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

by Yossi Goldstein

  At the time, Biocraft was considered one of the 10 largest companies in the generic drug sector in the United States; its acquisition made Teva the third largest company in the massive American market. Biocraft was a leading generic drug manufacturer with an annual sales volume of approximately $140 million. Aside from its sales, its 25 main products, and its 750 employees working in its four different plants, the acquisition of Biocraft presented four distinct advantages.

  The first was price. The company’s cost – which just a few years earlier would have seemed astronomical to Teva’s CEO, corporate management, and board of directors – was relatively low in comparison to its true value. Over the previous two years, Biocraft had suffered losses due to management problems and difficulties in acquiring FDA approval. This was why Harold Schneider, who established the company in 1964, sought to sell it. Eli was convinced that after the acquisition, Teva could nurse the company back to health using its unique management style. In the end Teva was successful, as it almost always was – even more successful than it had expected. Although it was initially necessary to close a chemical plant for the production of raw materials in New Jersey and to transfer the production it had housed to a plant in Missouri, the positive results Teva had hoped to achieve began slowly but surely to emerge; the company soon became profitable.

  The second advantage of acquiring Biocraft was the method of payment. Teva might have been able to purchase the company in cash. It could have also raised funds for the acquisition from banks and on the stock market. Eli had no intention of doing either since they would undoubtedly be tough for the group financially. Instead, he offered to purchase the plant using shares in Teva. The family with the controlling interest that was selling the plant, headed by Harold Schneider, agreed. In this way, Teva profited once again. During the negotiations preceding the purchase, Eli offered 6.4% of Teva’s stock at its relatively high current market price, to which Schneider also agreed.

  The third advantage was the fact that although the deal made the Schneider family the single largest Teva shareholder, it did not demand decisive representation on Teva’s board of directors. Eli convinced Schneider (with whom he became friends over time) that despite its considerable holdings in the company, the Schneider family should settle for two votes.

  The fourth advantage was Biocraft’s expertise in the field of antibiotics, an area in which Teva was not particularly active. The deal immediately increased the diversity of the products that Teva offered the American consumer by 50%. This was why Eli told the board of directors, as it was considering his proposal, that “the acquisition of Biocraft and its integration into Teva’s pharmaceutical business in the United States can be expected to make a considerable contribution to its future profits.”

  The market had confidence in Eli. Within a few months of the acquisition, Teva’s share price rose dramatically to $35, reflecting an increase of more than 25% from the beginning of the year (1996). The increase undoubtedly also reflected positive expectations regarding the sale of Copaxone, which had already gotten underway, but was triggered by the acquisition of Biocraft.

  “We are presently in the midst of a drive to expand,” Eli told an analyst attempting to understand how Teva’s value had increased in such a short time period.

  “According to an analysis carried out on us,” Eli continued, “we can be expected to grow at an annual rate of 25%,” modestly omitting the fact that he had been the one to set this spectacular rate of growth that not long ago had seemed impossible.

  “Teva made a brilliant move when it entered the generic drug market,” the business headlines proclaimed, with elegant tardiness.

  •••

  Three years after it acquired Biocraft, Teva bought the American generic drug manufacturer Copley Pharmaceutical Inc. for $220 million, this time using only its own funds. Based in Canton, Massachusetts, Copley had been founded in 1972. Its operations included the development, manufacturing, marketing, and distribution of a broad range of multi-source pharmaceutical products, including prescription and over-the-counter drugs in a variety of dosage and forms (tablets, solutions, suspensions, syrups, elixirs, jellies, creams, ointments, and powders).

  Copley’s product catalogue would further diversify Teva’s marketing and sales capability. Its sales during the previous year had reached $133 million and two of its drugs were about to go on the market the following year (2000), with annual sales estimated at $100 million. More than anything else, for Eli and for Teva, its acquisition was symbolic of yet another stage of development. When the new addition was combined with Lemmon and Biocraft, it made Teva the largest generic pharmaceutical company in the United States, with sales bypassing its three competitors: Mylan Laboratories, a global generic and specialty pharmaceutical company headquartered in Cecil Township, Pennsylvania; Watson Pharmaceuticals, also a global, integrated specialty pharmaceutical company, which focused on developing, manufacturing, and distributing generic, brand-name, and biosimilar products with global headquarters in Dublin, Ireland, and administrative headquarters in Parsippany-Troy Hills, New Jersey; and Ivax Corporation, a Miami-based publically traded US corporation specializing in the manufacture and distribution of generic pharmaceutical products.

  This accomplishment was a source of pride for Teva personnel and enabled Eli to proclaim the achievement of another strategic goal, which he had set 15 years earlier. He also subsequently announced that he would not acquire additional generic drug companies in the United States in the near future for the simple reason that all the companies with acquisition or takeover potential for Teva were valued at a few billion dollars. However, he did not rule out the possibility that Teva might strive to achieve this goal in the more distant future

  Indeed, at a meeting of Teva’s corporate management on the subject of “renewed strategic thinking toward the new millennium,” Eli had already declared that this would be Teva’s next goal and that it would be achieved within a few years. During this five-year period, the number of Teva’s generic products would increase from 150 to double that number. In 2001 alone, 58 Teva products were awaiting FDA approval. The group would also acquire a few new companies, including Sicor in 2004 and Ivax two years later.

