"Globes" has more than once reported statements calling the layoffs at Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) "a blow to the Israeli economy." A report by the Samuel Neaman Institute for National Policy Research, commissioned by Teva three years ago, by Dr. Gilead Fortuna, Yuval Neev, and Dr. Daniel Friman confirms this. Fortuna and Neev are former Teva employees.
The report shows that activity by Teva indirectly contributes five times as much to employment in Israel as employment at Teva itself. What was good news when the report was issued is now bad news. All the layoffs at Teva are all affecting a second and third ring of employment created by the company's activity, and every person laid off at Teva risks five more layoffs in the economy as a whole.
The researchers used a Nobel Prize-winning model for estimating the contribution of a specific company's activity to the economy in three rings. According to their approach, the effect of Teva, which is now becoming the negative effect of layoffs at Teva, has several elements. One is the effect on the company's direct suppliers. "When a plant is closed down, it sometimes causes the total bankruptcy of a supplier," Fortuna writes.
A second element is the second and other rings: providers of services to Teva workers in their private lives and to Teva's suppliers. Activity is now liable to be affected by a chain reaction.
There is also a third element - the taxes paid by Teva (although these are at a reduced rate), its workers, and those working in the employment rings around it. These taxes enter the state budget, thereby contributing to employment of additional workers in government projects.
The researchers found that the rate of added value created by Teva was significantly higher than one prevailing in industry in Israel. According to reports by the Central Bureau of Statistics, the average rate of added value as a percentage of sales is 31.8% in industry, 44% in high tech, and no less than 54.6% at Teva. In other words, even according to the most optimistic scenario, in which all of Teva's laid off employees find other jobs and all of Teva's suppliers who downsize find new customers, the contribution of their activity to the Israeli economy will probably be less.
"Substantial damage to the chemical industry"
According to the report, as of 2012, Teva directly employed 7,400 workers, its second ring included 27,500 workers, and the third and other rings included 40,900 workers. In 2016, even before the layoffs, Teva employed 6,600 workers in Israel, fewer than in 2012.
Furthermore, according to the report, Teva contributed NIS 13.2 billion to GDP, the contribution from direct suppliers and service providers was NIS 18.7 billion, and the indirect contribution through consumption, payment of taxes, etc. by the company's workers was NIS 22.7 billion.
The report also pointed out Teva's contribution as a global pharmaceutical company to upgrading of the local drug development industry by improving the industry's local and global management capabilities, and by motivating students to study life sciences in the hope that Teva might hire them.
Fortuna and Neev wrote, "If Teva significantly cuts back on its activity in Israel, the local chemical industry will suffer substantial damage. The local market will focus on startups as a result of a lack of confidence in the ability of local industry to build established companies. The academic research base, which benefits from the connection with Teva, will also be affected."
Among other things, this statement is based on the report that Teva invested $254 million in 2002-2012 in local companies and projects originating in local research institutions, compared with only $212 million by foreign pharma companies. At the same time, Teva already significantly reduced its involvement in the Israeli medical sector after 2012, did not invest in Israeli startups, and invested only $10 million in academic projects. Nevertheless, it is true that Teva was a source of inspiration for the establishment of major companies in Israel, while the fall of such a company can cause young companies to despair of becoming industrial companies, leading them to prefer an earlier exit.
The report also takes note of Teva's contribution to the community. As of 2014, when the report was written, Teva spent NIS 15 million a year on activities that contributed to the community. 175 Teva employees did volunteer work regularly, and Teva's annual contribution to activities in the community amounted to 24,000 hours of volunteer work a year.
The researchers told "Globes," "We estimate that the jobs of 27,500 workers in the second ring will be affected immediately. Employment among the 41,000 workers in the third ring is likely to drop substantially."
Neev: "Production in Israel is more expensive than in India, and even than in most European countries, but technology now exists that can make up for productivity problems, and it is very important to apply it in the remaining plants. When output rises, even if it is through automation, the usual result is employment of more workers."
"Globes": Why were Teva's factories inferior to the rest of the world?
Fortuna: "I have always known Teva as a company that in time became more efficient, but it appears that the revenue from Copaxone put the system to sleep, instead of making its generics section more efficient. The focus was on innovative directions that appeared very successful. For example, the chemical division was very profitable and very independent in the years when I knew it, while in recent years, it was merged with the general generics activity, and that does not always contribute to motivation. Meanwhile, in other countries, companies are continuing their streamlining."
Published by Globes [online], Israel Business News - www.globes-online.com - on December 28, 2017
© Copyright of Globes Publisher Itonut (1983) Ltd. 2017