Boycott Hurt Israeli Drug Giant
- An Israeli Giant In Generic Drugs Faces New Rivals
Arab Boycott Gave Teva Edge;
Now It's No. 1 in Industry,
But U.S. Market Toughens
An Army Colonel and CEO
By LEILA ABBOUD
Staff Reporter of THE WALL STREET JOURNAL
October 28, 2004; Page A1
TEL AVIV -- In 1967, when the Arab boycott was cutting off Israelis
from many Western drugs, Israel fought back with a new patent law.
One provision allowed Israeli companies to copy a foreign patent-
protected drug if the foreign company didn't market it in Israel.
For Eli Hurvitz, the law meant opportunity. His company, Teva
Pharmaceutical Industries Ltd., got approval to copy dozens of
foreign drugs -- and gained expertise in how to do it efficiently
that few others shared.
Today, Teva is the world's biggest generic-drug maker and a major
force in the U.S. market. It fills more prescriptions for Americans
than any other company except Pfizer Inc. Teva expects revenue of
about $4.5 billion this year, twice the amount of the next-largest
generic maker although only a fraction of the more than $52 billion
in revenue Pfizer expects this year.
"I used to say that we should thank God for bringing us the Arab
boycott," says Mr. Hurvitz, who retired as Teva's chief executive in
2002 after 26 years at the helm. "Without it our company wouldn't
The boycott is one example of how Israel's tumultuous history has
shaped Teva from its early days making salt tablets for British
soldiers serving in the Moroccan desert. The Israeli pharmaceutical
industry developed as Jewish scientists fleeing Nazi persecution
emigrated from Europe. Recently, Teva has become a symbol of Israeli
companies' global ambitions. The government has granted it tax
breaks to build factories and it is a magnet for Israeli academics
with ideas for new branded drugs.
Teva now faces challenges in keeping up its rapid growth because its
top market, the U.S., is turning tougher for generic drug makers. In
the U.S., the first generic company to win approval for copying a
branded drug gets six months of marketing exclusivity -- an
advantage that traditionally accounts for much of generic companies'
profits. Now branded companies are fighting back by licensing their
drugs to "authorized" generics makers or selling their own generics
through subsidiaries. These tactics cut into the profits the first
generic reaps in the first six months.
And competition is growing. India also has a burgeoning generics
industry expanding into the U.S. that stems from earlier lax
government rules about copying patented drugs. Indian companies such
as Ranbaxy Laboratories Ltd., Dr. Reddy's Laboratories Ltd., and
Cipla Ltd. have lower labor costs and often make their own raw
materials, just as Teva does.
Such concerns have helped drive down Teva's shares 25% from their
June peak, giving the company a market capitalization of about $15
billion. Investors are also worried about a branded drug Teva sells
for multiple sclerosis. The drug has been highly successful and sets
Teva apart from rivals that sell only generics, but a competing
multiple-sclerosis drug is expected to come on the market in the
next few months.
William Fletcher, president of Teva North America, says Teva can
weather the storm by using its size to strengthen ties with U.S.
retail pharmacies and other big buyers. Teva offers these customers
one-stop shopping for generic drugs because its lineup of products
is so extensive.
Teva traces its origins to three German Jewish businessmen who
founded a wholesale drug business in 1901. Based in Jerusalem, then
a part of the Ottoman Empire, they imported medicines and sold them
throughout the Middle East. The company name is Hebrew for "nature."
A merger of Israeli pharmaceutical companies in 1976 created today's
Teva and brought Mr. Hurvitz to the top job.
The son of a plasterer, Mr. Hurvitz was drafted as a 16-year-old to
fight in Israel's 1948 war for independence. Later he began a career
in pharmaceuticals, starting out washing glassware in the labs.
Occasionally, he was called up for service in the army, where he
rose to the rank of colonel.
By the 1980s, Mr. Hurvitz's strategy of copying foreign drugs was
proving a big success and he was looking to expand beyond Israel.