  •••

  Teva emerged as the largest generic pharmaceutical company in the United States just as the group began tackling one of its other goals in North America: entering the Canadian market. In December 1999, the group purchased the Canadian generic drug manufacturer Novopharm. Since its establishment in 1965, Novopharm had been privately owned by a Jewish Canadian family headed by billionaire Leslie Dan, one of the wealthiest people in Canada. At the time of its acquisition, Novopharm was facing difficulties. It was still considered Canada’s second largest generic drug company, but its value had recently decreased dramatically. Once valued at more than $600 million, its negotiations with Eli began at half that amount, despite the fact that its turnover for January-September 1999 stood at $298 million, a relatively high figure in comparison to Biocraft’s turnover. The American company sold for a higher price, even though the Canadian company still held a 21% share of the Canadian generic drug market.

  When Eli visited Canada during the spring of 1999 to negotiate with Dan, he was aware of the difficulties facing the company. However, he also learned that others were interested in Novopharm for approximately the same price at which they were negotiating, including some of Teva’s American competitors. The two men and their teams negotiated for two weeks and Dan, who was not only Jewish but a Zionist, ultimately decided to sell the company to Teva for the relatively low price of $260 million; he explained that he accepted this price due to his faith in Teva. He had received more attractive offers than Eli’s, he explained,

  but I believed in the company’s [Teva’s] management culture and organizational culture, and its latent potential – at the time, growth in the generic market was still in its early stages. At a later stage, Teva’s sto
ck generated handsome returns, confirming that my decision had been correct.

  Dan also agreed to sell Novopharm in exchange for 4.8 million shares of Teva, which was the equivalent of 7% of all of Teva’s stock. Eli had made it clear to the Canadian billionaire that this was the only way he would be able to make the purchase and Dan agreed. However, he did not appear to place much significance in the fact that he was now Teva’s largest shareholder. Like Harold Schneider of Biocraft, he too sought only two seats on Teva’s board of directors, one of which was for himself. This decision appears to have been partly influenced by Zionism, since sitting on Teva’s board of directors would require him to visit Israel at least once a month.

  Eli and Dan also agreed that two-thirds of the payment would be in the form of special non-voting and non-dividend paying shares, which could be traded in at any time for regular Teva shares at a ratio of 1:1. This time, however, Dan’s agreement does not appear to have stemmed from Zionist altruism, but rather from his intention to sell off a portion of his stock over time and his resulting willingness to relinquish his dividend and voting rights from the outset. Indeed, two years later, Dan sold approximately half of his shares for a considerable profit.

  In Canada, as in the United States, Eli decided to execute the acquisition by means of a local company set up especially for this purpose: Teva Ontario. This company would purchase Novopharm after the deal was agreed upon in principle and then a due diligence investigation would be conducted. The final agreement would be signed at the end of this process, which was expected to last a few months.

  Eli had a variety of reasons for making the Canadian deal. More important than the business opportunity that the company’s low price presented and the convenient method of payment the sellers agreed to, Novopharm offered Teva a foothold in yet another large country. Novopharm’s main area of operation was Canada, which was a new and important market for Teva. In addition, the acquisition further bolstered Teva’s standing in the US generic pharmaceutical market and contributed to its position as a leading force in the world market.

  “In the international pharmaceutical industry, which is characterized by mergers and integrated operations,” Eli explained after signing the acquisition agreement, “both continued expansion of the scope of Teva’s operations as a generic company and geographical distribution that is as broad as possible are of decisive importance.”

  •••

  North America was not the only region where Teva operations expanded. In mid-July 1998, Eli assembled Teva’s 10 senior directors in the offices of the Dutch pharmaceutical company Pharmachemie to discuss his new and extremely ambitious goal: “augmenting company operations in Europe and equalizing them to operations in the United States within seven years.” Teva had purchased Pharmachemie the previous year for $87 million and the Dutch company’s annual sales stood at $130 million. It was known for its cancer medications and drugs for respiratory problems. These products were manufactured in two plants, one of which had already received FDA approval. The company also maintained sales operations in Holland, Belgium, Germany, and South Africa. Its acquisition transformed Teva into the leading company on the Dutch generic market. This, of course, was consistent with Eli’s new goal of conquering Europe.

  A few years earlier, Eli’s son Chaim had been sent to Amsterdam to assume responsibility for Teva operations in Europe. His father had informed him then that conquering Europe would be the goal of Teva Europe, the company’s European branch, after Teva succeeded in America. Eli targeted Europe because the standard of living there was not far behind that of America, at least in western and southern Europe. Furthermore, Teva’s offerings in the European market (350 medicines and other products) was already much more diverse than in the American market.

