The actions of the Israeli concern Teva endanger the lives of tens of thousands of sick Russians

Teva Pharmaceutical Industries Ltd.

Public company

Teva Pharmaceutical Industries Ltd.

(Hebrew: טבע תעשיות פרמצבטיות בע»מ) is an Israeli transnational pharmaceutical company producing generic drugs, active ingredients and proprietary drugs, one of the world's leading manufacturers of generic drugs.

[edit] General information

In 1901, Chaim Solomon, Moshe Levin and Yitzhak Elstein founded a small pharmacy and distribution company in Jerusalem. In the 1930s, several pharmaceutical companies were founded by immigrants from Europe, including Zori and Teva, and Solomon, Levin and Elshtain opened the Assia plant. In 1951, Teva began trading shares on the Tel Aviv Stock Exchange. In 1964, Zori and Assia merged into a single company, which acquired a controlling stake in Teva in 1968. In 1976, Teva merged with the company to create Teva Pharmaceutical Industries Ltd. Teva's 2021 net revenue was $21.9 billion.

It ranks 16th in the list of the largest pharmaceutical manufacturers and 485th in the Forbes Global 2000 ranking of the world's largest companies.

The company has 66 factories.

It operates and sells its products in 100 countries.

He is a member of the American Pharmaceutical Research and Manufacturers Association.

Produces drugs such as Adderall, Alprazolam, Amitriptyline, Amoxicillin, Atorvastatin, Augmentin, Aviane, Azathioprine, Azithromycin, Baclofen, Budeprion, Budesonide, Brotizolam, Calcitriol, Cefdinir, Cephalexin, Cyclosporine, Ciprofloxacin, Citalopram, Cetirizine, Clarithromycin, Clonazep am, Clozapine , Codeine, Copaxone, Dexmethylphenidate, Dextroamphetamine, Diazepam, etc. The company's product portfolio includes more than 1800 molecules.

Our own development is, for example, a specific immunomodulatory drug intended for the treatment of multiple sclerosis, Copaxone.

In May 2021, she was charged with “conspiracy”[1].

How Theory of Constraints Can Save Teva?

Eli Schragenheim's Blog

Teva is a giant pharmaceutical company that started in Israel and went international. Just two years ago the company was valued at $65 billion. It seems like it was a long, long time ago, as its current value is estimated at just $19 billion.

Teva is a sad story from which we should all learn. This is the dubious behavior of top managers, their delusions of grandeur combined with personal fears and a craving for gambling, where the fate of their employees was the stake.

Teva's big problem started out very successful with a known completion date. The patent for the original drug, which brought them significant profits, is expiring. This means that profitability drops sharply, and this situation is very scary for people who are used to high bonuses. Another threat to managers was the possibility of takeover by competitors. The “remedy” against a takeover was supposed to be the consolidation of the company and the reduction of available funds by purchasing more and more companies.

Teva operates primarily in the pharmaceutical business with generic drugs, releasing them when competitors' drug patents expire. To be successful, such a company must be truly flexible to be the first to come out with a good replacement for an off-patent drug, giving them a six-month advantage over competitors other than the drug's original manufacturer. The second potential benefit is really good supply chain management to ensure there are no shortages or too much surplus.

Due to cut-throat competition, the generic pharmaceutical business must live with low margins relative to the potential "easy" profits generated by selling a few successful brand-name drugs. This requires a very high sales volume supported by a smooth flow of products. The need for excellent management of both new generic drug development and the supply chain is a constant pressure on managers in an area where customer loyalty is low and low price is key. For such a company, it is very important to maintain highly qualified middle managers to ensure stable financial performance.

So, the ticking time bomb and the threat of takeover created hysteria among Teva's top managers. Failure to come up with worthy new branded drugs meant a return to working only on the generic market. This is where the once small company has succeeded in the past: it has been a truly excellent performer in the generics business.

Somehow, Teva's management believed that in order to remain sufficiently successful after the patent on its key original drug expired, they would need to buy large competitors and become the largest generic drug manufacturer in the world. To be the largest means to have almost ten percent of the global generics market.

This pressure to buy competitors, demonstrate growth, become the largest in the world and be relatively immune to takeover has led to a series of very bad decisions. First they acquired a Mexican company for $2.5 billion. It turned out that the company is a dummy, and its real value is zero. Teva's executives and board of directors then decided to acquire Allergan, a major generic drug competitor, for $40 billion. And after purchasing Allergan, Teva became the largest company with 8% of the total generic drug market. The deal left the company with approximately $35 billion in debt.

This was the kind of game that senior executives should never play!

The simple explanation for these actions is that Teva executives hoped that the market would always behave the way Teva wanted it to.

It's ironic what actually happened in the market that destroyed Teva's position. One of the reasons to become the largest supplier of generic drugs is the ability to dictate a higher price to the market. However, many drug buyers in the United States have banded together to form large organizations that can purchase drugs at a reduced price.

The idea that a big player can set the rules in business is open to both sides!

A company has two general goals for purchasing a competitor, other than improving the image of its executives and eliminating the threat of a takeover by a competitor:

1. Gaining a stronger position in the market to dictate a better price.
2. Opportunity to reduce costs by eliminating redundant jobs.

