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

by Yossi Goldstein

  At a press conference marking the event, Eli tried to explain what he had been through during the years in question.

  It is a sweeping acquittal. It was simply an indictment that should not have been brought. It was a case of recklessness, of negligence accompanied by the maliciousness of the authorities…. Undertaking criminal prosecution was an inexcusable injustice – the greatest of all – and as a result, the time for settling accounts is yet to come…. For the first time in my life, I am looking at the world from the wrong side. It is a world that is not run correctly…. The authorities’ decision to issue a criminal indictment is simply unacceptable. I truly felt as if Lador, who represented the State Attorney’s Office, was fighting a personal battle against me. Each time he stood there and said that he was the representative of the state, I almost exploded. Is it his state? My feeling was that I was facing a man who had been given immense power and was using it improperly. When you give one man immense power, he can do anything…. With the help of some of the best attorneys in the country, I was able to contend with the authorities. But what about the average citizen who lacks the means to contend with closed-mindedness and aggressiveness that borders on violence, albeit not physical violence, but violence nonetheless?

  From the Supreme Court building, Eli proceeded directly to the Teva plant in Jerusalem and, from there, to corporate headquarters in Petah Tikva. He knew that people were waiting for him there, but he could never have imagined to what extent. At the plant’s entrance he was eagerly awaited by hundreds of Teva employees – not just the executives, but the men and women who staffed the offices, worked in the plants, and swept the floors. Eli knew many of them by name, knew the names of their wives and children, and was overwhelmed that they had come from Teva plants around Israel to be there. Emotions ran high upon his arrival and some even wept. Eli approached them, embraced some, shook the hands of others, and thanked them all. He then made his way to the conference room in the Teva offices, where members of the corporate management and the board of directors awaited him. There, he wept together with them and embraced them all, one by one.

  In his article, Strassler summed up the legal process’s impact on Eli: “He went from being the eternally young man with the forelock whose words everyone listens to seriously to a sad man who has to try to give the outward impression that everything is fine, while his heart is broken. Who will give him back his six lost years?”

  Chapter 21

  The World’s Largest Generic Pharmaceutical Company

  Eli’s trial, which began in 1994 with his interrogation by the Income Tax Division and concluded six years later with his complete acquittal by the Supreme Court, exhausted him and drained him of his joie de vivre.

  “How do you function at a time like this?” he was asked.

  “In a word,” he answered, “it’s difficult – very difficult.”

  Eli continued working as if nothing out of the ordinary was happening, arriving at his office in Petah Tikva each morning and immersing himself in intensive work until evening. In this way, he continued managing Teva as he had in the past. He even would return to his office after interrogations and court hearings, as if constantly trying to remind himself that he would never be broken and to remind Teva personnel that life goes on. Perhaps it was also his way of conveying to skeptics that he was innocent and had to go on living his life.

  One reason he was able to continue working was the strength he drew from his home. His family encouraged him, his friends supported him, and those in his immediate and more distant surroundings, in addition to Teva’s employees, corporate management, and board of directors, all demonstrated their faith in him. For example, in January 1997, after Eli’s indictment, the board of directors decided to extend his appointment as CEO by five years and to present him with purchase options that could be redeemed at the end of his term in 2002. This was a supreme act of confidence. After all, they could have also simply replaced him or appointed him for a much shorter term and not granted him the options. But Teva’s corporate management believed in him, even at difficult moments when the legal system doubted his integrity. The board of directors explained its demonstration of faith in Eli by pointing out, “Hurvitz’s unique and exceptional contribution to society.”

  Teva’s support should come as no surprise. Under his leadership, the group had grown in size and strength from year to year, albeit not by the 25% to which Eli had aspired, but close. Teva’s results for the year 2000 not only were better than ever before and surpassed analysts’ forecasts, but also surprised Eli. Sales reached $1.7 billion, representing a 36% increase over the previous year and an 84% increase over 1996, and net profit stood at $184 million, representing a 36% increase over the previous year and a 113% increase over 1996. Growth during the following year, 2001, was not much different, with annual sales passing the $2 billion mark and profits growing by 87% over the previous year, reaching $278 million. At this point, Teva employed 9,000 people around the world, including 3,000 in Israel.

