Eli Hurvitz and the creation of Teva Pharmaceuticals: An Israeli Biography
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“We cannot have products in America,” he explained, “without having a presence on its stock market.”
The NASDAQ’s relatively low entry requirements (in comparison to its older sister, the New York Stock Exchange) and its status as a home for innovative technology companies such as Scitex (the most prominent Israeli company on the NASDAQ during the 1980s) motivated Teva’s leadership to begin operating on the NASDAQ.
Teva’s first supporter on Wall Street was Harvey Krueger, who later became the vice chairman of Lehman Brothers. At the time, Teva’s stock offering was perhaps the smallest in which Harvey had participated and he may have been motivated more by Zionism than profits. Over time, however, Teva proved to be the most successful transaction in his Wall Street career. His seemingly minor decision to support Eli’s dream also may have saved his life. He became a close friend of the Hurvitz family and so it was only natural that he accepted Eli’s invitation to travel to Israel to attend the celebration marking the one-hundredth anniversary of the founding of the pharmacy that grew into Teva. It was scheduled for September 2001, when the Second Intifada was raging in Israel. Harvey’s friends begged him to stay in New York and postpone his trip to Israel until the security situation improved. Harvey stubbornly responded, “I made a promise to Eli and I’m going.” Harvey kept his promise. Had he not, he most likely would have been sitting at his desk at 6 World Trade Center on the morning of September 11 when a steel girder from the Twin Towers crashed through his window, destroying his office and killing a number of his colleagues. Instead, Harvey lived to be present when Eli sounded the closing bell at NASDAQ in February 2007 on the twenty-fifth anniversary of Teva’s IPO.
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On February 16, 1982, shares of Teva were first sold on the NASDAQ “over the counter,” as the trading of ordinary stocks was popularly designated. In retrospect, this was an important milestone for the pharmaceutical group. It marked the establishment of a foothold in the US economy and the beginning of a new phase in the company’s development.
However, during the two-and-a-half years following its initial offering, no practical progress was made on this front. Perhaps the dire state of the Israeli economy deterred Eli and his associates from seeking an American strategic partner. Or perhaps he was distracted by his considerable responsibilities at the Manufacturers Association of Israel. In any event, after signing the agreement with Koor, his urge to advance in this direction reemerged.
Other factors, both external and internal, also played a role in intensifying Eli’s desire to enter the US market at the time. For example, there were the limitations of the Israeli market. At the time, Eli felt not only that Teva had exhausted its potential in Israel and that its chances for additional growth there were insignificant, but also that because of the major difficulties it faced during the period of hyper-inflation, the group, in his words, was “treading water.” Approximately half its pharmaceutical sales were now directed to Israel’s Clalit Health Services and other institutions. Government supervision of drug prices, which was aimed at contending with the country’s increasingly serious inflation problem, meant that Teva was barely profiting from these sales.
During 1983-1984, Eli and Teva’s corporate management learned of another factor that motivated them to seek an American partner. The US Congress had just started seriously considering the approval of generic drugs. Until that point, the patent rights for a new drug lasted for between 17 and 20 years from the date of patent allowance, protecting the rights and profits of the patent holder. Once the patent expired, the patent holder lost its exclusivity and any company could theoretically be authorized to market the same drug. However, the potential competitor first would be required to present the FDA with its own studies of safety and efficacy. In practice, it was unheard of to go to this expense in order to launch a drug on which there was no patent protection.
Until the 1980s, the cost of new drugs was a fairly modest component of US healthcare costs. However, the 1970s saw the beginning of a pharmaceutical revolution with new and innovative drugs launched for high blood pressure, cholesterol, and other common ailments. Sales of these drugs were in the billions. The concept of a blockbuster drug that could garner one billion dollars or more in sales was born. The actual cost of making a drug in those days generally was 5% or less of the drug’s selling price. As more blockbuster drugs entered the market, the price of health insurance began to rise and Americans clamored for relief. Most health insurance in the US was funded by employers and the rise in the drug costs caused America’s industrial base, traditionally aligned with the Republican Party, to make common cause with the more liberal, Democratic Party.
