Earlier, in 1970, Assia had established a company named Assia Chemical Export Industries Ltd., whose sales were directed exclusively at markets outside of Israel. The company was set up with the express purpose of taking advantage of the incentives that the Israeli government offered to export-focused companies by means of the Israeli Investment Center. Under the Law for the Encouragement of Industry, Assia Chemical Export Industries was recognized as an authorized enterprise and enjoyed substantial tax incentives. Its establishment was functional, resulting in the consolidation and marked expansion of the group’s export operations. Between 1973 and 1974, within the course of just one year, Assia Chemical Export Industries’ profits increased from 1.8 million Israeli pounds to 5.5 million Israeli pounds (before taxes).
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Although Eli had intended to carefully plan the pharmaceutical group’s entry into Europe and the United States in advance, such preparation was not always possible. At the end of the 1960s, Assia began manufacturing nitrofurans – a class of antibiotics developed in Japan for use with animals in general and poultry in particular. Due to improper patent registration in Japan, nitrofurans were not patented in Israel so Assia and Abic began to manufacture them. One of the products Assia developed was Nitrovin, a medicine to accelerate growth that was then available in several countries worldwide. It originally had been developed by the veterinary giant American Cyanamid Company.34 After a trial run to produce it proved successful, the drug was sent to the Assia agent in Australia to sell in the Australian market, based on the assumption that Assia was not violating a patent. The agent, however, also happened to serve as American Cyanamid’s agent in Australia.
The Australian agent informed American Cyanamid, which immediately contacted its attorney in Israel, who happened to be Avraham Levin. Not only was he the son of Yitzhak Levin, one of the three founders of Assia, but he was also serving as the chairman of Assia’s board of directors at the time. Alarmed, Levin phoned Eli in the middle of the night.
“Have you decided to violate patents as well?” he asked in amazement, explaining the urgent appeal by the American pharmaceutical giant.
“Avraham,” Eli explained, “Nitrovin is not patented in Israel. The question is not whether we can manufacture it – I am completely certain that we can – but rather whether we can market it in the United States, Britain, and Australia. As our impression was that we could so in Australia, we sent the chemical substance to our man there. We have no interest in risking a patent violation for 100 kilograms of Nitrovin in Australia. I am asking you, as chairman of Assia, to try to set up a meeting for me immediately with the representatives of American Cyanamid in the United States and to propose that we supply them with Nitrovin.”
“Are you crazy?!” Avraham responded in disbelief. “What’s gotten into you?!”
Once again, Eli explained that he had gone over the material on the subject and was certain that no patent for the medication had been registered in Israel, aside from registration of the use of Nitrovin for poultry. Therefore, he assured Levin, they would not sell the medication for use with poultry and they would not authorize anyone to mix it with poultry feed. Levin calmed down when he heard Eli’s explanation.
“And what do you intend to propose to American Cyanamid?” he asked Eli.
“Arrange a meeting with them for me,” Eli answered, “and I’ll consult with you about what to offer them.”
Levin accepted the challenge and quickly arranged the meeting.
In preparation for the meeting, Eli and Gabi Polack, the director of Assia’s chemical division, calculated that it cost American Cyanamid 12 dollars per kilogram to manufacture Nitrovin, not including raw materials. Assia could manufacture it for between seven and eight dollars, including raw materials and production, in other words, for five dollars less than the American company. With this information in hand, Eli flew to the United States alone. When he arrived at the meeting, he was astounded by the high-level composition of the group that had assembled; it included the entire senior management, legal advisors, and corporate officials. Eli immediately concluded that his request deviated from the corporate norms. After all, it was strange that such senior corporate officials would take the time to attend a meeting aimed at solving a problem with a small Israeli company.
It turned out that the American company had discovered that the process by which Assia’s scientists in Petah Tikva planned to manufacture the product was revolutionary and would cost much less than its own production process. So it was no surprise that during the meeting, the Americans proposed purchasing Assia. Eli not only refused the offer, but also audaciously proposed that American Cyanamid make Assia its primary supplier of Nitrovin around the world, including in the United States and Israel, for the price of eight dollars per kilogram plus the cost of raw materials, on condition that they sign a five-year contract. When asked to explain this condition, Eli said that Assia wanted to build a plant for this purpose and that he wanted them to fund it. The Americans’ response was no less startling: they were willing to entertain his impudent proposal, but first Eli would need to prove the seriousness of his intentions by sending them 50 kilograms of Nitrovin within two months.
“No problem,” Eli said confidently, even though the Assia laboratories had not yet produced even one kilogram commercially. “We’ll get it to you.”
After the meeting, Eli called Polack to inform him of the new development.
“Gabi,” he said,
Find a chair and sit down. In two months, I need 50 kilograms of Nitrovin. Take all the vessels and reactors you have and make it. I made a commitment. If we supply them with 50 kilograms, they’ll order six tons per year from us at a minimum price of eight dollars per kilogram!
Later, Eli confided that even he did not believe had committed to supplying such an unfathomable quantity to the American corporation.
