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

by Yossi Goldstein

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  As mentioned above, the primary area of growth that Teva targeted was the US market and exports to the United States indeed increased from year to year. In 1993, exports to the US accounted for approximately 46% of the group’s overall sales, exceeding sales in Israel, which then accounted for 40% of overall production. In the US generic pharmaceutical market, Teva was considered an important, influential company. This was reflected in its 1992 receipt of FDA authorization for 10 generic drugs, which came after four years during which not even one such drug had been authorized due to corruption discovered in some American drug manufacturers’ dealings with the FDA. Teva was the first company to receive FDA approval after this long dry spell. Soon after, Teva received approval for five more generic drugs.

  “We were surprised,” Eli admitted. “We didn’t think we would receive authorizations so quickly, certainly not for the more important drugs. We were so surprised that we had not even prepared enough raw materials to begin production of some of the important products.”

  Surprised or not, Teva had become well known in relevant circles. Its pharmaceutical products, which filled most (71%) of the production lines in its plants, now became well known among physicians in the United States. So it is not surprising that the FDA subsequently approved most of Teva’s authorization requests for 26 additional generic drugs quickly. It also is no wonder that Dupont and Merck, two major American chemical companies, signed contracts with the group to distribute their generic drugs (in addition to Teva’s sale of these medications) or that the drug manufacturing giant Pfizer signed a contract awarding Teva production and marketing rights for a new generation of drugs it had developed. More than simply serving as another springboard for the growth of Teva sales in the United States, these agreements symbolized these corporations’ recognition of Teva as a company with potential whose pharmaceutical products were worth selling, whose distribution services were worth engaging, and whose plants’ production lines were worth using.

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  The Americans’ faith in Teva was also reflected in a stock issuance on the NASDAQ in late June 1991, as well as concurrent secondary issuances in Geneva and London. Four years after the previous issuance on the American stock exchange, Eli had concluded that another issuance was necessary. One reason was Grace’s resolution to sell its 14% share in Teva and Eli’s lack of desire to take on additional strategic investors at that point. In light of the company’s performance in the years following the previous issuance, Eli, Susskind, and the rest of the corporate management decided that it would be worthwhile to sell Grace’s stock on the American stock exchange. The sale was also important in that it provided an opportunity to raise additional capital to facilitate Teva’s future expansion.

  Even before the issuance, Eli had decided to purchase Grace’s share of TAG, the joint American company that had enabled Teva to break into the US market. The management at Grace explained to Eli that although it was “very satisfied with the partnership,” it needed to focus on its own strategic goals in the chemical industry, as compared to the pharmaceutical industry, and was therefore no longer interested in owning a pharmaceutical plant. It would make do with the massive profit it had accrued from its 14% share in Teva. In July 1990, just five years after the establishment of the joint company, Teva’s board of directors authorized the acquisition of the other half of the TAG shares, which were being held by Lemmon as a single asset. They were sold at the same price that the Americans had paid for their share – half the plant, which was then worth $21.5 million. Teva originally had paid only $4 million for its share, due to a shortage in cash. Now, the large cash surpluses that Teva had started to accumulate financed the purchase of Grace’s half.

  Eli was extremely pleased by Teva’s acquisition of the Americans’ share in TAG since Lemmon, the shared plant it had purchased in partnership with Grace, had become the engine of the group’s growth. He also greatly appreciated the gesture of his American friends in Manhattan. After all, they could have sold their shares in the joint company to anyone at a much higher price or forced Teva to pay more for the shares. Instead, the proprietors of Grace had decided to sell its shares to the thriving Israeli group as a sign of their satisfaction with its impressive performance. Eli viewed this development as another stage in his American plans and subsequently changed Lemmon’s name to Teva America. Within a few years, the additional companies it purchased throughout the United States transformed it into a group that was larger and stronger than the group in Israel.

  After selling its share in TAG to Teva, Grace’s management decided to sell its share in Teva as well. In coordination with Grace, Eli recruited two investment banks, Merrill Lynch and Shearson Lehman, to underwrite the issuance and to mobilize the capital it needed from institutional investors and the public. They sent 13 experts to Israel to assemble the information required for the issuance. Their trip was a well-kept secret due to concern that rumors regarding the issuance could destabilize Teva’s stock and cause the issuance to be cancelled. Next, Susskind traveled to the United States to work with both companies’ accountants on formulating the prospectus, which was submitted to the NASDAQ on May 29, 1991.

  Eli then joined Susskind in the United States to present Teva to potential investors. They set out on a two-week road show to expound on Teva’s virtues far and wide:

  We started with breakfast in New York with a group of buyers from a bank. A half hour later, another group arrived. The presentation also was broadcast by video to other places in the United States. Then we left the meeting place quickly in two cars waiting for us downstairs. In the elevator on the way out, we argued and analyzed every word we had said and would need to say in the future. Awaiting us in the car was a representative of the underwriters, who explained whom we would meet next. We reached the next stop, rode up in an elevator, blew into another room like the wind, made our presentation, rode down, drove, presented, and flew – over and over again, with no end in sight…. The tension was tremendous and we argued endlessly. I have no idea what cities or states we were in. We made eight presentations in a single day. I had to be nice and smile. I sat facing a row of people who were intelligent and complete professionals, who carefully read every word of the prospectus and asked the most menacing questions…. We went from New York to Boston and from there, in Grace’s private jet, we flew to Chicago and San Francisco. Then we continued onward to Geneva and London…. After 10 days, I was a total wreck. I had no idea where I was.

