Eli Hurvitz and the creation of Teva Pharmaceuticals: An Israeli Biography
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In addition to Teva’s large-scale acquisitions such as Sicor, Eli sought to continue acquiring smaller generic companies in other parts of the world. As mentioned above, one of Teva’s strategic goals for had been to conquer the European market. Therefore, in April 2002, prior to its acquisition of Sicor, Teva reached an agreement with the major German drug manufacturer Bayer to purchase its French generic division, Bayer Classics – the third-largest supplier of this kind of medicine on the French retail market – for $86 million. Eli’s reasoning for the acquisition was clear and succinct: “We are interested in expanding Teva’s operations in Europe and turning it into a major player in the rapidly expanding generic market in Europe, in which France is a leader.”
Two years later, in November 2004, Eli continued his efforts at expansion in Europe. This time, he turned his sights from France to Italy, where Teva acquired the rights to market and distribute the products of Dorom, Pfizer’s generic marketing company in Italy and a major supplier of generic products on the Italian retail drug market. This acquisition added 77 products to the catalogue of generic Teva products sold in Italy, with another 63 products awaiting the approval of the Italian authorities, among many other potential benefits. In the years that followed, Teva continued its push to increase its share of the European generic drug market by acquiring companies in Turkey, Spain, and Germany.
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Teva’s expansion in Europe was not limited to generic production; it also was reflected in its chemical products. During 2002, Eli announced another European acquisition with a similar purpose: PFCH (Pharmaceutical Fine Chemicals Honeywell), an Italian manufacturer of raw materials for drug production. Teva acquired it from the international Honeywell group. PFCH’s annual sales totaled $55 million and a large portion of them were sales to Teva. Teva paid $70 million in cash for the acquisition, which, in addition to expanding its activities in the generic drug market in Europe, met the strategic goal of increasing Teva’ supply of chemical products.
Teva’s chemical division had been transformed during the previous decade. At the beginning of the 1990s, it was still a candidate for closure and raw materials for drug production accounted for only a small percentage of the group’s total sales. Moreover, in light of its mediocre performance, the Assia plant in Petah Tikva had been reassigned to meeting other needs. During the 1990s, Teva’s chemical production underwent dramatic changes in both approach and organization. As a result of renewed strategic thinking, which Eli and other members of the corporate management led, the production and marketing of raw materials for the drug industry, for pharmaceutical companies, and, equally as important, for Teva’s own use gradually emerged as one of the group’s major goals. Activities in this field subsequently grew rapidly. By 2005, raw materials accounted for 11% of total sales.
As a result, by the beginning of the new millennium, Teva’s API (active pharmaceutical ingredients) division had become an important cornerstone of the group’s strategy. The acquisition of companies operating in this field – such as Biogal in Hungary, ICI in Italy, Biocraft in the United States, and PFCH in Italy – demonstrated the importance that the group had come to place on the expansion of chemical production.
Between 1996 and 2002, Teva focused more on the acquisition of generic plants and less on the acquisition of chemical production plants to provide raw materials for the drug industry. Teva’s API division had become well established and more technologically advanced at its various plants and increased the number of products it produced. The new acquisition in Italy heralded another change in orientation, which was reflected in another expansion of the chemical plants in Israel. As Dan Susskind explained at the time, “The acquisition gives us significant flexibility and increases our production capabilities.”
Europe was not the only market that interested Eli at this time. He also looked toward countries such as Japan, India, and China, whose combined potential did not lag far behind that of the US or Europe. Eli understood that there was no point in expanding Teva’s presence in these markets until it had exhausted its potential within the markets of the US and the Europe. Still, he did not rule out incidental purchases. For example, upon learning in November 2003 that a plant for the production of active pharmaceutical ingredients owned by the Indian company JK was about to be sold for $8 million, he snatched up the bargain, endowing Teva with its first presence on the subcontinent. The day was not far off when Teva would open a research and development center there with thousands of employees. And that, of course, was only the beginning.
