Teva’s lessons

Teva’s meltdown has been colossal. The Israeli pharmaceutical company’s market capitalization has fallen from a level of $60b. in its heyday in 2015 to less than a third of that in recent days. Teva CEO Kare Shultz’s announcement of a restructuring program that includes firing a quarter of its workforce and selling off plants resulted in a rise in stock prices. But the future looks grim.

Teva has debts of about $35b., while the market believes the company is worth only around $18b. It is difficult to imagine a scenario in which Teva manages to extricate itself, particularly in the pharmaceutical market, which is extremely competitive. What is more likely to happen is a series of takeovers and spin-offs that will either result in Teva’s disappearance or its downsizing to a small to medium-sized firm.

Much of public discourse on Teva’s fall has focused on the huge tax breaks received by the company under the Law for Encouraging Capital Investments, which have amounted to some NIS 20b. in the past decade.

Some are arguing that Teva’s crisis is proof that the law was abused by the company and did nothing to prevent its demise. But we run the risk of allowing populist zeal get the better of us. In the globalized world we live in, Israel must compete with other countries to attract multinational concerns to set up shop here and provide jobs, technological development and improved productivity. If Israel refrains from offering competitive tax rates to companies like Teva, Intel and Check Point, those companies will pick up and go to a country where it is cheaper to manufacture.

We must be careful. Carried away by the populist backlash against the tax breaks given to Teva, politicians are liable to pass stupid laws that will hurt the Israeli economy by making it harder to attract big businesses.

While Teva’s tax breaks exceeded the amount of money it pumped into the Israeli economy in the form of factories and jobs – particularly in “periphery” towns in the North and in the South – there were many indirect benefits. Service providers – such as delivery companies, restaurants, cleaning, construction and others – benefit from Teva’s presence in Israel. Tens of thousands of jobs were created as a side effect, even though they were not directly employed by Teva.

Of course, much of the money Teva received in the form of tax breaks went to paying high executive salaries, or were diverted back into the company to pay for misguided acquisitions or other goals not connected to Israel. But there is no effective way of preventing companies like Teva from doing what they want with the surplus profits they receive from tax benefits.

Ideally, it would be nice if for every shekel in tax breaks Israel gave, it got back a shekel from Teva in the form of salaries to Israelis or investment in R&D or construction of a factory.

But attempts to regulate these matters would only generate excessive red tape and bloated regulatory oversight, which would scare away potential investors.

To remain competitive in the global market, Israel has to provide multinational firms with attractive tax rates and a business environment that is conducive to growth and profitability. Instead of attempting to revamp the Law for the Encouragement of Capital Investments, Israel should think of other ways of making its economy more attractive to foreign firms. Electricity costs can be lowered by moving forward with a long-awaited reform of Israel Electric Company; a larger percentage of Israel’s GDP should be devoted to occupational training in fields in demand; import and export costs should be cut; and more efficient transportation should be developed. These steps would help improve productivity and make it more attractive to set up shop in Israel. Companies that would opt to come here would be doing themselves a favor.

Teva’s fall is tragic. But we should not learn the wrong lessons. The Law for the Encouragement of Capital Investments is not perfect. It is one of several tools that Israel has at its disposal to boost economic growth. Amending it or annulling it would signal instability and do more harm than good.