  The market responded to Teva’s performance with a strong show of confidence, enabling Teva to mobilize additional capital in two major bond issuances: one in October 2000, which raised $550 million; and one in August 2001, which raised $360 million. Just a few years earlier, such figures would have seemed unimaginable. Now, the demand for its bonds was immense.

  •••

  These successes stemmed from the fact that Eli and the 10 members of Teva’s corporate management, in partnership with Teva’s employees, never stopped pushing the group forward toward Eli’s strategic goals. For them, 1982 – the year of Teva’s first public offering on the US stock exchange – was an initial and decisive milestone in the group’s entrance to the United States and its transformation from the largest pharmaceutical company in Israel to the largest generic pharmaceutical company in the world. The onset of cooperation between Teva and Grace and the acquisition of Lemmon just a few years later marked the second phase of Teva’s expansion in the United States and its establishment as a significant generic pharmaceutical company there. The third and decisive phase of the process began in the mid-1990s, when the group began moving toward Eli’s ambitious goal of becoming the largest generic pharmaceutical company in the world.

  Teva’s expansion and feverish pace of development naturally resulted in the constant need to implement major changes throughout the group. Eli continued directing it from his modest office in Petah Tikva, but found it necessary to drastically increase its human resources on a regular basis and to adjust its corporate structure and management.

  The most prominent change in Teva’s senior management was undoubtedly the 1995 departure of Deputy CEO Ami Rosenfeld and Israel Makov’s promotion in the corporate ranks until 2002, when he was appointed to replace Eli as the company’s next CEO. Rosenfeld had initially joined Teva in the 1970s, but was forced to leave due to Eli’s severe criticism of his behavior. Eli later brought Rosenfeld back into the group in the hope that he had changed his ways. Rosenfeld had been considered a shooting star in corporate management and served in a variety of key positions. Despite their past, Eli still appeared to have major plans for him and when he was appointed deputy CEO, it briefly seemed that he regarded Rosenfeld as his potential heir at Teva. What Rosenfeld lacked, it seems, was the patience to wait. Tensions again emerged between him and Eli, and, once again, he was forced to step down from his position. The trigger for Rosenfeld’s final departure from Teva appears to have been Makov’s imminent arrival. However, because he respected his abilities, Eli agreed that the former deputy CEO could hold senior positions in the company in the future, just not as part of the corporate management.

  In hindsight, Makov’s appointment to the corporate management and his entry into the place left vacant by Rosenfeld were extraordinary and unexpected developments. Until that point, the group’s management could be broken down into veteran Teva personnel appointed during the 1970s (such as Aharon Schw
artz, Dan Susskind, Ben-Zion Weiner, and Uzi Karniel) and those who joined the group during the following decade (such as Jacob Winter, Meron Mann, Yaakov Agmon, Moshe Manor, and Haim Benjamini). All in all, it was a talented, unified senior management team with a solid track record that preferred to make decisions through consensus. Its members were loyal both to Teva and to Eli, a dynamic demonstrated most prominently during fundamental disagreements among members, which always revolved around the question of what would be best for Teva. Eli was their model of a corporate manager and everyone followed his lead.

  Israel Makov was born in Rechovot and was seven years Eli’s junior. He held a BA and an MA in agriculture and economics from the Hebrew University and was not an organic part of the corporate milieu. He began his career at the Citrus Fruit Marketing Council and moved into the pharmaceutical industry in 1974. Eli first met him when he was serving as Abic’s chief operating officer and encountered him again later, in his capacity as CEO of Interpharm Laboratories, a biotechnology company, and Axiom, an investment banking firm. Later, Makov served as the president and CEO of Yachin Yakal Ltd. and subsequently as the CEO of Gottex Models Ltd.