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For Eli, the acquisition of large and small companies alike constituted important strategic steps toward making Teva not only the largest generic pharmaceutical company in the world, but also one of the world’s most important pharmaceutical companies. After this acquisition, Teva ranked among the world’s 15 largest pharmaceutical companies. Although Eli did not regard this achievement as his end goal, in the course of 2004, he decided to put all plans for additional acquisitions on hold while Sicor was in the process of being absorbed into the group.
Then, in February 2005, Teva’s corporate offices in Petah Tikva learned that Sandoz, the generic arm of the Swiss multinational pharmaceutical company Novartis, had purchased Hexal, the largest generic drug manufacturer in Germany. Novartis had also purchased 67.7% of Eon Labs, Hexal’s American division. This $8.4 billion deal turned Novartis into the largest generic pharmaceutical company in the world, a position which until that point belonged to Teva.
The title of “the largest generic pharmaceutical company in the world,” which Teva had held since the late 1990s, was all about image. It ostensibly had no practical economic or pharmaceutical significance and was not a goal in itself. However, in the global world, where the public agenda is created in part and, at times, in its entirety by sets of images, the designation was nonetheless significant. Eli understood that the title of market leader had its own importance and significance; he subsequently sped up his negotiations with Dr. Phillip Frost, the chairman of Ivax Corporation and one of the company’s main owners. As he saw things, only by merging with or acquiring a major company of such massive proportions (Ivax’s market value at the time stood at more than $6 billion, its income for 2004 totaled $1.8 billion, and its net profit was approximately $198 million) could Teva regain its hegemony over the world generic pharmaceutical market.
Phillip Frost was born in 1936 to a traditional Jewish family and grew up in Philadelphia, Pennsylvania. Although his parents made a meagre living from the shoe store they owned, they managed to provide him and his two brothers with a rich upbringing. He attended good schools during his youth and went on to earn a BA in French literature from the University of Pennsylvania in 1957. His subsequent change in focus, from the humanities to medicine, had a dramatic effect on his life. After completing his medical studies at Yeshiva University’s Albert Einstein College of Medicine in 1961, he did his residency at the Montefiore Medical Center in New York and his internship at the Hospital of the University of Pennsylvania. Between 1963 and 1965, he served as an officer in the US Public Health Service and was stationed at the National Institute of Health in Maryland, where he specialized in dermatology and cancer. Frost completed his medical internship at Jackson Memorial Hospital in Miami, Florida. In 1966, he joined the faculty of the University of Miami’s School of Medicine as a professor of dermatology and between 1972 and 1990, served as the chairman of the Dermatology Department of the Mt. Sinai Medical Center in Miami Beach. In 1991, he was appointed a clinical professor of dermatology at the University of Miami.
Frost did not limit himself to a career in medicine but entered the world of business in the same field, purchasing Key Pharmaceuticals with a business partner in 1972. He served as the company’s chairman until 1986, when he sold it for $600 million in a transaction that earned him $100 million. One year later, he and his partners established the Ivax Corporation
, a manufacturer of generic drugs and veterinary products; Frost served as Ivax’s chairman and CEO.
Eli and Frost had met a few times back in the 1980s, and, despite the rivalry between the two pharmaceutical companies, they had developed a good rapport over the years, prompting Frost to comment on one occasion, “Eli Hurvitz and I are old friends.” Ever since their meeting in December 1993, Eli had sought to purchase Ivax. Frost agreed, but his high asking price, which always exceeded the company’s value on the stock market, remained a sticking point. Each time the two businessmen discussed the possibility of an acquisition or a merger, Frost insisted that Ivax’s market value did not accurately reflect its true value. The last time they had engaged in negotiations in the summer of 2002, they failed to reach an agreement.
