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

by Yossi Goldstein

  •••

  Initially, the option of acquiring Ikapharm had been less realistic for Teva than the option of acquiring Abic. It was, however, the option that Eli preferred. In 1978, he had sent out feelers within Koor and Hevrat Ha’ovdim, the Histadrut’s economic arm which owned and operated a variety of businesses, regarding the possibility of purchasing Ikapharm and had received a negative response. The struggle between Ikapharm and Assia over the right to produce Penibrin – during which, as mentioned above, Assia’s attorneys were granted an injunction against Ikapharm’s attempt to manufacture the drug – had caused tension between the two companies. Nonetheless, the heads of both companies had no interest in intensifying the conflict. Through its subsidiaries, Koor had become one of Assia’s partners in its projects in Africa and Eli was pleased with the partnership. Koor had accepted Assia’s demand for control of production and marketing for the jointly owned plants in Africa and profited from the partnership. It was therefore not surprising when, by means of Dizengoff West Africa, Koor emerged as Teva’s partner in the acquisition of Orphahell as well.

  The following year, in 1979, it was the heads of Koor Industries – under the leadership of the company’s highly esteemed CEO Naftali Blumenthal and his deputy Yeshayahu Gavish (a major-general with a heroic past in the IDF) – that sent out feelers regarding the sale of its pharmaceutical companies or their merger with Teva. The move was precipitated by Plantex’s substantial losses and the stagnation of Ikapharm. With the support of Yaakov Levinson, the CEO of Bank Hapoalim and a powerful figure in the Histadrut’s Hevrat Ha’ovdim at the time, the heads of Koor regarded both companies as a liability that needed to be cut loose without delay. The fact that one-quarter of Ikapharm’s shares were owned by foreign investors who were not at all satisfied with their management also influenced the heads of Koor.

  Eli, of course, agreed in principle but was in no hurry to close a deal for several reasons. First and foremost was the fact that, according to various calculations, the two Histadrut-owned companies were together worth one-quarter of the total value of Teva. Such a sum would not be easy to obtain, although Eli did not rule out the possibility. The alternative, a merger between the companies, made Eli wary of the possibility of a hostile takeover of Teva by the Histadrut-owned conglomerate. At the same time, he also recognized the problematic condition of Koor’s pharmaceutical companies as a one-time opportunity for a Teva takeover.

  For this reason, it was with mixed emotions that he entered into negotiations with the leadership of Koor. One summer day in 1979, Levinson set a meeting with Eli. The two men knew each other from their high-school days in Tel Aviv and had seen one another at various functions in recent years. They shared a mutual respect for one another, although Eli was not fully convinced of Levinson’s honesty. When Levinson suggested that Teva purchase Koor’s two pharmaceutical companies by issuing Koor some of its shares, Eli was hesitant and possibly even suspicious. Levinson justified his proposal by asserting that Koor “is not interested in money. It has more than enough…. it is interested in exchanging shares.”

  Eli’s response was characteristically frank: “Because you are known for your great appetite, Teva is not interested in exchanging shares with you…. We have enough money too, and if we need any more, we’ll approach you in your capacity as chairman of Bank Hapoalim and ask for a loan.” The meeting ended without results and it seemed to Eli that an agreement was out of reach.

  Then Blumenthal, Koor’s CEO, entered the picture.

  “Before we sit down to negotiate with you,” Eli explained, articulating his sense of unease with Koor Industries, particularly after his conversation with Levinson, “we want an irrevocable guarantee that you will never take over or attempt to take over the company – neither by means of Koor or a subsidiary, nor in any other manner.”

  Blumenthal was unequivocal in his response: “We have no desire to take over Teva. We failed with Plantex. Our facility at Ramat Hovav was a complete failure. We do not want to deal with it anymore.”

