Economic damage from Teva's cutbacks will mainly be local

Teva workers demonstrate  photo: courtesy Histadrut

Teva's contribution to Israel's tax revenues has been virtually zero.

The direct damage to the Israeli economy from a shutdown of Teva Pharmaceutical Industries Ltd.'s (NYSE: TEVA; TASE: TEVA) facilities is likely to be limited in scope, despite the heavy human cost, judging from the macroeconomic figures and talks with economists. Information agencies such as the Central Bureau of Statistics do not publish specific figures for Teva's weight in the Israel economy, but this can be learned from production figures for the Israeli pharmaceutical manufacturing sector, in which Teva's share is estimated at 75%.

Drug manufacturing is one of the pillars of Israeli exports. Israel's drug exports have amounted to $7 billion in recent years, with the figures for 2017 showing great volatility in export volume, including a steep drop in exports over the past three months. Drug exports account for 10% of total Israeli exports, making it the third largest export sector, roughly equal to chemicals.

The contribution of the pharmaceutical sector to the economy is estimated at 1% of GDP. Beyond the hit to exports, however, no great direct damage to the economy is expected to result from a serious cutback in Teva's activity. The immediate and heaviest human damage will come from the planned layoffs of 1,750 employees, but from a macroeconomic standpoint, the state of employment in the economy is the best that it has been for many years, with a 4.3% unemployment rate. Demand for labor in industry is at its highest point in years, so it is likely that many of those laid off will eventually be able to find work, even if on poorer terms than they enjoyed at Teva. At the same time, it should be kept in mind that the Teva's cutbacks affect mainly outlying areas, such as Kiryat Shmona, and also Jerusalem to some extent, and these places are liable to suffer irreparable harm because of the poor state of industry in them.

The aftershocks from the Teva earthquake should also be taken into account. An extensive network of suppliers, contractors, and service providers derive a large proportion of their revenue from Teva's plants. Institute of Certified Public Accountants in Israel head Izhar Kanne estimated that the circle of people affected by the layoffs at Teva was likely to be 3-4 times as large as the number of layoffs at Teva itself.

As far as state tax revenues are concerned, it appears that the events at Teva make little difference, if only because the company's contribution to tax revenue to date has been negligible. Teva enjoyed an effective 0% tax rate in 2004-2014 (according to a theoretical calculation, the tax benefits were worth NIS 20 billion to Teva). Since the benefit was canceled, Teva has paid almost nothing to the Israel Tax Authority, due to a dispute concerning the company's demand for recognition of the losses it accumulated during some of the years during which it received the benefit. The Tax Authority opposes this demand, saying that it amounts to a double benefit.

Published by Globes [online], Israel Business News - www.globes-online.com - on December 14, 2017

© Copyright of Globes Publisher Itonut (1983) Ltd. 2017

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Teva workers demonstrate  photo: courtesy Histadrut
Teva workers demonstrate photo: courtesy Histadrut
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