This ritual repeated itself when the two met again in May 2005. This time, however, Eli came to the table with greater resolve to merge the two companies and his determination ultimately paid off. He agreed to pay Frost’s asking price of $7.4 billion, in addition to covering Ivax’s net financial obligations of $900 million. This brought the overall cost of the transaction to $8.3 billion, making it the largest transaction in Israeli economic history. On May 25, an agreement was announced regarding the merger between the two companies pending a due diligence assessment. On January 26, 2006, seven months later, the deal was closed. Ivax merged with Teva, becoming a subsidiary that was fully owned by the Israeli company and was no longer traded on the US stock exchange.
“Today is a day of celebration,” Eli proclaimed at a news conference regarding the enormous merger, “because it represents a 12-year romance that ended in success.”
A number of factors led Eli to agree to buy Ivax for 14% above its market price. First, he was certain that the deal would increase Teva’s per-share profit within one year, as Ivax produced 500 prescription and non-prescription pharmaceutical products that it marketed around the world. In 2005, it was expected to rack up $2.2 billion in sales and generate an estimated profit of $236 million, representing what Eli referred to as “generics at its best.” Second, the American company had developed several medical innovations, such as a patented technology for the manufacture of inhalers for the treatment of asthma and other respiratory illnesses. Ivax also possessed other unique technologies such as medications for cancer of the pancreas and the ovaries. The merged companies agreed to carry out nine development projects in the field of oncology, which Teva had identified as a field with strategic promise.
Another important factor was that the merged company had a combined total of 175 products awaiting FDA approval. It also endowed Teva with 11 additional products designated for the market that generated $32 billion per year, including Merck’s leading product and one of the most widely used drugs in the world of pharmaceuticals, the active ingredient Simvastatin (or Simovil, under its commercial name). Ivax was the first company to apply to sell the generic version of these products and was therefore eligible for six months of exclusive sales rights.
An additional factor, and perhaps the most important one, was the strategic advantages that Ivax could give Teva. These included the substantial expansion of its generic sales catalogue; the boost it provided Teva’s leading status in the United States and Europe, which strengthened its footing as the largest generic company in the United States thanks to its $900 million in sales there; and the new level to which it brought the group in its establishment as the largest generic company in the rest of the world. A substantial portion of Ivax’s products were sold in Latin America, a market in which Teva had virtually no presence, for an income of $315 million in 2004. This was after its 2001 acquisition of Laboratorio Chile, Chile’s leading generic drug manufacturer and the owner of subsidiaries in Argentina, Venezuela, Peru, and various countries in Europe. As a result of the merger, sales throughout Europe were expected to increase from 26% to 29% of Teva’s total sales.
In this way, through one dramatic merger with the massive American company, Teva regained its title as the world’s largest generic company, with annual sales of $6.2 billion. After the merger, Sandoz once again trailed the Israel-based group with $5.1 billion in sales, followed by companies which were all significantly smaller.
One reason for the remarkable merger, from which Teva emerged as the employer of more than 25,000 people, was the Israeli group’s ability to finance the transaction.
“We have $1.6 billion in available funds and Ivax has half a billion dollars,” Dan Susskind explained at the time. “Half the merger will be paid for in cash and half will be funded by using stocks. Teva also agreed to finance the $1 billion in bonds that Ivax issued.”
According to Susskind, Teva would be required to provide a credit line of $3.2 billion, which would initially be supplied by two Israeli banks – Bank Leumi and Bank Hapoalim – and two non-Israeli banks – Lehman Brothers and Credit Suisse First Boston. The bank-provided credit line would serve as a bridging loan, to be repaid by Teva with capital mobilized by bonds issued in early 2006. According to Susskind, the funds would be raised using callable bonds and, apparently, regular bonds.
“At the beginning of 2006,” he explained, “we expect to receive extremely low interest loans for 10 to 30 years and we will return the bridging loans to the bank.”
Teva’s chief financial officer stood by his word. On January 26, 2006, the exact date he had specified, Teva successfully issued $2.75 billion in bonds on the securities exchange.
Teva’s acquisition of Ivax significantly changed the group’s image, organizational structure, and overall character. It became a global corporation in the full sense of the word.