  Eli believed Blumenthal. Although he did not trust Levinson, who was the more senior of the two, he was convinced he could trust Koor’s CEO. The two concluded a verbal agreement regarding the terms of Teva’s takeover of the two companies. It was decided that Teva would use its shares to fund the acquisition, but all additional details were to be resolved in subsequent discussions. Eli decided that before he presented the proposal to the board of directors, he would share it with a few board members. One was its chairman, Professor Meir Heth, who had previously served as the chairman of the Tel Aviv Stock Exchange and recently moved to Teva as a representative of the Levin family. Another was the man whom Eli feared most, his father-in-law Nachman, who was still serving as a member of the board of directors and still wielded significant influence in the group. Both of them, especially Nachman, articulated staunch opposition to the plan.

  Eli did not relent. He wanted Ikapharm and was sure that bringing it under Teva’s control was the right move. In order to convince the members of the corporate management to support this, he first conducted secret negotiations with Gavish, Koor’s deputy CEO. One of the problems, which Teva’s senior corporate officers had pointed out, was the dismal condition of Plantex. After discussing the issue, the two decided that Teva would issue Koor 20 percent of its shares and, in return, receive Ikapharm, but only half the shares of Plantex. In other words, Koor would remain a full partner in the failing plant.

  During the same period, Eli visited the Ikapharm facility in Kfar Saba and was astounded by its splendor and modernity.

  “I was left dumbstruck,” he said later, describing his visit to the site. “We would never build anything like that!”

  This sentiment was shared by his senior aides Dan Seusskind and Uzi Karniel, who worked alongside Eli and were privy to the secret negotiations then underway with Koor.

  “Everyone was amazed by the huge sum of money Koor had poured so generously into the facility in Kfar Saba,” Teva’s chief financial officer at the time recalled.

  Later, in consultation with his aides, Eli decided that, even before the formal discussion with the board of directors, he would take some of them on a similar tour. He had no doubt that they would share his reaction.

  In coordination with Koor, Eli organized a secret tour of the Kfar Saba facility for senior members of the board of directors. The secrecy stemmed from a desire to prevent leaks that could thwart the deal. The tour’s effect on Teva’s board was dramatic. The magnificent construction standards were unprecedented in Israeli industry, even at Teva’s enormous plant at Har Hotzvim. The facility’s massive dimensions, giant halls, marble floors, ceramic-tiled walls, unique air conditioning system, sterility, and even the magnificent guard post at the entrance to the facility (which contained a bathroom and bomb-shelter) all made an impression on the visitors.

  “The tour took about an hour,” Eli recalled. “The group went up and down. Yoel Elstein, Meir Heth, and Dov Shafir [senior members of the board of directors] beamed with pleasure…. Nachman Salomon pranced joyfully like a young lamb down the straight and spiral staircases…. The tour was followed by an agreement.”

  On March 31, 1980, the parties signed an agreement regarding Teva’s takeover of Ikapharm. On the same occasion, they also signed the Promedico deal, discussed at length below. Slowly but surely, Eli had achieved his first major goal: the group now enjoyed almost total control of Israel’s pharmaceutical market. When he first began working at Assia, it was the fourth-largest pharmaceutical plant in Israel. Assia’s acquisition of Zori and then Teva created the country’s first pharmaceutical group, an achievement that was threatened by its Histadrut-owned rival. Now all that remained was Abic. It was the only pharmaceutical company over which Eli had not yet assumed control and no one doubted that the day would soon come when Eli would bring it into the Teva group.

  •••

  The rest of the proce
ss was not as simple. Teva’s takeover of Ikapharm and Plantex was replete with difficulties; Eli had expected nothing less. He already had firsthand experience with employee opposition to a forced takeover by Assia out of concern that the change in ownership would result in loss of jobs, heavier workloads, and attempts to cut wages.

  As Eli expected, the prospect of being taken over by a capitalist company such as Teva (as opposed to the theoretically socialist Histadrut) sparked fear among Ikapharm employees. It was evident to its production workers and academic staff (pharmacists, physicians, and production engineers) alike that the work culture in a private company such as Teva would differ from that of a company controlled by the national labor union. Over the years, the Histadrut had consistently taken steps to improve employees’ benefits and zealously maintained the number of jobs at the plant, among other things. Teva’s takeover left employees wondering what would happen next.