  There were more challenges to come. Ten minutes before the close of trading on the stock exchange on the day of the issuance, the share price dropped to $12, which was relatively low in comparison to previous months. Eli immediately declared that he would not sell shares at such a price and suggested they wait another day. However, Grace’s representatives were trying to sell $40 million worth of shares in the minutes of trading that remained and firmly opposed any delay. After an intense debate on the matter, Eli gave up and the issuance continued at the same price. Within two weeks, what Eli initially regarded as a failure turned out to have been the right decision. Teva’s share price soon increased by 50% and within just a few months, it doubled in value.

  “I could have been in a bad mood because I sold shares for $12 and today they are worth double that amount,” Eli explained, summing up what he had learned from his adventure in New York shortly after the issuance, “but that’s the short-term thinking of a fool. The important thing is that today, I can raise $200 million at $24 a share. It is not a question of the price for which I sold them, but rather the market I created for the stock today and tomorrow.”

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  One reason that Eli decided on an issuance on the stock exchange instead of selling parts of it to private investors was the frequency with which Teva shares had been changing hands in recent years. This had heightened concerns regarding the possibility of a hostile takeover, which troubled Eli a great deal. When Koor t
ook over 42% of the company by means of Levinson and Bank Hapoalim, Teva was at risk of falling into its hands. Only with great difficulty did Eli manage to turn the tables with Danot’s help. Later, Grace bought a 14% share in Teva, which, when considered in conjunction with the founding families’ share, balanced out Koor. The addition of Eli’s friend Charles Bronfman, who used Claridge to purchase a 5% share in the company, further strengthened Eli’s position vis-à-vis Koor.

  The delicate balance that emerged between Teva’s shareholders, which enabled Eli to continue controlling the company as an agent of its founders, was again disturbed when Koor encountered major financial troubles. The Histadrut-owned company was transferred to a receiver, which forced it to sell its shares of Teva. Benny Gaon, Koor’s charismatic CEO, regarded its shares in Teva as a “treasure to safeguard.” Eventually, however, he found himself in need of cash to keep Koor afloat and had no choice but to sell them. On January 25, 1989, an Israeli district court authorized the sale of its shares, which Bank Leumi and Bank Hapoalim bought with the intention of selling them to an investor at some point in the future.

  At just this point, Jewish-British media tycoon and billionaire Robert Maxwell entered the picture. His company Maxwell Communications Corporation, which controlled Mirror Group Newspapers, Macmillan publishers, and other major assets, had also invested in Israel by acquiring the daily newspaper Ma’ariv and purchasing shares of Scitex and other companies. On April 10, 1989, it purchased $30.4 million of the shares of Teva that the two Israeli banks had acquired.

  Maxwell’s relationship with Eli and Teva had begun just three weeks earlier, when they met at the Conference on Jewish Solidarity” a gathering of Jewish businessmen from around the world that then-prime minister Yitzhak Shamir convened. The conference was initiated by former Bank Leumi and Bank Mizrachi CEOs Mordechai Einhorn and Aharon Meir, who had become businessmen and now handled Maxwell’s affairs in Israel, among other places. During the event, Eli was extremely impressed by the British tycoon’s “profound general interest in science,” as he described it, and especially by his willingness to buy the shares of Teva that the banks then held. More important, as far as Eli was concerned, was the fact that Maxwell had agreed to his condition that the founders continue to control the group, even if they held less controlling shares than he. In an agreement between the two parties, Eli and Maxwell resolved to consolidate his shares with those of the founders. This would give the founders 70% of the company’s voting rights, whereas Maxwell would hold 30%, regardless of the number of shares he purchases in the future. The agreement would be valid for 15 years.

  It was an exceptional deal with which Eli was “more than satisfied,” to use his words. The fact that Eli, a former kibbutznik and plasterer’s son, had struck the deal with the descendant of a poor Jewish Czech family made it especially interesting for him. Wall Street also believed in the deal: Teva’s price per share increased markedly when news of the agreement broke and continued to rise over time. When asked to comment, Eli declared that he was not “surprised by the increase in share prices, as the deal with Maxwell had great reverberations in the international business world.”

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  On October 31, 1991, Maxwell sailed his yacht to the Caribbean islands. On the night of November 4-5, he disappeared and his body was discovered floating in the ocean a few hours later. Like many, Eli was shocked. He attended the funeral, which took place at the cemetery on the Mount of Olives in Jerusalem, along with many other members of the Israeli elite, including Prime Minister Shamir, who delivered a eulogy.