Other factors included the quickly ageing American population, cuts in the US federal health-care budget, and changes in the manner in which health insurance was organized in the United States. All this caused an outcry among members of both houses of the US Congress, particularly in light of a US federal appeals court decision in Roche Products vs. Bolar Pharmaceutical,43 which upheld Roche’s petition and prevented the sale of a generic product. The ruling led to the formation of a congressional committee and the enactment of the Hatch-Waxman Amendments, which shortened and simplified the process of FDA certification for the sale of generic products. This legislation, spearheaded by Senator Orrin Hatch (a conservative Republican) and Congressman Henry Waxman (a liberal Democrat), changed the face of the pharmaceutical industry.
While some wanted Congress to artificially constrain drug prices (as Israel did routinely), Congress instead simply decided to end the monopoly that drug companies had on setting prices after the patent of on a drug expired by allowing generic manufacturers to use the safety and efficacy data already on file, if they could prove chemical equivalence to the previously patented drug.
Congress added one more feature to the new Hatch-Waxman Amendments that would become the real secret behind Teva’s explosive growth: the first generic company to successfully file a generic drug application would be awarded six months of “co-exclusivity” in the marketplace, which it would share with the brand manufacturer. In other words, the first generic mover against a blockbuster drug had six months to sell at the extraordinary profit margin enjoyed by the former patent holder before other generic companies were allowed to enter the market and drive down prices through competition.
The Hatch-Waxman Amendments intensified Eli’s desire to enter the US market since Teva specialized in generic pharmaceutical drugs. In the 1960s and 1970s, due to the Arab boycott of Israel, large drug companies – including some that feared that defying the boycott would hinder their ability to sell their products in the Arab and Muslim world – authorized Israeli drug companies to develop drugs that they held the patent for. The Israeli companies included Assia, Teva (in its previous incarnation), Ikapharm, and Abic. This still was true of the Teva group. As a result, in the early 1980s, Teva was producing 230 types of drugs and pharmaceutical products in 400 different dosages, just for the Israeli market. Thus, while other generic drug companies were forced to develop and validate their manufacturing methods in order to compete against a patented drug, Teva already had proven, production-tested methods ready to go. Teva was thus poised to reap the “first mover co-exclusivity” that guaranteed extraordinary short-term profit each time a blockbuster drug patent expired. This was another reason for Eli’s attempt to find an American company to help Teva penetrate the US market: theoretically, it could manufacture any drug in generic form if granted the proper authorization to do so.
Eli believed that Teva’s potential in the US market was “endless.” However, he also recognized Teva’s limitations and sought out an American partner. The partner would have to possess sufficient financial might to share the risk with him so that when Teva needed funds, they would be on hand. Moreover, Eli believed that Teva needed a partner that was “knowledgeable regarding the ins and outs of America…. We may speak English,” he explained, “but we do
n’t know ‘American.’ In order to succeed in the American market, we need a partner who knows how to do business in ‘American.’”
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In one of Eli’s many English-language interviews following the agreement with Koor, he mentioned his desire for a strategic partner in the United States. The long-awaited breakthrough in the search came one fall day in 1984, when a representative of the US-based chemical conglomerate W.R. Grace phoned Moshe Shamir, who was then serving as the chairman of Teva’s executive committee. After the call, Shamir phoned Dan Susskind and informed him that the US conglomerate had heard Eli’s interview, was interested in Teva, and had requested written material about the company. Susskind sent the material to W.R. Grace’s offices, in Manhattan.
Meanwhile, Susskind learned that W.R. Grace had been founded in Peru in 1854. Its founder, William Russell Grace, had travelled to Peru from Ireland three years earlier with his father and family. He initially found employment with the firm of John Bryce and Co. as a ship chandler. He subsequently went into the guano business. After his brother Michael joined the company, they changed its name to Grace Brothers & Co. They opened a main office in New York City in 1865. The company was formally chartered in 1872 and incorporated in 1895.