  Blumenthal was the first to attempt to allay employee fears. At a stormy meeting with representatives of the employees’ committee, Blumenthal argued that Koor had not abandoned them, but rather had become Teva’s main partner. This did not pacify the employees, who saw the CEO of Koor Industries as a traitor to the values of their socialist institution and demonstrated against the takeover. It was a meeting with the leadership of Teva that helped calm the stormy waters. Flanked by Gabi Polack and Yoske Shefler, an old kibbutz buddy of Eli’s and Teva’s director of human resources, Eli assured the employees that all they intended to do was upgrade worker performance.

  “In light of the production plans,” he promised during the meeting, “only a small number of people will be fired.”

  However, just like at Teva Jerusalem, the more problematic developments were yet to come and Eli’s success in calming the tensions was short-lived. Only a small number of workers were fired and only a few dozen either quit or opted for voluntary retirement, for which they received handsome compensation. Still, the plant’s new goal was crystal clear: increase efficiency at all costs. The Teva group introduced a much more demanding workload than what the employees had been accustomed to in the past.

  “We declared an end to hidden unemployment,” Eli explained. “You cannot work at 40 percent output…. You cannot work on Saturday to get paid 300% and then not work [during the week]…. The good old days were over.”

  Eli knew that over the years the plant had maintained a degree of hidden unemployment that stemmed from practices that had been customary at Koor Industries since its inception. The department heads that Teva appointed tried to rectify this, but the changes proved difficult for Ikapharm’s employees to internalize. Another problem was the understandable estrangement between the new Teva-appointed managers, on the one hand, and Ikapharm’s veteran employees, on the other hand. The problems, however, went beyond these areas. The personnel that Teva brought into the plant imposed changes at all levels: from the insurance, import, and export departments all the way to the accounting offices. As a result, tensions ran high as a matter of course, at times culminating in troubling and, in some cases, violent outbursts.

  As time passed, things settled down and, slowly but surely, a process of mutual adaptation got underway. The Ikapharm employees accepted the new reality and the Teva personnel began to understand that, despite everything, the employees of the Kfar Saba plant still had something to offer. Indeed, some Ikapharm working methods were adopted not only by the new plant’s management, but also by Teva Jerusalem personnel, who came to Kfar Saba to learn the production methods in which Ikapharm personnel specialized. Another area in which this cross-fertilization manifested itself was wage levels. On average, Koor employees were paid 25% more than Teva employees. It was clear to Eli that this wage gap needed to be eliminated, but he knew that cutting the salaries of workers in a former Histadrut facility was not the right move when it came to labor relations, which were already tense. Instead, he gradually increased the wages of Teva employees over a period of a few years, proving that new owners could also adapt in the wake of a takeover.

  There were more changes. The distribution of the production lines at Ikapharm’s huge facility was not at all efficient. This meant Eli and his colleagues could transfer production lines from Assia’s plant in Petah Tikva to the Ikapharm facility, instead of to Teva’s Jerusalem facility as originally planned.

  “The employees from Petah Tikva travelled to Jerusalem for a tour of the new plant, which in comparison to the Assia plant, looked like a palace,” Eli explained.

  They had no desire to [go to Jerusalem] and did so unwillingly…. The morning of the beginning of the Passover holiday in 1980, I called all the department directors from Assia to a meeting in the dining room. “I bought you a present for the holiday,” I told them. “Ikapharm.” The employees were dumbfounded. Very few people had been privy to the secret negotiations. “The problem has been solved,” I had to repeat several times. “There is no need to move [all the way] to Jerusalem. We are moving to [the nearby town of] Kfar Saba.” The sense of relief among the Assia employees was enormous. They jumped for joy. All of a sudden, their fears had been allayed.