  The aforementioned acquisitions of Biogal in Hungary and ICI in Italy constituted initial efforts in this direction. The next targets were APS Berk in the United Kingdom (1996) and Pharmachemie and Pharbil in Holland (1998). By 1998, Teva’s total sales in Europe had risen tens of percentage points over the previous year; they had come to account for more than 30% of the group’s total sales ($81.4 million). Teva already led generic drug sales in Britain, Holland, and Hungary and its products were also sold in pharmacies in other European countries. Although Teva’s European sales were still considerably less than its sales in the United States, the gap was shrinking. The 4:1 ratio that had characterized the relationship between sales in the US and sales in Europe in previous years had decreased somewhat. Now, US sales accounted for 47% of Teva’s overall sales and the ratio to Europe was 1:1.5 (meaning that for every dollar spent on Teva products in Europe, $1.50 was spent in the United States).

  Other European companies were also in Teva’s crosshairs. Eli described the new strategy in the name of which he had assembled his senior management in Amsterdam as follows:

  At the beginning, we proclaimed that when we felt comfortable in the United States, where we are one of the leading companies in the generic drug sector, we would focus on Europe. We plan on achieving within four years in Europe what it took us 12 years to achieve in the United States. The European market has potential comparable to that of the American market. Within four years, we plan to be the leading company on the European generic drug market…. We are currently in the process of registering hundreds of medicines in Europe at a cost of millions of dollars.

  The new vision was soon transformed into reality.

  •••

  At the same time it was recording impressive achievements in Europe and the United States, Teva was declining in a number of ways in Israel. On the whole, the group’s sales in Israel as a percentage of its overall sales had declined dramatically. By 1998, they accounted for only 18% of total sales, reflecting a 9% drop from the previous year. A major factor in this change was undoubtedly Teva’s many acquisitions abroad and the fact that the company’s overall sales outside of Israel were constantly growing. The change was not merely the product of statistics. It was also, and perhaps more significantly, a product of the local market. For example, the final quarter of 1997 witnessed a sharp decline in the sales and profits of several Teva plants in Israel, which since the beginning of the decade had been referred to collectively as Teva Israel and managed by Moshe Manor. The decline stemmed both from increasing competition between drug companies (importers in particular) on the pharmaceutical market and from the gradual reduction in drug prices.

  Manor, who had an MBA from Tel Aviv University, joined Teva in 1984. A decade later, he was made responsible for the group’s pharmaceutical companies in Israel. In February 1985, Eli summoned him, along with all other senior managers, to an emergency meeting aimed at clarifying why at home, in Israel of all places, Teva was treading water. In addition to the immediate conclusions that resulted in the dismissal of dozens of employees from plants with accumulated losses (most notably the employees of Teva Medical in Ashdod, where one-quarter – or 40 out of 160 – lost their jobs), Eli asked Manor to reorganize Teva’s operations in Israel.

  Now, Teva’s plants in Israel were following the lead of those in Europe and the United States. However, broad group reorganization abroad had been the result of growth, whereas in Israel, it was the result of difficulties. Teva’s Israeli companies were losing on their home turf.

  “We will work tirelessly to change the situation,” Eli promised.

  Within two years, with the help of Manor’s skillful management, he delivered on this promise as well.

  •••

  “Teva is shoring up its position as the largest generic company in the world,” according to reports analysts at Merrill Lynch and Oppenheimer issued to sum up the developments of 2001.

  “The goal of the heads of Teva, led by Eli Hurvitz,” the report stated, “is to become the world’s largest generic pharmaceutical company.”

  The report also contained the following analysis:

  It [Teva] succeeded i
n achieving $1.75 billion in sales during 2000 in light of the rise in generic drug sales in the United States, in addition to the impressive sale of Copaxone…. Teva’s good sales in the United States stands in contrast to those in another geographical region – Europe, where the company has still been unable to gain momentum and where sales totaled $854 million. This can be explained by the weakness of the Euro against the dollar, various regulatory problems, and the price freeze currently being implemented by England and Hungary.

  In contrast, sales in the United States and North America have been higher, both due to the onset of marketing of two new products in the United States and the acquisition of Novopharm during the first quarter of 2000. Sales of Copaxone, Teva’s patented medication for the treatment of Multiple Sclerosis, have grown and currently account for 7% of its overall income. Its sales continue to increase, particularly at the expense of Avonex, which is currently the leading drug in this field…. Teva has an impressive list of drugs awaiting approval; two significant authorizations may be issued in the near future…. In light of the results the company achieved, it will report a profit of $1.77 per share for 2001 or 3.5% more than the previous forecast. [As a result,] the forecasted profit for 2001 must be raised by 2.4% to $2.10 per share…. The target share price must be raised from $71.70 to $74, which is still 23% higher than the current share price. Company income for 2001 is expected to total $2.09 billion, representing annual growth of more than 60%.