“Welcome to the dining room of the global corporate management of Teva,” Susskind said to journalists who asked him about the benefits of Ivax. “When we first entered this room, we were a company with $100 million in sales. Now, we are a company with sales of $7 billion.”
One prominent financial analyst described the merger as a “leap to a new level” and “a quick and brilliant move.” It was symbolic that as a result of the merger, Phillip Frost, the chairman and CEO of Ivax and an American citizen living in Miami, became the deputy chairman of Teva’s board of directors and holder of a five percent share in Teva. The position had been specially designed for him, as the group’s new international status more or less required.
It is therefore no wonder that the Yedioth Aharonoth newspaper’s financial analyst Sever Plotzker wrote the following about the merger:
Teva’s investment in Ivax provides an indication of its future direction. It opens a new era in the tumultuous life of the Israeli economy in which Israeli companies will be considered significant players on the world market of acquisitions and mergers – not sardines, but sharks. Not entities that foreign companies swallow, but forces that are capable of swallowing up the foreigners.
Plotzker’s assessment was well founded. The strategic goals that Eli had demarcated, the first and foremost of which was increased growth, had been achieved primarily by means of two parallel methods: increasing sales by all possible means and at any price; and taking over other generic pharmaceutical companies. By the early 1960s, Eli had reached the conclusion that in order to grow and to expand in size and in strength, Assia, and subsequently Teva, would need to merge with and take over other pharmaceutical companies. Over the years, he turned this self-imposed business imperative into an art-form, demonstrating a clear and consistent ability to identify relevant companies, to thoroughly assess the viability of their integration into the group, to decide on a tactic with which to proceed, to conduct negotiations characterized by caution and uncompromising daring, and to plan the financial method and means necessary for the purchase or takeover.
Each merger or acquisition would be followed by another process of decisive importance: assimilation of the new company into the Teva framework, which meant increasing employee productivity at all costs and adjusting the company to meet Teva’s strategic
needs. This was achieved by adapting the production lines to meet Teva’s standards, which were based on uncompromising quality – a fundamental principle for the success of any pharmaceutical company and a non-negotiable goal. In historical hindsight, the impact of these mergers was nothing short of astounding. Over the years, Teva purchased dozens of companies and most contributed to the group’s overall profitability. This is notable since statistics for the world economy show that most mergers are not successful. This well-known fact of modern economy deters most companies from doing what for Teva was a matter of routine. When it came to this issue, the company from Petah Tikva – which purchased, merged with, and took over dozens of companies – had turned the tables.
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The Makov affair found its way into the commotion surrounding Teva’s acquisition of Ivax. Eli felt that the natural candidate to replace Makov was his friend George Bart, the CEO of Teva North America who had dedicated much of his career to the generic pharmaceutical industry. Indeed, Bart was selected by the search committee that the board of directors set up under Eli’s leadership. He had planned to arrive in Israel toward the end of 2006 to begin a training period with Makov. The one problem was that in order to serve as the CEO of Teva, according to the Teva bylaws that Eli had formulated over the years, Bart was obligated to reside in Israel. Eli saw this as a major element of the group’s Israeliness. However, it was a criterion that Bart was unable to fulfill for family reasons, leaving Eli extremely disappointed and forcing the search committee to continue its quest for a suitable candidate. Bart continued to serve as president and CEO of Teva North America until January 2008 and also served as Teva’s executive vice president of global pharmaceutical markets from March 7, 2007, to January 2008.
After Bart, the most prominent candidate was Amir Elstein, a member of Teva’s board of directors who had been part of the group’s senior management for almost a decade. Elstein, a physicist and mathematician by training, had been named a senior vice president by Makov and was then serving as the company’s vice president for global biogenerics. He also served as the CEO of Intel Jerusalem and a representative of the Elstein family on Teva’s board of directors. Eli regarded him as a worthy candidate, as did Dan Susskind, who refused all such offers that he fill the role himself from the outset. In the end, however, Eli preferred Shlomo Yanai.