To stay credible as free economy, Israel must swallow Teva’s bitter pill

Amid uproar over layoffs, economists say state should butt out of the pharma company’s decisions, focus instead on finding new jobs for its workers and figuring out what went wrong

Shoshanna Solomon

Shoshanna Solomon is The Times of Israel's Startups and Business reporter

Teva employees protest at the entrance to the Teva Pharmaceutical Industries building in Jerusalem on December 18, 2017. (Yonatan Sindel/Flash90)
Teva employees protest at the entrance to the Teva Pharmaceutical Industries building in Jerusalem on December 18, 2017. (Yonatan Sindel/Flash90)

Prime Minister Benjamin Netanyahu, Finance Minister Moshe Kahlon and Economy Minister Eli Cohen are scheduled to meet with the CEO of Teva Pharmaceutical Industries Ltd., Kare Schultz, on Tuesday to try to figure out how best to soften the blow of the Israeli drug-maker’s plans to cut its local workforce.

There is not much the government can do if Teva decides that Israeli layoffs are the right way forward. With countries vying for corporations to set up their businesses locally, Israel cannot be seen as interfering in the decisions of private companies. Such a move would lose Israel its credibility as a competitive and free economy, economists warn, and turn away investors and corporations.

Schultz last week unveiled a plan to cut some 14,000 positions globally, over 25 percent of its total workforce, in the next two years in a bid to restore the fortunes of the firm, which is burdened with debt. It has been suffering from price cuts in its generics business and sooner-than-expected competition to its flagship branded drug, Copaxone, for multiple sclerosis.

One of the world’s largest generic makers of drugs and one of the nation’s largest employers, Teva had been until recently a symbol of Israel’s industrial success. The company’s shares were a staple in local savings plans, earning the nickname of “the people’s stock.”

Teva Pharmaceutical Industries employees protest in front of the Prime Minister’s Office in Jerusalem against the company’s plan to lay off hundreds of workers, December 17, 2017.(Yonatan Sindel/Flash90)

Prime Minister Benjamin Netanyahu knows that in addressing the Teva crisis, his tools are limited. His own economic adviser said in an interview that Teva, if subjected to undue pressure, “can get up and leave Israel,” which would then lose the remaining local jobs and the “billions of dollars” in taxes the company generates for the state’s coffers.

“The state cannot manage Teva,” Prof. Avi Simhon, head of Netanyahu’s National Economic Council, told The Times of Israel. “This is a private company.”

To be sure, there are many voices calling for the state to step in. Avi Nissenkorn, head of the powerful Histadrut union, has demanded government intervention to prevent the layoffs, and the union held a general strike of the Israeli workforce for several hours Sunday morning in response to the layoffs. Politicians have accused Teva of “ungratefulness and greed” for having the chutzpah to cut jobs in Israel after having received billions of shekels in tax benefits over the years.

TheMarker daily financial website said Israel could use tax negotiations with the company as a tool to put pressure on the CEO, while  Labor party leader Avi Gabbay said Israel should insist that Teva’s layoffs be limited to outsside Israel. “The government has a lot of authority and no one wants to pick a fight with a Prime Minister,” he said at a Knesset meeting, according to the Calcalist financial website.

Teva workers burn tires as part of a protest against the company’s plan to lay off hundreds of employees, outside the Teva Pharmaceutical Industries building in Ashdod, on December 17, 2017. (Flash90)

But leading economists are strongly warning the government not to interfere. Taking a stand, they said, would help politicians win kudos with the public but would raise the hackles of the business community globally.

“It is absolutely inappropriate for Israel to interfere in the business considerations of a private company,” warned Prof. Eytan Sheshinski, an emeritus lecturer in economics at the Hebrew University of Jerusalem, in a phone interview. “You cannot do that, because it is a slippery slope, and it would hurt Israel’s global standing as an open and liberal economy that is based on competition. This is how capitalism works. We need to abide by the rules of the global game. Otherwise investors will stop coming to Israel to set up their business.”

Sheshinski has in the past headed panels recommending higher taxes on companies benefiting from Israel’s natural resources and a reexamination of the taxation policy applying to the natural gas companies operating in Israel.

Prof. Eytan Sheshinski, an emeritus lecturer in economics at the Hebrew University of Jerusalem (Yonatan Sindel/Flash90)

“When Teva got the incentives, as part of the investment incentives law, there were no limitations in place, saying they can’t fire workers. You can’t come now and say — retroactively — that there are conditions attached,” he said. “One could say that you can do away with the law, and not provide any incentives for companies to set up businesses here in Israel. That is a legitimate consideration. But that would just mean that companies would set up businesses elsewhere, in countries that do offer them, like Ireland for example.”

“In a long-term view, the government should not interfere with the company rescue efforts,” warned Alex Zabezhinsky, chief economist at Meitav Dash, one of Israel’s largest investment houses. “The government can’t force the company not to fire employees. If tax benefits to the company will be canceled, it will worsen its situation in the present. A company that can’t fire workers will not recruit workers in the future.”

The calls to halt the layoffs are “populism,” he said. “Everyone knows that without tax benefits, Teva’s factories simply would not be here.”

Workers of the Teva company protest against the company plan to lay off hundreds of employees, outside the TEVA Pharmaceutical Industries building in Jerusalem, December 14, 2017. (Yonatan Sindel/Flash90)

Teva said the number of layoffs in Israel would total some 1,700 employees by the end of 2019, according to a letter sent to Israeli employees. The restructuring will see the closure of the firm’s Jerusalem manufacturing plant by the end of 2019 and some of the research and development activity in Israel will be cut back. The company will also seek to sell off its global logistics center in Shoham and its plant in Kiryat Shmona.

“A flexible labor market opens the door to entrepreneurship, which in turn increases the range of products and services to consumers, employment opportunities and economic growth,” said Prof. Omer Moav, a lecturer of economics at the University of Warwick and at the IDC Herzliya, by phone. “The lack of flexibility to fire employees destroys entrepreneurs’ desire to take risks and invest.”

Prof. Omer Moav, a lecturer of economics at the University of Warwick and at the IDC Herzliya (Credit: Michelle Tennison)

If Teva “is forced to continue employing unnecessary workers then it is likely to stop producing in Israel and fire many more.”

The aim of the prime minister’s meeting with Schultz, the CEO, on Tuesday is to hear the situation firsthand and try to minimize the layoffs as much as possible, said national security adviser Simhon.

Schultz said in a letter to Netanyahu last week, after he announced the company’s reorganization plans, that the measures Teva is undertaking are “painful but absolutely vital” and that the company has “no other choice — we must and we will save Teva.”

What the government should focus on, the economists said, is working on ways to help the dismissed workers find their way back into the workforce, they said. In addition, government should probe what went wrong in Teva’s decision-making processes, in order to prevent a repeat of this failure, with Teva or other firms.

“The government should help the transition from one employer to the other and stop subsidizing firms,” said Moav. “Unemployment is very low and based on past experience almost all workers would find alternative employment, though some for a lower wage.”

“What is legitimate is to study whether corporate governance in Teva was functioning,” Sheshinski said. “That is, did the board of directors have the best available information — mainly about risks — at the time decisions were taken and did the board comprehend the information.”

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