Tel Aviv Diary: As Teva Hits the Skids, What Will Bibi Do?

Israel is known for its start-ups.

Although Israel is recognized to be home to scores of start-ups, its one challenge has always been to grow companies that remain independent and develop into world leaders in their field.

The one exception has been Teva Pharmaceutical Industries, until now.

The company, whose origins lay in pre-state Palestine, grew to become Israel's largest, and one of the leading pharmaceutical companies in the world — with sales last year of $21.9 billion.

Teva is the world's leading producer of generic drugs. However, today, Teva announced it was laying off a quarter of its worldwide workforce, which translates into 14,000 workers. Of those let go, 1,750 layoffs will be in Israel, and that does not include factories that will be sold.

In response, Israel's labor union, the Histradrut , called for a half-day nationwide strike on Sunday, which will shut down almost everything in Israel, to demand that something be done to limit the layoffs.

How did Teva go from being the crowning jewel of Israel's economy to a company that has been a free fall for the last year? How did a company that has been consistently profitable lose 60 percent of its value in less than one year?

While sometimes the answer to questions like this can be complicated, in the case of Teva the answer is rather straightforward — i.e. a string of poor acquisitions and continued R&D efforts that failed to develop any significant new drugs.

Starting in 2000, Teva began a buying spree, primarily to purchase additional generic manufacturers, buying Canada's largest, Novopharm. It went on to acquire the Ivax Corporation in 2006, Barr Pharmaceutical in 2008, and Ratiopharm in 2010.

Israeli employees of Teva, the world's biggest manufacturer of generic drugs, gather outside the pharmaceutical company's plant in Ne'ot Hovav, an industrial south of Beersheva, on December 14, 2017. Teva is to announce a cost-cutting program today that will include thousands of layoffs, according to widespread media reports. The Calcalist business newspaper said Teva intended to 'cut over 4,000 jobs, mainly in the US and Israel' as it was saddled with almost $35 billion in debt. MENAHEM KAHANA/AFP/Getty

Teva continued its acquisition binge over the course of the next few years, until it came to the purchase of Actavis Generics for $40.5 billion. The Actavis acquisition, which was primarily a cash purchase, has left Teva with $35bn in debt.

Much of Teva's purchases over the years were funded thanks to Copaxone, their drug used to treat multiple sclerosis, which first came to the market in 1997. Last year, Teva's sales from Copaxone were $2 billion, with profits of $1.5 billion.

Teva knew its patent on Copaxone would run out, and, ironically, that one of the world's largest generic drug manufacturers would face competition from other generic drug makers at the 20 year point (when its patent expired).

Nevertheless, Teva had hoped to extend its Copaxone patent by the well known trick of changing the dosage and calling it a new drug. That effort failed and, starting in June, Teva's cash cow became just another generic drug.

Despite the many R&D successes in Israel in recent years, including triumphs in Biotech, Teva has been unable to develop any additional drug that could replace Copaxone's contributions to Teva's profits.

Since 2006, Teva has been the recipient of nearly $4 billion in special tax incentives, which were designed to increase investments in Israel. However, as opposed to Intel, who just completed a $6 billion renovation of its chip fabrication facility in Israel, Teva seemingly used most of its money to fund its worldwide acquisition spree.

Teva is now under tremendous pressure to cut costs and show that it is able to service its debt load. Furthermore, with its stock price so depressed, Teva itself could be an easy takeover target.

Teva has a new CEO, Kare Schultz, who had already announced a major reorganization of the company. However, today's reorganization announcement is much more extensive.

The Israeli government will be facing a dilemmas in the coming days — which is, how to respond to what will be a growing chorus demanding they do something to save the jobs in Teva.

Teva is one of Israel's largest exporters. Furthermore, in addition to Teva employees who work directly for the company, there is an entire supply chain of companies that depend on Teva.

A strong argument can be made to do nothing. The Israeli economy is at full employment and the workers will be easily absorbed into other places. The counter-argument is that while Israel's high-tech sector is soaring, Israel's manufacturing sector has been in slow decline, and there is little chance that the well paying jobs in Teva can be replaced with other manufacturing jobs.

If the Israeli government does decide to get involved, there are only a couple of things it could do to provide Teva with relief.

First, the government could offer to subsidize the salaries of some of the Israeli employees, in some way, to make their continued employment more economical. Alternatively, it could either guarantee or purchase a portion, or all, of Teva's debt, in return for some level of oversight and guarantees that the jobs will remain in Israel, and that more of the cuts will take place in other parts of the world.

In many ways, Teva is to Israel as GM is to the US. Teva is Israel's premier manufacturer, and its largest local company.

The government will have to make some hard decisions in the coming days, as to if and how it wants to respond to the crisis caused by Teva's latest reorganizations plans.

Marc Schulman is a multimedia historian.