Spelling "Serono" wrong

Why foreign investors have become hesitant about Israel.

How many ways are there to drive away the world’s third largest biotechnology firm, and the largest in Europe, Swiss-based Serono? Israel used them all, and invented new ones. We spelled “Serono” with 10 mistakes.

Serono has invested hundreds of millions of dollars in Israel since it first came in 1978. Serono’s global sales were $557 million in the first quarter of this year, and net profit was $106 million, up from $60 million. a year ago. In 2003, it made $390 million in profit on sales of $2 billion. Its success was driven by sales of Rebif, Serono’s multiple sclerosis drug, developed with the help of Israel’s InterPharm. Serono is locked in a fierce battle with American biotech firm Biogen, whose rival MS drug is Avonex, like Rebif an interferon-based drug.

Serono has now decided to end its investments here. Some 180 employees of its affiliate InterPharm, Israel’s biggest biotech firm, will be laid off, and a new plant to be built in Ness Ziona will now be cancelled.

What went wrong?

• On July 7, the Investment Center approved a $20 million grant, only a third of Serono’s requested $60 million investment in the new plant. The reason: “a budget shortage”. The total cost of the plant was estimated at $210 million.
• The new plant was intended to be capital intensive, using less labor. A few months ago, InterPharm laid off 80 redundant employees. This fact was used against InterPharm and Serono. Does the Investment Center demand that companies build old-fashioned inefficient plants here?
• Israel’s old R&D law kept InterPharm from receiving grants, because the Ness Ziona plant makes only an ingredient of the drug Rebif, while the drug itself is made abroad. The old law bans a company from producing abroad products developed with Chief Scientist grants. The law was changed last year but not before a fierce fight, and the new law still put obstacles before InterPharm.
• Israel is again in hot water with the US over infringing intellectual property rights. The US threatens to put Israel back “in the corner”, on the Priority Watch List for offenders. A senior US manager told Globes, “Israeli companies are getting a free ride on our intellectual property…if someone else can use our investment, why should we make it in Israel?” For this reason, Bristol Myers-Squibb recently halted its Israeli activities. Rightly or wrongly, Israel, once known as the one-diskette country (only one copy of software was needed for everyone), is again becoming infamous for disrespecting intellectual property rights. This will prove very costly.
• Some observers suspect the real reason Serono chose not to build the new plant in Israel was the fear that Teva, a world leader in generic drugs, would somehow acquire the knowledge Serono is required to file with Israel’s Health Ministry, about how the key ingredient of Rebif is to be produced here. Recall that Teva is a major producer of API (Active pharmaceutical ingredients), and is unexcelled at quickly producing generic drugs when drug patents expire.

Teva is a highly ethical, straight-shooting firm that plays hardball within the law. It has to. Global pharmaceutical firms, with an ever shorter pipeline of new drugs, do everything they can in the courts to delay Teva’s production of generic versions. Teva has cleverly built a profitable API division, and sells ingredients for profit even to its fiercest competitors. It is the case that Teva’s main ethical drug, Copaxone, also treats multiple sclerosis.

Teva is ethical. But - is Israel, the country, perceived as ethical by foreign investors? Here the record is bleak. As I wrote in a "Globes" column on August 11, Israel ranks 21st out of 133 countries in being corruption-free, falling from 16th in 2000 and 18th place in 2001. Four Israelis in 10 expect corruption to get worse. Well they might. When cabinet ministers are accused of hiring party hacks, their response is: Well, this is the norm. Everyone does it.

Nothing is more important in attracting foreign investment than squeaky-clean business practices. Cutting tax rates helps. But an investor who fears he will lose 100% of his investment to theft is not persuaded by a 10 % tax credit.

So far, we counted five mistakes in spelling Serono. And we haven’t even begun to mention port strikes, general strikes, bad labor relations, bureaucracy, growing poverty, and political instability.

Is anyone listening? Have we learnt from the Serono-InterPharm episode? And can we learn to spell Serono right? If not, look for more foreign money to leave - or worse, never to come in the first place.

Shlomo Maital is Academic Director of TIM-Technion Institute of Management.

Published by Globes [online] - www.globes.co.il - on September 22, 2004