The company was now run by its founder’s grandson, Peter Grace, who had been born on Long Island in 1913 and had been serving as the CEO and chairman since 1945. He had also served as an advisor to several US presidents, including then President Ronald Reagan, and was asked to sit on the boards of directors of various major American companies. Under Peter Grace’s leadership, W.R. Grace went from being a South American shipping firm to a huge concern specializing in chemicals and other commodities, with more than 250 factories and 425 marketing units.
In early 1985, when Eli happened to be in New York, Susskind asked him to visit the Manhattan offices of H.R. Grace to ascertain why an American corporate giant like Grace was interested in a small company like Teva.
“I told him that their might be an interesting story here,” Susskind recounted. “It could be an attempt at a takeover, but it could also lead to cooperation. Eli was pressed for time. ‘Forget it,’ he told me. ‘Who cares? I don’t have time for it.’”
As fate had it, however, a blizzard brought about the cancellation of all outgoing flights and Eli was grounded. In order to occupy his time, he called back Susskind to get information about W.R. Grace.
Later, just before his flight back to Israel, Eli visited the company’s massive Manhattan offices. The blizzard had kept away all its employees and only Grace’s vice-chairman, Terry Daniels, was there awaiting Eli in his office. They began the meeting with preliminary small talk. Then, according to Eli, the two “fell in love … there was a sense of mutual trust from the very beginning. It clicked.” Daniels told Eli that Grace was looking for a way into the pharmaceutical market which was closely related to the chemical market, the American conglomerate’s field of specialization. It had already tried its luck by attempting to purchase two companies, but had failed to reach an agreement with their owners. Grace had read the publicity about Teva and its quest for a strategic American partner by chance. Daniels already had his own information about the group and after receiving additional details from Eli, he decided then and there to send a representative of Grace to Israel. If his agent submitted a favorable report regarding Teva, he told Eli, Grace would seriously consider joining the group as a strategic partner. At Eli’s prompting, it was also agreed that if they were to sign an agreement of cooperation, they would jointly purchase a plant to serve as Teva’s pharmaceutical headquarters in the United States.
Grace’s representative, who Susskind hosted during his visit, returned to the United States satisfied, despite the dire economic conditions in Israel at the time. His detailed report to the heads of the American conglomerate characterized Teva as a “large and worthy company.” In March 1985, Eli again found himself at Grace’s corporate headquarters, this time with Susskind, to finalize the terms of the deal. At the end of their visit, the two companies initialed an agreement that surpassed Eli’s wildest expectations. When asked Teva’s worth during the negotiations, Teva’s CEO quoted the inconceivable sum of “$70 million,” aware that the report submitted by Grace’s representative had offered a lower assessment. According to its stock market value, the group was valued at only $37 million. However, during the period in question, Teva’s net worth was increasing dramatically on a monthly basis, reaching $41 million in June. It hit approximately $70 million by the end of the year. Yet on the day the agreement was signed, no analyst would have ever believed that this would be Teva’s market value.
Even so, no one argued with the CEO of Teva. Eli explained that he and his partners at Koor wanted the American corporation to purchase 15 percent of the group’s capital, which was easily agreed upon. In retrospect, Eli realized that Grace not only had precise information regarding Teva but that it had been clear to its management that his estimate included not only the assessor’s value but the group’s future added value as well. For this reason, the figure he quoted did not differ considerably from the estimates with which Grace had already been provided.
Grace’s accountants advised its corporate management that in return for the $10 million it would pay the group, it should not be issued regular shares but rather callable Teva bonds for the same amount, which in due course could be redeemed for 15 percent of the company’s total shares. In principle, there was no difference between the two methods. Teva was paid the sum it had requested and the bond issue guaranteed Grace a return of the invested sum plus interest. However, had Grace been issued shares in the company, their value may have declined, and in the unstable condition of the Israeli economy, Grace’s financial advisors preferred to keep their money linked to a permanent interest rate and not to the fluctuations of the Israeli stock market.