  During Teva’s expansion, Eli sought out professionals to take on senior management positions and help direct the group’s dramatic growth. Makov was the most prominent new recruit. Eli had considered recruiting him in the past, but it had not worked out. In 1995, after Rosenfeld’s departure, he managed to bring Makov into Teva’s management circle by making him the group’s new vice president for business development. Four years later, he was appointed one of Eli’s deputies and made responsible for integration and globalization. I in 2001, he became Eli’s second in command. Eli regarded him as a potential heir and declared as much in public. By this point, he had already decided that he would step down as CEO on his seventieth birthday and that Makov would take his place.

  Makov’s appointment was by no means a foregone conclusion and Eli deliberated on the issue. His right hand man over the past few years, particularly after Rosenfeld’s departure, had been Teva’s chief financial officer, Eli’s long-time loyal colleague Dan Susskind. Eli and Susskind had a good relationship. Eli was born a generation before Susskind, but they had similar backgrounds. They both had the prototypical Israeli cultural experience of being members of the Israeli Scouts movement in Tel Aviv and the collective agricultural settlements of the 1940s and 1950s. Their worldview and way of thinking was often identical. Makov, in contrast, came from a cultural world that was altogether different, making Eli’s decision to name him as his replacement difficult. Ultimately, he chose Makov, but maintained Susskind as Teva’s second in command.

  •••

  Eli’s goal was the growth of Teva. For some time, he had regarded four years as the period of time in which the group should be able to double its achievements. He knew that this goal would be virtually impossible to achieve, but set it nonetheless and the corporate management and board of directors did not oppose him. They had learned that if Eli proclaimed a seemingly unattainable goal as official policy, it might end up being attainable after all.

  Eli sought to achieve this goal in two ways: first, by expanding production and marketing and constantly increasing Teva’s supply of generic drugs; and second, by systematically acquiring additional companies. After the US enacted the Hatch-Waxman Amendments in 1984, Teva’s ability to develop the generic drugs it acquired gave it a significant advantage in the US market and was a major factor in its growth. Still, entering the market took time. At first, this was achieved by means of drugs that Lemmon marketed and subsequently by drugs that Teva produced. As mentioned above, it was only in 1992 that the FDA authorized Teva to sell 10 generic drugs in the United States, after a dry spell of four years during which no such authorizations were issued. From this point onward, an increasing number of Teva drugs received FDA approval.

  The sale of existing generic drugs yielded high revenues, but low profit margins. While the Hatch-Waxman world of “first-mover co-exclusivity” was an enormous boost to profits, Teva’s unique advantage was driven by the generation of drugs launched during the years of the Arab boycott, where the major pharmaceutical companies had either neglected to file patents in Israel or chosen not to. Once, big pharma woke up to Teva’s extraordinary capacity to synthesize and produce generic drugs, Israeli patent filings became automatic. Teva could no longer produce a blockbuster drug in Israel because no patent had been filed and wait to become the first mover of that drug upon its loss of patent exclusivity in the US.

  The next phase of the generic drug market was to attack patents, based on legal challenges to their validity, rather than wait for them to expire. The same co-exclusivity benefits that could be obtained when a patent expired were also awarded to an entity that successfully overturned the patent for an FDA-registered drug. The US authorities created an environment that was neutral, if not friendly, to patent attacks due to the interest in lowering healthcare costs through the expanded use of generic drugs. The general assumption was that the initial launch of a generic drug, which would enjoy six months of co-exclusive rights, would bring about a 20-30% drop in the price of the drug and that the subsequent introduction of additional competitors would cause the price to drop an additional 80-90%.

  The potential of immense profits during this co-exclusivity period encouraged generic companies not to wait for a patent to expire or a legal challenge to succeed, but rather to “launch at risk” by claiming that the patent was not valid. This inevitably triggered litigation by the patent holder, but often led to settlements because patent holders were unwilling to bear the risk of unpredictable jury verdicts and occasionally led to outright victories on the part of generic companies. With successful patent attacks and at-risk launches, a company could earn a tremendous windfall by operating in the market almost alone, with only the company that invented the innovative drug as a competitor.

