that Koor owned. During this period, Koor’s financial situation was deteriorating and the Histadrut-owned company was in urgent need of cash. It inhaled the $15 million it received for its shares on the New York market like badly needed oxygen. As far as Eli was concerned, he had come full circle and could now breathe easy. Koor’s share in Teva had been significantly diluted and now stood at only one-quarter of the company’s stock, less than the share held by the founding families. With this, the attempted hostile takeover that Yaakov Levinson had initiated in 1983 was soundly and finally defeated.

  •••

  Teva’
s entry to the US market presented Eli with another serious challenge. It was now certain that Teva’s sales in the United States and Europe would soon surpass its sales in Israel. Teva had evolved into a multinational corporation and concerns grew that its strategic center might soon move to New York. Indeed, at the time, proposals to this effect were brought before Eli, the corporate management, and members of the board of directors. The company’s patriotic CEO ruled out any such possibility and after informing his colleagues in the corporate management and the board of directors of his position on the matter, he erased all such proposals from the agenda. From his perspective, nothing had changed.

  “The challenge facing Teva today is not that of being a multinational corporation, but that of being an Israeli multinational corporation,” Eli stated, explaining why he had ruled out all proposals to move its center to the United States.

  ”For a company like Teva,” he explained,

  being Israeli means leaving the “head” in Israel, doing the research and development in Israel, implementing the more advanced technology in Israel, and managing the corporation from Israel…. Meeting this challenge means making sure that in every step we take toward multinationalism, we remain Israeli. If the answer is no, we will not take the step!

  In 2000, as Israel’s Companies Law came into effect, Eli took measures to formulate and instill Teva’s character as an Israeli company in its bylaws in a more substantial way.

  Chapter 16

  In the Service of Bank Leumi

  During the 1980s, Eli’s success as the CEO of Teva, president of the Manufacturers Association of Israel, and an influential figure in the Israeli economy earned him widespread recognition and regard in Israel. One reason for his prominence was his personality. Not only was he intelligent, pleasant, and kind, but he was also an uncompromising industrialist and businessman known for sticking to his guns.

  “His broad, friendly smile has already become his trademark,” journalist Orly Azulay-Katz wrote in a major profile published on May 16, 1986, in the Israeli daily newspaper Yediot Aharonot. “His green, innocent eyes and the smile that seems never to leave his face envelop him in an air of serenity. But those who know him well will tell you that his smile is deceiving and that behind it lies a tough businessman who fights like a lion for his own personal interests.”

  Eli’s positive reputation also stemmed in part from his tendency to express opinions that were practical and businesslike while trying to avoid unnecessary controversy and steer clear of political debate. It was therefore not at all surprising that he was widely accepted on both sides of the political spectrum, even though he did not conceal his moderate views, which were comparable to those of supporters of the Labor party.

  “Prime Minister Shimon Peres frequently says: ‘I simply like the man,’” Azulay-Katz continued in the Yediot profile. “To describe him, Peres uses the words ‘noble,’ ‘fair,’ and ‘trustworthy.’ On one occasion, Peres wanted Hurvitz to serve alongside him as finance minister. On other occasions, senior members of the Likud party sought the same thing.”

  When Ernest Japhet was removed from his position as chairman of the board of directors of Bank Leumi Israel,44 which was then the most senior position in the Israeli banking system, Eli’s name was put forward to replace him. Eli’s candidacy did not raise many eyebrows, despite the fact that he did not have a background in finance. With the exception of his few years of service on the bank’s board of directors, he had never held a banking position of any kind. When asked why he supported appointing the CEO of Teva to this key position, professor Pinhas Zusman, a world-renowned economist and member of the bank’s board of directors who had also served as a successful director general of the Israeli Defense Ministry, explained that they “had been looking for a person who was talented, successful, fair, and honest, who understands banking issues by virtue of his position in industry, and who is capable, by all standards, of bearing the burden of the most important bank in the country.”

  “Most importantly,” he continued, “we believed that he, and no other, should be the one to try to rehabilitate the battered bank in light of its current dire state.”

