Teva: This Century's Israeli Success Story

The last thing we expected to hear from Eli Hurvitz was that he had seriously contemplated leaving Teva. We met him the day after a company announcement, extending Hurvitz’s tenure as company general manager - a post he has held since 1976 - by another five years. We were convinced this was merely a matter of protocol. How could Eli Hurvitz leave the most highly valued Israeli publicly-traded company on the market? It makes no sense.

Absolutely his last term of office as general manager. Hurvitz.

In the end, Hurvitz decided in favor of staying at Teva until the year 2002, but this will be his last term in office. At the end of this period, he will retire from ongoing management of the company. It will certainly not be easy. One only has to make the rounds at Teva’s Kfar Sava plant with Hurvitz in order to see how attached he is to the company.

Lining the corridors of the factory - one of 11 owned by Teva - are the company’s Ten Commandments. This is not a Teva innovation. Every self-respecting factory, all over the world, has a variation on the theme. But at Teva they have extra impact, as this is one of the first Israeli companies which from the outset adopted American management methods, and bid farewell to the Israeli art of improvisation.

Make no mistake. Teva is not a conservative organization that rises and falls on its rule-book. The company’s greatness lies in the spunk and fresh ideas it has demonstrated over the years. But in a country where long-range planning is almost a dirty word, and emergency measures are an art form, Teva is an oasis of sanity.

This sort of long-range vision is the thing that turned Teva into a multinational, employing 5,900 people around the world, with an annual revenue rate of over $1 billion, trading on $3.3 billion company value - the all-time high for any publicly traded Israeli company. Teva is Israel’s largest pharmaceutical company, one of the three largest generic drug manufacturers in the US, and is at the height of activity in penetrating the European market. The company will soon begin marketing its patented multiple sclerosis therapy Copaxone in the US, which Teva expects will bring multi-million dollar revenues, expressed in particularly high levels of profitability.

In the Beginning

We asked Hurvitz to think back to the 1980s and explain how one turns a small Israeli company into a world leader in the field, on a non-stop growth track.

"The story indeed starts in the 1980s, when we bought the Kfar Sava plant which was then owned by Koor. The factory was built according to US standards, but there were no products. We sat here, a small group of managers, and thought about what we could do here."

"We knew Israel was a market with Western levels of consumption for medications, we knew the products and the technologies and we wanted to reach an annual turnover of $100 million within a few years. So we began an organized process of meetings and study, according to the Harvard case study model, together with Prof. Shai Pines, one of the great industrial strategists working for Boston Consulting, who happened to be visiting Israel at the time."

"Over a two-year period, we went through this process and formulated our strategic plan, which continues to exist in principle, to this day. The Israeli market serves us as vast database, offering many possibilities for understanding markets, and with an excellent scientific environment. We decided not to go to Europe, as we understood there was no generic drug market there, but a collection of countries, each with its own market."

"At the same time, the US generic market opened up, a trend we identified at this time. We looked for a strategic partner for an entire year, because we had no money. In order to give you an idea of size, Teva at that time was worth $16-18 million, but that was entirely theoretical because no one bought and no one sold. We barely managed to scrape together a $1 million loan to invest in the US but we did, and set off to find a partner. We knew that in order to build up a business in the US, we needed $22-23 million."

"We found Grace, and the rest you know. We invested $1.5 million, they invested $21.5 million and we were 50-50 partners. We negotiated with them for a year. No one here believes me, but we talked financial terms for only two hours. The rest of the year was spent discussing how to build, what to build, whether to buy or whether to start from ground zero. We looked at every possible company and in the end, we bought Lemmon. The beginning was rough. I maintained that we, the Israelis, could not teach the Americans how to run a US company and we left the company under American management."

"We then formulated three strategic decisions. The first was to enter the generic field. The second was to locate added value in the generic field. We didn’t yet know what that was but we said it couldn’t be that all generic drugs were created equal. There had to be a niche market in there. The third decision was to enter with unique products. At that time we also decided to invest funds in Copaxone."

The Mergers

Acquiring Lemmon was nothing new for Teva, which had conquered the Israeli market via a series of mergers. Over the past year and a half, however, Teva has accelerated the pace, with four acquisitions in the US and Europe, a $390 million investment in cash and shares. These purchases have brought the company an additional $300 million in revenues and made a permanent change. Suddenly, Teva is no longer an Israeli company but a real multinational. This year, for example, sales to Israel will represent only 25% of revenues, and the relative size of the Israeli market share is expected to further decline in the coming years.

The US Generic Market

"Even by the end of 1994," says Hurvitz, "We asked ourselves what was going to happen in the US generic drug market. We reached the conclusion that we were entering a situation in which generic drug prices were falling faster than in the past. This was bad news, but at the same time, the possibility arose that we might be able to acquire our competitors at a lower price than before. Consolidation starts by damaged profitability, after that, the strong eat the weak."