  Eli understood the great potential in these two options and decided to focus Teva’s efforts in this direction. This meant expanding Teva’s resources so it would be able to identify the expiration date of patents on new drugs or “attack” a patent in some other way. This required setting up a large, skilled department of investigators, attorneys familiar with patent law, and pharmaceutical researchers to voice their opinion on the best course of action in each instance. When the department’s personnel identified a drug to attack, Teva’s Research and Development Department was asked to find the appropriate formula for producing a generic version. To do so, Teva’s R&D Department, which had always been big, grew even larger.

  Once R&D found the right formula, Teva submitted an Abbreviated New Drug Application (ANDA) to the FDA, requesting approval of the generic version of the drug. The moment the request was submitted and entered into the public record, the company that held the drug’s patent would inevitably proclaim that its rights were being infringed upon since the patent had yet to expire. The protest would immediately make its way into the legal realm and Teva would be forced to defend itself against a lawsuit. Teva’s legal department thus also expanded. Subsequently, in the event that the courts rejected the claim and the FDA approved the generic formulation, Teva would have to begin producing the drug immediately and be capable of manufacturing a large enough stock to ensure rapid global distribution. After 1996, the system grew increasingly sophisticated and within a few years, Teva became an expert in this. Attacking patents and seeking FDA approval to manufacture generic drugs earned Teva hundreds of millions of dollars each year.

  Teva adopted diverse and interesting methods to attack patents. For example, at the end of 1999, the department responsible for identifying potential generic drugs discovered that the patent protecting Nabumetone – a popular prescription drug that the British company GlaxoSmithKlein produced and whose annual sales totaled $265 million – was no longer valid. This was because the active ingredient in Nabumetone had been discovered by researchers in 1973, almost a decade be
fore GlaxoSmithKlein had requested a patent on the drug.

  Teva’s R&D Department went to work to produce a generic formulation of the brand-name drug, which it succeeded in doing relatively quickly. The resulting drug, which was named Relafen and given the generic name Nabumetone, was submitted to the FDA for approval. It received approval in June 2001. Teva thus received co-exclusive rights to distribute the generic drug for six months alongside the original drug. During the fourth quarter of 2001, the medication’s sales totaled $4 million, but subsequently dropped when additional competitors entered the market.

  GlaxoSmithKlein sued Teva for breach of patent, but, in a ruling issued by a New York appeals court on August 15, 2002, Teva won the legal battle. After accepting Teva’s argument that the active ingredient in Nabumetone had been discovered almost 10 years before GlaxoSmithKlein requested a patent on the drug, the judge ruled in Teva’s favor and authorized it to continue selling the drug’s generic version. Had the court ruled against Teva, it would have likely been required not only to cease selling the drug but also to compensate GlaxoSmithKlein for its resulting loss of profits.

  •••

  Beginning in 1996, as mentioned above, Teva grew at a dizzying rate. In addition to the rising sales of its growing number of generic medicines manufactured on production lines at Teva companies, Eli sought, as in the past, to further increase supply through acquisitions and takeovers. This was the reason that Teva purchased eight plants around the globe in the coming three years. Each of them had a distinct area of pharmaceutical production as well as a distinct supply of generic products that had been approved for production and type of markets for which its products were designated.

  The most prominent acquisition during this period was undoubtedly Biocraft, an American company acquired in January 1996. For several years, Eli and his associates had sought a well-established generic pharmaceutical company in the United States to merge with Lemmon, thereby increasing Teva’s share in the immense market. Until that point, Teva was considered the fifth largest generic drug company in the United States. Eli understood that in order to achieve his strategic goal of making Teva the largest generic company, he would have to make acquisitions. It was also clear that from that point on, every significant acquisition would cost more than the previous one, as the plants in question were now much larger and accounted for a substantial share of the market. Teva paid $295 million in shares for Biocraft.