  Some of the group’s pharmaceutical departments moved from Petah Tikva to Kfar Saba soon after the takeover. Approximately two years later, the syrup and cream departments moved as well. The relocation to Kfar Saba offered the personnel of some of the laboratories, which had previously operated in substandard conditions in buildings that Salomon and his associates had built in the 1930s and 1940s, luxurious working conditions that were hitherto unimaginable. The acquisition of Ikapharm thus gradually transformed Teva’s entire production apparatus, resulting in the implementation of plans that the corporate management had drawn up during the 1970s. Even then Eli and his colleagues had wanted to classify and divide up the production of pharmaceutical products. Now they were able to do so. In addition to the consolidation of similar products that were being manufactured by both companies, all production of solids and tablets were gradually moved from Petah Tikva and Jerusalem to Kfar Saba, while all syrup production was moved to Jerusalem. Eventually, all that remained in Petah Tikva was the chemical department.

  Unsurprisingly, the inherent differences between the plants had over time created two work cultures that were completely distinct from one another. The unavoidable outcome of the takeover, as Eli understood it, was the streamlining of the former Histadrut facility. The validity of his approach was reflected in the Teva balance sheet in the years to come. Under Koor ownership, Ikapharm was more or less a break-even venture, while Teva’s takeover led to a major turnaround, meaning Ikapharm became a profitable company. Within three years, the sale of its products almost doubled, exports tripled (with a small number of products being marketed in the United States after complying with FDA regulations), and preliminary inquiries were made regarding the possibility of entering the US market on a much larger scale.

  The improved efficiency and order at Ikapharm resulted in a “discovery” by legal advisor Uzi Karniel during a due diligence investigation. Koor, it appears, had simply forgotten about the existence of the buildings that Ikapharm owned near the diamond exchange, from the period when it operated in Ramat Gan. These buildings had not been figured into the transaction and their value, which turned out to be enormous, had not been calculated. After their discovery, they added tens of millions of dollars to Teva’s balance sheet.

  “Koor didn’t know what it owned and what it didn’t own,” Karniel recalled. “Chaos reigned supreme.”

  Teva instituted order.

  •••

  The difficulties that Teva faced at Plantex were much more serious than those in Kfar Saba. At Plantex, the losses were astronomical, totaling approximately one million dollars per month. For Eli and his colleagues, it was clear that the only way to save the plant from closure was implementing dramatic efficiency measures. The main issues were Koor’s operating methods and the immense power that the employees’ committ
ee had amassed over the years. During the 1970s, the management sought to develop chemical processes and to produce medicinal plants, veterinary products, nitrofurans, and other products that had previously passed FDA inspection. However, once they moved to the stage of mass production, they failed to meet the required standards because the production workers refused to operate according to the approach prescribed by the American inspection: G.M.P. (good manufacturing practice). This system is designed to help ensure product quality and is used widely in the pharmaceutical industry. Many countries have legislated and enacted good manufacturing practices of their own, but all possess the same basic attributes. Their goal is to ensure high-quality medical products to protect the health of the consumer. For example, these procedures required employees to work in a sterile environment, which of course made their work more difficult.

  For months, heated arguments raged between employees, who were not willing to adopt the standards required for sterile work, and the personnel responsible for quality control. This delayed production, as the FDA would clearly not allow products manufactured in the manner insisted upon by the workers to be sold in the United States. Plantex sustained enormous losses as a result of the company’s lack of control over its workers. This is what first prompted Blumenthal to seek Teva’s assistance. He recognized that both plants – the one in Netanya, in which a fortune had already been invested, and the one in Ramat Hovav, which had just been rendered fit for the production of antibiotics – would have to be closed unless changes were made in their management. It is therefore not surprising that Eli refused to purchase Plantex under the same terms that he purchased Ikapharm. Since it would undoubtedly continue losing money for the first year or two, Eli insisted that Koor remain a full partner in its operations.