Polack’s response was not surprising: “No way. We won’t be able to do it.”
“We will,” Eli assured him. “Let’s talk tomorrow morning, after I get a good night’s sleep.”
The next morning, Polack insisted that the most that Assia could possibly manage to produce in two months was 25 kilograms. Eli was insistent: “There’s no way around it. I committed to 50 kilograms and that will be the quantity!”
Indeed, over the following two months, Assia produced 50 kilograms of Nitrovin and the heads of American Cyanamid instructed their European management in Zurich to negotiate a contract. Assia had been awarded the exclusive right to supply the drug at the designated price. However, despite Eli’s demand for a five-year contract, they signed a one-year contract with an option to renew it for an additional year. The limited duration of the arrangement stemmed from the American conglomerate’s difficulty believing that a small Israeli company could produce a regular supply of the substance at the price Eli had proposed. Eli agreed, but only after it was concluded that if the contract was not renewed, Assia would be permitted to market the substance independently around the world.
Immediately upon signing the contract, Assia began constructing a plant to produce the drug. The facility, Chemonim Bet, was completed in 1973 and cost seven million dollars to build. In the meantime, Assia produced Nitrovin at the old plant in substandard conditions, selling all the Nitrovin it managed to produce. During the Yom Kippur War, fears mounted at American Cyanamid that Assia, the world’s only supplier of Nitrovin, would not be able meet its commitments. But even while he was serving in the IDF as the commander of a special artillery force stationed along the Suez Canal during the war, Eli made sure that the plant mobilized all its resources and all its workers who had not been summoned to serve in the IDF at the time in order to meet the terms of the contract. Once again, Eli was successful and Assia fulfilled its commitment to American Cyanamid.
In February 1974, the heads of American Cyanamid requested to meet with Eli as they did every year to conclude t
he terms of the next contract. Eli was still serving in the military in the Sinai Peninsula, but was granted special leave to attend the meeting in the United States. The corporate heads came to the meeting especially to see Eli fresh from the battlefield in the Sinai; to praise Assia for maintaining its operations, which gave no indication of the wartime conditions under which it was operating; and, of course, to sign a contract for the year to come. Years later, Teva’s production of Nitrovin would stand out as one of the group’s most profitable enterprises.
Assia’s success in producing Nitrovin for American Cyanamid highlighted the extraordinary innovation of Assia’s chemical division that was reflected in their research, processing, and production operations. For a fledgling Israeli company to have developed a more efficient synthesis that the major pharmaceutical company that owned the product in the first place was the ultimate embodiment of Israeli brains and chutzpa. At the time, approximately 100 (or 13 percent) of the division’s 750 employees were academically trained professionals who focused on research and development. This represented an increase of tens of percentage points from the company’s development-related workforce in the past. Assia’s research budget grew dramatically each year, almost doubling between 1971 and 1975 from 438,000 to 822,000 Israeli pounds. This helps explain why the Nitrovin agreement was not the only instance of its kind. Between 1974 and 1975, the US Food and Drug Administration (FDA) authorized Assia to manufacture two other medicines using novel synthetic techniques.
The FDA manufacturing authorization that Assia received was not only unprecedented for an Israeli plant, but also had only been granted to few plants around the world at that point. This occurred at the start of the generic drug movement, when the pharmaceutical industry was just beginning to wake up to the potential of increasing profits through more efficient synthetic processes. Until this point, the profit margins available to drug manufacturers were so high that nobody cared much about the actual manufacturing cost of the drug.
In addition to its financial implications, FDA authorization was also evidence of Eli’s particularly effective management. Directing exports to the United States, which was now viewed as Assia’s most important export target, had born fruit. Assia’s cooperation with American Cyanamid alone was generating an annual income of two million dollars. In 1976, the exports of Assia, Zori, Teva, Maabarot, and other related plants stood at $10 million and were distributed evenly between Europe, Africa, and the United States.
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Production at Assia grew thanks to the expansion of its production lines. Eli also sought to continue growing through acquisitions. For example, in 1975, Assia took over a factory in Bat Yam that had previously belonged to Paka Industries Ltd., which produced yeast and alcohol. Since its establishment, the factory had been partially controlled by Assia’s three owners along with additional partners. The building now returned to its roots and was slated to help increase production. A structure was built next to it to serve as a chemical fermentation plant, where Eli sought to develop veterinary medicines and materials. The plant recycled the wastewater from alcohol and yeast production, which was rich in proteins that are valuable in the production of veterinary medicines. After Paka, Assia went on to acquire several other plants.
In 1976, the year that Assia-Zori and Teva were merged, their turnover stood at approximately 200 million Israeli pounds. It is therefore no wonder that in the same year, the shareholders of the merged enterprise received 20% cash dividends (after taxes) and another 35% incentive stocks. The management also distributed 2.5 million Israeli pounds worth of stock options to employees according to a scale based on seniority and length of employment, with redemption set for three years at a preferred price of 60% more than the market price. The media reported that the shares, each of which was worth 56 Israeli pounds, were snatched up by employees.