The timing was right. To encourage the use of cheaper generic drugs,
the U.S. Congress passed the Hatch-Waxman Act in 1984, eliminating
the requirement for extensive human testing of generics. The law
allowed generic companies to market drugs if they proved that their
copies were equivalent to the original drug and convinced a court
that their products didn't violate any patents.
To break into the U.S., Teva in 1985 bought a small drug maker in
rural Pennsylvania. Revenue tripled to $668 million in 1995 from
$211 million in 1988. But Teva was still a mid-tier player. To lead
the pack, Mr. Hurvitz and his team decided, Teva would have to go
global to achieve economies of scale in research and manufacturing.
The company went on an acquisition spree, buying Biocraft
Laboratories Inc. of Fair Lawn, N.J., a big maker of generic
antibiotics, and a Hungarian drug company to gain a foothold in
Europe. Teva swallowed companies in Canada, Italy, Lithuania and
Scale matters in generic drugs. If a branded company such as Pfizer
sells a pill for $2.50, it's not crucial how many pennies each pill
costs to make. But for generic drugs, which sell for much less,
every penny per pill spent on manufacturing counts.
Teva drives down manufacturing costs by producing big volumes of
popular pills in one place for world-wide sale. At its factory in
Kfar Saba, Israel, workers in white lab coats tend a large whirring
tablet-pressing machine for a muscle-relaxant drug. A white granular
powder is molded into pills that flow down a conveyer belt and are
sealed in blister packs. Pills are stuffed into boxes along with
labels printed in Thai.
Being global allows Teva to start manufacturing generic copies of
drugs even before they lose patent protection in the U.S. For
example, the Kfar Saba factory is already making a generic version
of Merck & Co.'s big-selling anticholesterol drug Zocor even though
Zocor's U.S. patents don't expire until 2006. Teva sells the pills
in parts of Europe where Zocor patents have expired. When the U.S.
market opens, it'll be ready to pounce.
Once it has done tests showing that its generic drug is equivalent
to the branded product, it can use the data around the globe. Chief
Executive Israel Makov says one recent product cost Teva $5 million
to get ready for sale in the U.S., Europe and Canada but would have
cost $12 million if all the testing and chemistry had to be redone
for each market.
Teva has built one of the broadest portfolios of generic drugs, with
215 products. Competitors Watson Pharmaceuticals Inc. and Mylan
Laboratories Inc. sell 154 and 140 prescription drugs, respectively.
Teva's scale gives it the staying power to outlast the initial burst
of competition on popular drugs. For example, about 10 generic
makers started selling the cholesterol-lowering drug Lopid, known
generically as gemfibrozil, in 1993. Today, only three do, and Teva
is one of them. Teva declined to comment on pricing in this case,
but typically as competition shrinks prices go up.
"Be first, stay last," says Mr. Fletcher, the Teva North America
Analysts worry, however, that growing competition will make it
harder for Teva and other leading generic makers to keep prices up.
Some executives say wholesalers and retail drugstore chains are
driving harder bargains on generic drugs as their choices widen. Mr.
Fletcher says the business is no more cutthroat than it's always
been, and he believes Teva can stay ahead by continuing to expand
its product line and keeping manufacturing costs low.
Banc of America Securities analyst David Maris agrees, even though
he frequently warns of pricing pressures. Mr. Maris likens Teva to
a "nicer house in a bad neighborhood." Jeffrey Herzfeld, who manages
generic drugs for the big U.S. wholesaler McKesson Corp., calls
Teva "a clear industry leader." In a volatile field where product
decisions hang on complex litigation, Teva's managers "are very
attuned to what's going on, and they are right more times than
wrong," he says.
U.S. generics makers tend to be scrappy upstarts with short
histories and sometimes-rapid turnover. At Teva, many employees have
been around for decades. The company has a paternalistic streak that
would be more familiar at a long-established European company. It
pays the tab for employees' vacations and subsidizes their
children's educations. The children even get a Teva bag to carry to
Last month, the company threw a Jewish New Year party for workers at
its Jerusalem plant, as it does every year. As a violinist and a
flutist played lively klezmer music, the workers dipped apple slices
in honey, a tradition ushering in a sweet New Year. They ate red
pomegranate slices in the hope the year would bring as much
prosperity as the kernels dotting the fruit.
