When national champions fall – The case of Teva requires us to revise our thinking about national champions and national interests

Prof. Meir Perez Pugatch addresses the current situation with Teva pharmaceuticals – the biggest generics company in the world - in Israel and how it has been impacted by the patent expiration of Copaxon.

There are not many countries where a pharmaceutical company can make the headlines day after day, jostling for space with serious foreign policy stories such as relations with Iran. But in Israel the pharmaceutical company, Teva, is currently doing just that.

In the Israeli psyche, of course, Teva is more than just any old pharmaceutical company; it has become the national champion. During the 1930s, new immigrants to Israel from Europe founded several pharmaceutical companies including Teva (which means 'nature' in Hebrew). No one could have imagined at the time that the company would go on to become the largest generic drug manufacturer in the world.

Teva has become perhaps even more synonymous with Israel than Nokia has with Finland. Its success really began in earnest in the wake of the 1973 Yom Kippur war when some foreign pharmaceutical companies acceded to Arab boycott demands. Teva imported and received approval to manufacture and market copycat versions of their drugs. Its fortunes are tied not only to Israeli national pride but also to the Israeli economy since the success of many pension funds and other investments are closely linked to the performance of the firm.

"There are not many countries where a pharmaceutical company can make the headlines day after day..."

As a consequence of its hallowed status, Teva has received an intense level of support from the Israeli government. As a result of Israel's Capital Investment Law, for example, Teva only pays around 3% effective corporate tax on its profits and no tax at all on its overseas profits. Intellectual property laws have been similarly designed to suit the growth of Teva's manufacturing operations and the provision of local employment at its plants. There is no doubt that over the years the company has been handsomely rewarded for its place in Israeli society.

Yet recently developments at Teva have begun to break the myth that the interests of so-called "national champions" are precisely the same as the interests of the nation itself. And the example of Teva and Israel provides lessons that go far beyond Israel's borders.

Teva's CEO, Jeremy Levin, announced his resignation on 30th October after less than 18 months in the role after a row over a cost-cutting plan to downsize 10% of the company's workforce, including 800 employees in Israel. In the scheme of worldwide corporate restructuring, 800 redundancies - however worrying for the individuals concerned - might seem like a drop in the ocean, so why all the fuss? The outrage goes back to Teva's unique status and to the arguments it has aggressively pursued in maintaining that status. After all the huge privileges the company has been granted, it is perhaps not surprising that Israelis are now outraged when the company begins to act more like a typical multinational enterprise and less like a local hero.

The fact that pharmaceutical companies tend to undergo major restructuring processes which also include reductions in the workforce, is far from new. But this is the first time that a generic company is letting people go in its own country (as well as in other countries) because its innovative product will face generic competition in the mature markets (i.e. due to patent expiration). Teva's innovative drug Copaxon, for the treatment of MS, is a major blockbuster drug that is responsible for more than a third of Teva's worldwide sales. It was invented by the Weitzman Institute in Israel and was licensed to Teva more than a decade ago. The company has now begun to make arguments – be it on jobs or on intellectual property – that they once ridiculed when the same arguments were used against them by rival multi-national firms. In the past, to take an important example, generics companies and IP sceptics used to argue that patent expiration was a good thing since, in addition to price reduction, it enhances competition and allows generic companies to build up their capacity including their own local domestic activities to the benefit of the national economy.

"Teva has become perhaps even more synonymous with Israel than Nokia has with Finland."

This is the first case where the biggest generic company in the world has begun to argue the exact opposite by declaring that the patent expiration of Copaxon will seriously impact on its ability to compete, which forces it to downsize its workforce in different markets.

Israel's identity crisis over Teva is not just a 'local issue' however. Similar issues are now springing up in Russia, India and Brazil as other national champions begin the process of expansion into global markets and start to face the challenges of doing business there. Suddenly the arguments that once worked in a national or local context become redundant and these firms find they have more in common with the lobbying messages of their rivals than with the homegrown statements of the past.

As Israel undergoes a period of soul-searching about the role of Teva with voters asking whether successive governments have offered the company too much and got too little back in return, other countries, especially the BRIC economies, might do well to take note that placing too much faith in the national champions may eventually backfire. By choosing to have a low or weak level of IP protection – due to the close identification of the national interest with the interests of generics companies – they may not only end up with the inability to attract multinational activities, but may also face a reduction in jobs and economic activities of their own generic companies. It could be an expensive lesson to learn.