These figures reflected a group of plants which, according to the press, had already become a major business and had been built and developed quickly and decisively, dramatically increasing turnover and profits from one year to the next.
When asked about the secret behind his accomplishments, Eli shared the method that he had already adopted and that he continued to employ for the next three decades. He began by “learning the data, including assessing the sector, its quality, the possibility of progress, and potential market shares.” He then went about setting goals, which, he emphasized, “should be set as far away as possible and be long-term.”
The third step was …establishing the framework being built – work should always be carried out in full cooperation with the framework you are constructing. This is where employee rights come in, which are greater than those of the CEO…. The employees do the work and therefore deserve the credit. After setting the goal, all a good manager has to do is supervise his employees and guide them toward achieving it.
Eli had already adopted this philosophy, but now, in 1976, after all three companies had officially merged into one publically traded company known as Teva Pharmaceutical Industries, or Teva for short, he insisted on it all the more. From that point on, he also had more freedom to implement it. The merger also relieved him of other concerns – such as the potential for conflicts of interest between the publically traded company and the family-owned company – that he had contended with for the past eight years, since Assia’s acquisition of Teva. During this period, Eli had understood that he could not simply do whatever he pleased at Teva (such as discontinuing production lines that were successfully competing with Assia). This led him to two far-reaching conclusions. The first was that he needed to draft a plan for merging the two companies. Since Teva already was a public company, he understood that it was preferable for it to absorb the family company and not vice-versa. Eli’s second conclusion was that until the merger was implemented, Teva should be treated as an independent company in every way. Eli worked in this manner without running into trouble with Teva shareholders or the shareholders of Assia-Zori, despite the constant potential for conflicts of interest.
Preparations for the merger between Assia-Zori and Teva had been underway since 1974. The longer Eli engaged in the joint management of the three companies, the more pressing it became to formulate a structural solution to prevent conflicts of interest between the private shareholders of Assia-Zori and the shareholders of the publically traded Teva. The solution was a merger, but implementation was delayed for various reasons. One of the most serious obstacles was taxation.
In practice, Assia-Zori acquired Teva in 1968. A standard acquisition would have included the full merger of the Jerusalem-based company and the company in Petah Tikva and would have been subject to taxation. Assia’s energetic team, led by accountant Shmuel Zigelman and legal advisor Uzi Karniel, sought to minimize taxation. They were assisted by the law offices of S. Horowitz under the leadership of Amnon Goldenberg and, later, by International Consultants. A young economist at International Consultants named Dan Susskind eventually became one of the most senior figures at Teva and Eli’s right hand man.
The solution to the taxation issue was creative. Those who implemented it referred to it as “incest” or as a “reverse takeover.” Eli, his associates, and his advisors took advantage of several Israeli laws – specifically, Section 105 of the Income Tax Ordinance, Section 120 of the Taxes Law, Section 118 of the Corporations Ordinance, and Chapter 7 of the Law for the Encouragement of Industry – to support the solution. All this legislation deals either directly or indirectly with the takeover of parent companies by subsidiaries.
They decided that since Teva was a publically traded company it would become the parent company, while Assia-Zori would become the subsidiary and the two companies would swap stocks. This meant that all those who held private shares in Assia-Zori would be issued public shares in Teva, which was traded on the stock exchange. If the shareholders kept these shares for five years, they would not be subject to capital gains and would be tax exempt. Another a
dvantage of this solution was that it transformed Assia-Zori’s shareholders into shareholders in a publically traded company, turning their shares into a liquid asset.
At a general meeting on March 22, 1976, Assia shareholders officially resolved to merge with Teva. Teva shares were then issued to Assia-Zori shareholders and were not sold for the next five years, ultimately making them tax-exempt. In May 1976, the Israel Securities Authority approved the prospectus submitted by Teva and the Tel Aviv District Court subsequently approved all the principle and clauses of this remarkable merger.
Assia-Zori shareholders avoided paying taxes by taking advantage of Section 101 of the Income Tax Ordinance, a precedent known as the Moshevich Correction. The precedent was established when, under the leadership of Mark Moshevich, Elite registered its shares for trade and then claimed that they were publically traded so their sale was tax-exempt. In order to prevent a similar situation, the Israeli income tax authorities issued a new regulation which stipulated that tax exemption based on the initial registration of a share on the stock exchange would only be granted if the public issuance was conducted by means of a prospectus. This is why Teva released a detailed prospectus to the public in 1976 that featured Assia-Zori as part of Teva. The prospectus was meant to establish that Teva’s issuance was a public offering and was therefore not subject to taxation. In this case, the more than 35 shareholders of Assia-Zori were considered to be “the public.” They exchanged their shares in Assia and Zori for shares in Teva and were therefore not obligated to pay taxes. The Israel Securities Authority had no choice but to authorize the merger.
Eli Hurvitz and the creation of Teva Pharmaceuticals: An Israeli Biography Page 17