Teva has one of the biggest global presences of any Israeli company,
and at home Mr. Hurvitz is a business celebrity a la Bill
Gates. "Every Jewish mother wants her son to work at Teva," says Dan
Suesskind, the chief financial officer, who has been at Teva since
In part because of the isolation that spawned its generics business,
Teva chose to make its own raw materials. Now it sees this ability
as an edge over competitors such as Watson and Mylan, which prefer
to buy from outside suppliers. Teva makes about half of its own
active ingredients and also sells them to many competitors.
The recent race to market a generic version of Pfizer's $2.7 billion-
a-year epilepsy and pain drug Neurontin shows how Teva's raw-
materials capacity can give it an edge. A small generic maker,
Alpharma Inc., was the first in line with generic Neurontin and won
the coveted six-month exclusivity period from the Food and Drug
Administration. Alpharma started selling the generic on Oct. 8, but
Teva is still taking a slice of the profits because it sells the raw
materials to Alpharma and extracted a high price for them. While
Alpharma could have switched suppliers, it would have had to rewrite
its application to the FDA, causing delays.
Although Teva's Mr. Makov wouldn't disclose specifics on Neurontin,
he estimated that in such situations, Teva grabs 20%-50% of the
profits from the exclusive period of sales.
The Neurontin case also demonstrates Teva's willingness to use the
same bare-knuckled tactics as branded companies to protect its
position. Teva obtained patents on its own formulation of
Neurontin's active ingredient and its manufacturing process. So if a
generics maker buys the active ingredient from another supplier it
risks running afoul of Teva's patents. One generics company, Apotex
Inc., started out using Teva's active ingredient but switched
suppliers to get a better price. Teva then sued Apotex for patent
Teva's close ties with the Israeli scientific community brought it
Copaxone, a branded multiple-sclerosis drug that it has sold in the
U.S. since 1997. The compound was discovered in 1967 by a scientist
at the Weizmann Institute of Science, the research center founded by
Israel's first president, who was also a chemist. Immunologist
Michael Sela made a compound that seemed to reverse induced
paralysis in laboratory guinea pigs, and wondered if it would help
the paralysis of multiple-sclerosis patients.
He called Mr. Hurvitz, a friend for years. "I have something I want
to show you," Dr. Sela told him. Mr. Hurvitz invited the scientist
and his wife to dinner at his home. Dr. Sela used a slide projector
to show the data on the drug's early success. "I want it," Mr.
In 1996, Copaxone became the first Israeli drug approved by the FDA.
The drug had world-wide revenue of $720 million last year, which
Teva splits with its marketing partner, Aventis SA (now part of
Sanofi-Aventis SA). Gregory Gilbert, an analyst at Merrill Lynch,
estimates that Copaxone accounts for 16% of Teva's profits. Teva
doesn't release that figure.
For Teva, a big danger ahead is Antegren, a multiple-sclerosis drug
being developed by Elan Corp. and Biogen Idec Inc., which many
analysts expect to capture a chunk of Copaxone's market share.
Teva's application to market a new Parkinson's drug, Agilect, is
under review by U.S. and European regulators. Teva has about 10
drugs in early and midstage clinical trials, including treatments
for Alzheimer's disease, multiple sclerosis, and lupus. But unlike
other generic drug companies, which hanker after the big profits of
branded drugs, Teva executives say they want the company to continue
to be primarily a generics maker. That will keep it exposed to the
risk that already-low profit margins will get even lower.
Favorable tax policies in Israel boost Teva's profits. The Israeli
government offered Teva tax breaks to persuade it to build an $80
million facility in the hills just north of Jerusalem. The plant
should be completed by mid-2005. Teva won't pay any tax on the
profits generated by the plant for 10 years. Teva paid an average
tax rate of 21% on its 2003 pretax income of $872.5 million compared
with 35% for U.S.-based Mylan, which had pretax income of $513
Write to Leila Abboud at leila.abboud@...1
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