"We analyzed the feasibility of consolidation, which in my opinion indicates a situation where no more than five outstanding companies will remain in the US generic drug market by 1997-8. This means your market share must expand from 8% to 20%, if you want to remain a market leader. Now, if you can grow from within, more power to you but if not, you must acquire. The minute the market gives the signal, we’re ready."

Both Hurvitz, and Teva CFO Dan Suesskind like to say: "To date, we have at least doubled in size every four years. On every line. In sales, gross profits, pre-tax profits and net profits." Folk wisdom has it that, after a certain size, this type of action will make it difficult for the company to continue it’s rapid growth rate. Hurvitz claims the consolidation trend now taking place in the US market, together with Teva’s expansion in Europe, may make it easier to continue doubling at the historic rate. "In the future, we may need less than four years, and growth will be even faster, internally and externally. It’s hard to say what the result of our 1997 growth will be but if you ask me, it’s very reasonable to assume that in four years we will double our size again, and perhaps even before then."

Globes: Is it possible the opposite could occur, and that someone would want to acquire you?

"Yes, of course. There is always that danger. That’s what happens in a free world."

Despite this, Hurvitz is convinced that, at least as far as the large pharmaceutical companies are concerned, there is little chance of gaining control of Teva. In his opinion, the major companies have been burned on every attempt to enter the generic drug market, as they are used to thinking in terms of the high expenses which characterize the patent drug market. The large companies are not used to the generic drug market’s way of thinking, which is fiercely competitive, everyone trying to steal customers from everyone else, in a climate of ever-plummeting prices. Therefore, Hurvitz is convinced a joint venture with a major drug company is more logical. On the other hand, he says, "the banks give money to those who already have money, so anything is possible."

Copaxone

This year, Teva will cross the boundaries of the generic drug market, assisted by Copaxone, the first Israeli-developed drug to receive FDA marketing approval for the US market. Analysts estimate Teva will record $100 million in sales for the first year, with multi-million dollar sales after that.

"During the first year, we will re-invest all Copaxone income, to position ourselves as number one in the MS therapy market," says Hurvitz. "The analysts say sales will be multi-million. If you multiply the number of MS sufferers by the expected price, you get a potential market of $2 billion. Getting a couple of hundred million of that is a very reasonable expectation."

"Don’t forget, all our competitors are really one competitor: beta interferon. In another 4-5 years, there will be perhaps a few other drugs on the market, but by that time we’ll probably come out with a new model."

The Heirs

Hurvitz has been at Teva for over 30 years. He began by washing test tubes, but its clear his marriage to Dalia Salomon, daughter of one of the company’s founders Nachman Solomon, was no less a factor in his rise to the top. Thirty years is a long time, and Hurvitz himself admits he’s a little tired.

"I don’t know of many other jobs that give the sort of satisfaction and enjoyment that managing Teva does. The company, the people, the atmosphere, the creativity are extraordinary. The fact that Teva is an important Israeli company is certainly an ego-boost, and I’ve never complained about the financial side. On the other hand, the responsibility is enormous."

"Making the move from one scale to another is a bit frightening, even if the transition is successful. There is a big difference between an annual turnover of $650 million and $1 billion, despite the fact that the difference between the two sums seems small. It’s not the same thing. It’s another country, another five factories, and other 2,000 employees, and you’re suddenly reading another newspaper. When the tornadoes hit the US recently, I ran to find out if the storms had passed over our New Mexico plant. That’s a little incident, but the burden of responsibility is great."

"Consider Copaxone for a moment. You invest and invest, and despite the fact that you create a safety net, you submit a request to the FDA committee, made up of doctors you don’t know, and just as the decision can be made unanimously in your favor, it can also be the opposite. And of course, you can’t sleep at night. On the other hand, woe betide you if you try to stop progress. You have to keep advancing, while keeping in mind that you must not endanger the company. In truth, we’ve made bold moves at Teva but we’ve never exposed ourselves to real danger."

Have you considered handing the reins over to the next generation?

"This was definitely a question I asked myself before the current nomination. There is a theory that the average stay of a given worker at any job is seven years. I’m willing to give a simple answer to the experts. A company that is failing, that doesn’t grow, can certainly take the risk of changing its workforce every seven years. Clearly, the general manager of any company that isn’t growing, should go home."

As to the matter of an heir, Hurvitz will say only that, at present, there are only four managers at Teva capable of taking his place. Haim Hurvitz, his son, is a vice-president at the company and responsible for European sales, the company’s fastest growing market. Hurvitz ignores the question as to whether his son is one of the four potential replacements.

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