  •••

  The “dire state” Zusman noted was the drama that gripped the Israeli stock market in 1983, when the country experienced the most severe financial crisis in its history. As mentioned earlier, one of its outcomes was the collapse and nationalization of the country’s banks and the dismissal and legal prosecution of senior members of their managements. The roots of the crisis stretched back to the early 1970s. The banks had an interest in controlling the price of their own stock on the Tel Aviv stock exchange. Therefore, they recommended that their customers invest in their stocks; the resulting purchases enabled them to increase the capital at their disposal for providing loans. To ensure that the stocks remained an attractive investment – the banks also engaged in mass purchasing of their own stocks, primarily through mutual funds and the companies under their control.

  This reckless activity continued until January-March 1983, when Bank of Israel governor Moshe Mandelbaum and Israeli finance minister Yoram Aridor asked the banks to gradually reduce self-regulation of their stocks. Their request was not met and in the months that followed, the supply of bank stocks continued unabated, reaching new heights in September. Meanwhile, the public steadily sold off bank stocks and purchased dollars in their stead. The crisis intensified on October 5, when large supplies of stocks were dumped on the Tel Aviv Stock Exchange. The next day, which the media dubbed Black Thursday, marked the onset of a mass rush by sellers. It seemed clear to all that the banks would collapse in a matter of days and the heads of the banks announced that they could not prevent a crisis without government funding. The stock exchange was closed and during a consultation at the home of the finance minister, it was decided that the government would wait until the total value of all the shares in question dropped to approximately 20 billion Israeli shekels and then offer to purchase them. Regulation was discontinued and the government guaranteed the bank stocks in the hands of the public. The stock exchange reopened on October 24, after a 23% devaluation of the shekel. Some investors did not take the government up on its offer of waiting five years before redeeming the bond and then being paid their full value; instead they sold them for 17% less than their previous price.

  In January 1985, after the resolution of the stock market crisis and after the government comptroller submitted a harsh report on the banks’ conduct, the Knesset’s State Control Committee resolved to establish a state commission of inquiry into the matter. The commission, which Supreme Court justice Moshe Bejski led, submitted its findings in April 1986. It unequivocally concluded that the crisis had been the direct result of the banks’ regulation of their stocks. The commission also called attention to ostensibly criminal offenses committed in the course of this self-regulation. As a result of the commission’s findings, the heads of four of Israel’s five commercial banks that engaged in stock regulation were dismissed, including Ernest Japhet of Bank Leumi.

  •••

  Eli was displeased by the findings of the Bejski Commission, not because he believed they were inaccurate, but because he thought they did injustice to Japhet. After all, stock price regulation was an acknowledged practice that had been widely employed for more than 15 years. Though technically it was illegal, it had gained legitimacy in the eyes of much of the Israeli public. Eli himself had sustained serious injury when Levinson, the general secretary of Hevrat Ha’ovdim and Bank Hapoalim, employed the practice in his attempt to takeover Teva. Why, Eli asked, had the authorities failed to take action against Levinson yet were now seeking to punish Japhet?

  “I still do not understand why the Bejski Report is regarded as the word of God,” Eli protested later. “The commission members may have done a thorough job, but their assessment of the situation was incorrect…. Hundreds of people were involved in regulating the stocks. Were they
all stupid? Were they all irresponsible?”

  The regulation was conducted in violation of an ineffective law routinely ignored. Indeed, the law was only enforced after thousands of people were harmed by its violation.

  •••

  The directors of Bank Leumi now sought a credible, experienced, and well-connected individual to replace Japhet; the consensus was that Eli was the man for the job. For months, he had been among those on the board of directors who had cautioned his colleagues about the body’s substandard functioning, particularly

  the failure to issue real reports by the management and the board of directors…. I must admit, I was furious…. I exerted personal pressure all the time to call the board of directors to order…. “You’ve gone crazy!” I told them. “I don’t know what’s going on at the bank and I heard from someone at a competing bank [Hapoalim] that Bank Leumi bought so many shares that it was almost worthless. If I’m mistaken, please tell me so. If it’s true, you’ve gone insane, and I’m not willing to take part in the game.” As a result of my pressure and the pressure of others, they made a change, but it was already too late.

  At first, Eli declined the board’s request. He knew that stepping into Japhet’s shoes at that point would be difficult if not impossible.

  “It was looking for trouble,” Eli said, justifying his refusal.

  Nonetheless, someone had to save the country’s largest bank; thousands of citizens and institutions were depending on it.