The sudden downfall of the giant pharmaceutical company Teva based in Israel, which has branches in many countries sent shivers down the spine of investors. Teva was the darling of the Israeli government. Without doubt it was a flagship company that was supported in many ways by various fiscal incentives. The strategy was to help Teva grow so it was showered over the past three decades with astronomical tax benefits. As a result, it grew in stature and expanded in international markets specializing in manufacture of top quality medical equipment. During its meteoric growth, it supported tens of thousands of families and contributed to the prosperity of Israel's economy as it gained prestige and was listed as one of the world's largest and best run pharmaceutical company. In its heyday, Teva kept its plants in Israel, even when it could reduce production costs and transfer some of them to India. Later it expanded in other countries and also acquired plants in Malta.
So, what went so wrong at Teva which contributed to its financial crisis? It was due to a number of strategic management errors that forced this giant company, which at its peak in 2015 was valued over $55 billion, to shrink to $29 billion and accumulate a huge debt of $35 billion.
Two years ago, Teva announced the acquisition of Actavis Generics in Malta in a bid to improve its international commercial opportunities and significantly enhance the global market. Actavis employed around 850 people in 2014, having dismissed some 100 workers the year before when it closed down some of its manufacturing units and its R&D department. Without its R & D in Malta, the generics producer was out on a limb as any future development of new medical products depended exclusively on innovation created at its overseas headquarters. At its peak, Actavis ran two manufacturing facilities in Bulebel and Hal-far. Teva completed its ambitious purchase of Actavis Generics for a cool $40.5 billion and piled up additional debt of $35 billion.
A few months following the acquisition of Actavis, the Malta plant dismissed 200 workers including qualified lab technicians. Recently, Teva took a nosedive and reported that its second-quarter earnings had fallen by a tenth and announced plans to cut 7,000 jobs and pull out of 45 countries by the end of 2017.
The background of Teva's stellar growth was commented upon in The Economist magazine. It reported that owing to the smart creation of innovative clusters in Tel Aviv this policy resulted in hundreds of technology start-ups being created and obviously some were snapped up by global US firms. Due to this smart policy with a bias towards helping start-ups by direct support for innovation especially in biotech and digital sectors, there are many success stories. In Israel these are fully funded by venture capital and other business angels. It is part of Israel's booming "start-up nation" economy, as it manages the most dynamic innovation ecosystem outside America.
It is worthwhile reflecting that the strength of Teva lies in the support it received from the Israeli government to build up its research and development potential as part of its unique quality to penetrate the international markets. The recent wave of financial problems was mostly due to bad management yet the fact remains that Teva was a national champion that made Israeli very proud of its protégé especially in the international arena. Perhaps we can learn a lesson here and try to cultivate a flair for home -grown research hubs which may be the start of an incubator for local and international research staff to focus on cutting-edge technology.
In its last budget, the government had allocated over €75 million to build a new campus in Smart City and this may be an ideal venue to host an innovation centre. Only thus can we attract international business to exploit a top-end R&D status and, with government support, attract talent, a particularly shy bird. It is not an easy journey and many countries want to emulate the commercial success which rewarded Boston, Silicon Valley, Singapore and Israel over the past 50 years. Even China is investing massively in the Pearl River Delta town of Shenzhen to emulate the success of Silicon Valley.
Can our country, albeit small and lacking indigenous materials rise to the occasion and seize this opportunity? Having an international innovation and business accelerator centre of calibre may prove to be a true catalyst to attract and retain such investment. Two years ago, a PKF delegation visited Massachusetts Institute of Technology (MIT) and CIC an accelerator in Boston, USA to explore links to promote Malta as a potential business accelerator and/or Life Sciences hub.
A number of high-profile companies were brought into being at CIC - including HubSpot, which now employs over 1,100 people, and raised $125 million through its IPO last October, and Greatpoint Energy, which several years ago announced a $1.25 billion deal to build reactors in China. Additionally, Android co-founder Rich Miner built his unique Google Android software. Rich established Google's New England headquarters there. CIC also has a non-profit sister, the Venture Cafe Foundation (this provides a Forum for venture capitalists to scout and help fund new talent). Having toured its offices and laboratories, PKF staff were impressed by the number of dedicated entrepreneurs who work hard to seek the proverbial Alchemist Stone.
Granted, it is not an easy journey and many countries want to emulate the commercial success of Silicon Valley. The Teva crisis was partly due to lack of ongoing R & D and perhaps we may heed the lesson to start investing at once in a research facility such as the Life Sciences Park in San Gwann. More is needed and we may wish to increase investment in building other Science parks. It is well to remember that we pledged the Commission to increase this contribution to two per cent of GDP by 2020. The Prime Minister, who is now responsible for innovation and digital economy will consolidate a strategy, bequeathing a golden legacy by funding a research centre based on a true ecosystem of excellence. As always, fortune favours the bold.
Mr Mangion is a senior partner of the audit and consultancy PKF.
He can be contacted at [email protected] or on +356 2149 3041