However, there are several possible negative branches:

1. Merging the activities of two different organizations raises problems that both companies have not yet faced, such as the clash between two different cultures, management policies, middle-level management practices, language barriers and a general decline in employee morale due to great uncertainty. 1.1. Note the possible negative impact on supply chain performance.
2. A very large increase in the workload of several key managers whose area of ​​responsibility, including the number of subordinates, has increased. Such an increase may exceed the capacity and capabilities of these individual managers. In other words, management attention may be limited, leading to a certain amount of chaos.
3. The occurrence of a limitation on the available funds in the organization. Using Theory of Constraints we can understand consequences that are not obvious to managers who do not use TOC. In our blog you can read articles by Ravi Gilani about limiting funds. The emergence of a new limitation can occur in different ways. [More on this topic: article by Victor Valchuk “How to cope if there is not enough money in business.” Note ed.] 3.1. The company is using its own available cash and a line of credit to partially finance the deal. 3.2. The company finances the deal by taking out a large loan in the hope that it will be repaid from its own future profits. If a company encounters difficulties in repaying its debt, its very existence will be in jeopardy.

By ignoring the aforementioned potential negative consequences and unanimously deciding to take such an obviously large risk, management effectively caused the collapse of a once great and successful company. We must study the emotional reasons for such behavior and decide how we can prevent such reckless behavior.

So far we have looked at how a large organization finds problems. Let's try to analyze the traps that a company falls into when trying to get out of trouble.

Conventional Paradigm: An organization experiencing financial problems should downsize.

That means either selling off parts of the business or embarking on a massive "efficiency program," which mainly means cutting jobs, closing some sites and moving them to cheaper locations. The focus is on reducing costs, not increasing sales!

For Teva, a potential alternative is to sell the company whose purchase caused the problems. Let's say Allergan's former owners are willing to pay $15 billion to buy their company back, despite the tough generic drug market. Teva management finds this situation unbearable. They will still have to pay $35 billion in full. But they'll still have to pay, even if Allergan doesn't generate enough profit for them to make more than $15 billion. Has such an alternative been considered?

So a solution that looks reasonable is more efficient, and will hopefully bring in enough money to cover the loan required to keep Teva alive.

The key assumption is that there are a lot of underperforming locations at Teva right now. By inefficiency I mean costs that can be reduced without reducing revenue . There are times when some jobs may be cut because costs are higher than the revenue they generate. But I believe these are rare cases.

It is relatively easy to calculate the cost savings of cutting 14,000 jobs (the figure reported in the media). It is not easy to estimate the true impact on earnings. However, leaked figures about Teva's current survival efforts focus only on cost savings; but not an increase in income.

When you evaluate an investment, you are sure to evaluate the increase in income it will generate. But when you decide to cut jobs, you somehow assume that income will remain the same. When job losses occur due to a significant decline in demand, it is utopian to hope to cut costs to the extent required to meet the declining demand. This is a false assumption, but Teva's case is different. Global consumption of generic drugs is probably not declining, at least not by much. But the pressure to lower prices is indeed increasing. So Teva faces the same demand, but revenues are down. If Teva has less capacity available due to massive job cuts, revenues will be even lower. What is the net profit after cost savings and reduced revenue? Will this money be enough to pay back the loans?

TOC gives us an understanding: Excellent production must have excess capacity.

The amount of excess capacity required to maintain flexibility for competitive advantage is not easy to determine. In TOC, we receive signals about the correctness of the current situation through buffer management. I doubt there is a better methodology.

Job cuts reduce excess capacity, create new bottlenecks and reduce responsiveness to market demands. The common act of moving production from an expensive location to a cheaper one requires significant time and expense, especially in the pharmaceutical field. But over the long term, the real question is whether the cheaper plant can produce all the volume needed, including the volume that the shuttered plant previously produced, while maintaining supply chain flexibility standards. If not, or significant unplanned investment in additional capacity may be required, then the risk to the future business will be significant.

Another disruptive aspect is the ability to maintain the required high standards of managing the flow of goods throughout the supply chain at mid-level . Job cuts mean the loss of a significant number of experienced middle managers. Will the remaining middle managers be motivated to excel in their jobs? Will they work harder out of gratitude for not being fired? Or will they actively look for another job because they have lost confidence in Teva management?

Instead of cutting the workforce, organizations can offer all employees temporary pay cuts to avoid layoffs, and promise that once profits reach a certain level, previous salaries will be automatically restored. There are negative branches for such an action, but in most cases they can be cut off. The upside is that capacity and capabilities remain intact and can be used to achieve competitive advantage.

Passage economics provides excellent tools for assessing the impact of management actions on the bottom line, such as purchasing a competitor or cutting a large number of jobs. Calculating TOC throughput (T) and operating costs (OE) helps clarify the net impact of possible actions.

After all, any company in a crisis situation must improve its sales.

In the generics market, this means superior supply chain management unmatched by any competitor. This will create a real advantage in the market by ensuring ideal availability across the entire network, while maintaining lower inventories than competitors. This could open up customer inventory management (VMI) capabilities for Teva and even take on responsibility for the entire drug inventory of certain hospitals and other healthcare organizations, perhaps even some pharmacy chains. This could be a powerful vision for Teva, and TOC has the tools to achieve it.

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Eli Schragenheim

Eli Schragenheim, CEO of Elyakim Management Systems (1992) Ltd

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