  After Maxwell’s death, Eli was further shocked when it came out that his British partner had been deeply in debt and had committed serious criminal offenses. Throughout the year, Eli had heard rumors that the wealthy British businessman was experiencing financial troubles. His empire turned out to be a bubble that had been inflated to immense proportions with the assistance of his charismatic personality and his financial advisors. The massive acquisition and sale of companies enabled him to cover up a fundamental lack of capital. In order to conceal his debt, Maxwell had made use of vast sums of money from his companies’ pension funds, violating British law. When the business failed, thousands of employees discovered that they had lost the money they had saved. Overall, his debts were estimated at 400 million pounds (or approximately two billion dollars).

  The insights that Eli took away from the Maxwell affair were troubling and the fact that so many others had fallen into the same trap by believing in the charismatic figure was no consolation. He felt “like a fool” as Maxwell’s Teva shares could have easily been sold to a “hostile” element that could have taken over the company. Once again, he was convinced that he must continue to do his best to safeguard Teva. He therefore took two measures: first, he facilitated the passage of eight resolutions by the board of directors that made changes to the company’s bylaws regarding the appointment of board members. According to the revised bylaws, anyone purchasing shares for the purpose of a hostile takeover could not immediately appoint a board member, but rather had to wait up to three years to receive suitable representation on the board. The measure not only made takeovers more difficult, but, more importantly as Susskind explained, indicated “to those with the potential to take over Teva that the company opposed hostile takeovers.”

  Eli also took steps to ensure that Maxwell’s shares did not fall into the hands of yet another strategic investor. He contacted Lehman Brothers and National Westminster, the two financial institutions whom the British receiver had charged with selling Maxwell’s shares of Teva. He explained the nature of his deal with Maxwell, which left control of Teva in his hands as a representative of the founders. The heads of the two financial firms were aware of the situation and tended to cooperate, not only for Eli’s sake, but for their own reasons as well. As a result, 70% of the shares in question were sold in early 1993 via a secondary issuance to institutional investors and an effort was made to effect a broad distribution that ensured they would not become stakeholders. This allowed Eli to say that the Maxwell affair was behind him and had even ended for the better.

  Yet Eli still did not rest. Teva continued purchasing plants in an effort to boost its growth. In addition to its purchase of Grace’s share in TAG, it bought other companies abroad and in Israel, despite the fact that the Israeli market was not particularly advantageous for Teva at the time. This was especially true in light of the serious financial troubles now facing Teva’s largest customer, the Histadrut’s Clalit Health Services. Clalit’s debts continued to grow, prompting Eli to exert pressure on its directors by ceasing to supply it with medicine. The matter was eventually settled and Clalit began to repay its debts little by little. Nonetheless, the institution continued to flounder and Eli’s aspiration to increase exports in order to minimize Teva’s dependence on the Israeli market grew accordingly.

  In 1988, the same year it acquired Abic, Teva bought two relatively small Israeli manufacturers of medical supplies for hospitals: Tribunal in Ashdod and Migada in Kiryat Shemona, which subsequently came to be known as Teva Medical. Eli knew that he could not purchase any more pharmaceutical plants in Israel due to the new antitrust legislation, which barred Teva from doing so because it already possessed more than 50 percent of the drug companies in the country. As a result, Eli now sought related products that did not belong directly to the realm of pharmaceutical manufacturing.

  By means of additional products manufactured in its other plants, Eli transformed these two companies into Israel’s largest supplier of permanent and perishable medical supplies to hospitals and HMOs in Israel. Later, they would begin exporting abroad. In 1993, 8% of all Teva products were designated for hospitals and a substantial portion was manufactured in these two plants. They produced a wide array of solutions and soluble materials for intravenous use, solutions for dialysis, antiseptics, and a wide variety of other soluble medical products. In time, Teva Medical would come to repre
sent large multinational corporations specializing in dialysis blood banking, pharmaceuticals, blood components, and medical diagnosis.

  For Eli, the acquisition of Migada, which was located in the town of Kiryat Shemona’s46 industrial park in northern Israel, had special meaning that transcended its business significance. This plant was helping the people of northern Israel in their constant struggle for economic survival.

  “The Katyushas will not frighten us,” he said, explaining why he had acquired the plant in the northern border town.

  Eli was not concerned by the shelling from the north. Patriotism was deeply ingrained in his personality and was an inseparable part of his existence.

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  The next target was Europe. In 1993, only 8% of Teva’s products were exported to Europe and as far as Eli was concerned, this was too little. He envisioned much greater activity. His next targets for takeover were GRY-Pharma of Germany and Prosintex of Italy in 1992-1993. They were followed by I.C.I. of Italy and Biogal Pharmaceutical Works of Hungary in 1995. These companies were not especially large: the two Italian acquisitions were valued at $20 million and the Hungarian acquisition, which was initially only partial, was valued at $26 million. Nonetheless, they effectively designated all parts of Europe as Teva’s third most important target, after Israel and the United States.