For Eli, the new partnership with Grace was a reason to rejoice. On a practical level, after the reduction of shares at his disposal, the percentage of the shares held by the founding group under his leadership, along with those held by Grace, totaled 35.7%. This was only slightly shy of the percentage of shares held by Koor (37.2%), partially allaying his ongoing fears of a takeover by the Histadrut-owned concern.
In 1987, Peter Grace decided to visit Israel to see firsthand the company in which he had acquired a stake.
“He arrived at the height of the First Intifada,” Eli’s personal assistant Chava Nachshon recalls, “and wanted to do two things: take his venerable secretary, who had served his father also, to visit the holy Christian sites in Jerusalem and to meet General [Ariel] Sharon, as he called him.”
Nachshon contacted the head of the Jerusalem police department, explaining the importance of the visit and the need to show the visitor how tranquil Israel really is. So, as Grace and his secretary, who was in her late eighties, walked down the Via Dolorosa, border police units discretely made sure that the visit passed without mishap.
“The visit to Sharon was also not so simple,” Nachshon remembers, “Sharon invited us to visit him at his ranch in the Negev, near the Gaza Strip, instead of at his official residence in the Old City.”
The visit was a raging success. Sharon played the piano and whipped out maps to explain his security vision for Israel, while his wife Lily captured Grace’s heart when she offered them a homemade cake that she had just pulled out of the oven. Then Sharon and Grace toured the ranch and talked cattle and farming.
“Grace was enamored with Israel and Teva for the rest of his life,” Nachshon concludes.
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Now that Eli had an American financial partner, he needed a seasoned American pharmaceutical executive who could help guide Teva’s growth in the United States. He found that partner in Abraham (Barry) Cohen who, together with his wife Yvonne, became a confidant and member of the extended Hurvitz family. Barry was born into a Jewish family in Bagdad and raised in Calcu
tta. The Jews of Bagdad had a long history of scholarship and Barry’s family tree included numerous sages and community leaders. Barry applied himself to his studies in India and won a place to study chemistry in England. With his wonderful smile and gracious manner, he secured a starting position at Merck, where his talents were recognized by Roy Vagelos, Merck’s visionary CEO who eventually appointed Barry to be the managing director of Merck, International.
As described earlier, Merck and many other drug companies had never filed patents in Israel because of Israel’s small market size and the power of the Arab boycott. As a result, Teva could manufacture otherwise patented drugs freely in Israel. Barry helped Eli recognize, however, that the better strategy was to gain the support of the innovative pharmaceutical companies by negotiating paid licenses to major drugs on behalf of Teva, despite the lack of patent coverage. The cost of the licenses was minimal since Israel’s internal market was so small and Teva could not sell the licensed drugs outside of Israel until the expiration of the worldwide patents. These licenses, however, gave Teva approved access to the proprietary methods by which the major drug companies synthesized their products. While those methods would become publicly available upon patent expiration under the Hatch-Waxman Amendments that were soon to be enacted, in the case of one major drug after another, Teva already had mastered the synthesis and would become the first mover in the new era of generic drugs.
Although Barry continued to work for Merck for another 10 years, there was no conflict in the guidance he gave Eli, since Merck was not in the generic drug business. Barry helped Eli form good relationships with the leaders of America’s major pharmaceutical companies, some of whom sincerely regretted the role their companies had played in the Arab boycott and some of whom were self-conscious about their company’s behaviors in light of the US Free Trade Act of 1977, which imposed severe penalties against US corporations that supported the boycott. After retiring from Merck in 1992, Barry joined Teva’s board as one of its most devoted directors. He served faithfully for 20 years until his death in November 2012.