Thomas White Global Investing
Israel Stamp
December 2, 2011
A Postcard from the Middle East
Israel: The nerve center of the global pharma industry

A shot in the arm

Israel’s famed prowess in medical research is powering the big pharmaceutical companies across the world today.

Teva is to Israel’s economy what Nokia means to Finland. The world’s biggest generic drugs manufacturer also happens to be the Middle East nation’s largest company and an industry bellwether. Comparisons apart, the two companies operate in sectors as diverse as chalk and cheese, a pointer to the technological prowess of the Finnish people and Israel’s rapid strides in the field of biotechnology.

Since its founding in 1948, Israel has carved a niche for itself in promoting research in life sciences, thanks to an influx of migrants from Germany, which was considered the epicenter of the global pharmaceutical industry prior to the Second World War. The German immigration was followed by another wave from Europe after the fall of the Soviet Union and its satellite states at the beginning of the 1990s. Thus, much like the cultural renaissance of the 14th century, which led to a flowering of fine arts across the European continent, Israel benefited from the flow of intellectual capital that helped the country develop research-oriented industries such as drug manufacturing.

Scientific research in Israel got a shot in the arm in the first half of the 1970s with the election as president of Ephraim Katzir, a distinguished scientist of international repute. During his earlier stint as advisor to the then prime minister, Katzir, himself born to immigrant parents from Ukraine, succeeded in persuading the government to increase its funding for applied research in the country. Katzir was also instrumental in the establishment of a department of biotechnology at Tel Aviv University.

The strong foundation provided by the likes of Katzir turned Israeli universities into centers of excellence in research, both in engineering and in life sciences. Students who come out of these institutes form the backbone of research and development activities in many home-grown companies such as Teva Pharmaceutical Industries, which has a biotechnology R&D facility located in Israel. Apparently, according to a New York Times article, Teva’s iconic chairman, the late Eli Hurvitz, used to quip that “Israel had more Ph.Ds per square inch than any other country.” The number of Nobel laureates produced by Israel in the field of science over the years stands as testimony that Hurvitz was not exaggerating. And Teva is not alone in tapping the country’s talent to further its development of drugs. Other Israeli companies such as BioCancell Therapeutics Inc. and Mazor Robotics Ltd. have also benefited from the nation’s vast pool of researchers. What’s more, foreign drug manufacturers such as India’s Sun Pharmaceutical Industries have their units based out of Israel. Big pharmaceutical companies such as Merck and Johnson & Johnson also have well-established R&D centers in the country.

The life sciences industry in Israel witnessed scorching growth during the last decade as more than half of a total of 702 companies operating in the industry currently were established during the period. According to a report by the Israel Life Science Industry, the sector clocked a growth rate of 12% during 2001 to 2005. The report also notes that about 45 new companies were founded during the last five years of the decade. Indeed, an online industry report on the global pharmaceuticals sector says the Middle East and Africa drug market combined is forecast to grow at a CAGR of about 11% during 2011-12. Besides the nation’s renowned knowledge base, other factors such as Israel’s high per-capita spending on drugs also bodes well for the growth of the pharma industry.

Teva made its name in the cut-throat global market for generic drugs. Generic drugs are copycat versions of established branded drugs that have the same ingredients as the original, but are made available to patients for much lower prices as production costs are less. To put things in perspective, generics currently account for 75% of all prescriptions given by doctors in the U.S., the world’s biggest market for drug manufacturers. Small wonder then, that Teva garners more than 80% of its sales from North America and Europe. Interestingly, unlike other sectors of Israel’s economy, most of the companies in the biotech segment are financed by foreign and Israeli venture capitalists, not local business tycoons.

Most likely, research laboratories in Tel Aviv will be working overtime to bring more and more generic drugs onto the market, in a bid to make healthcare more affordable to millions across the world. In a clear case of globalization touching human lives, the molecules developed by Israeli scientists may help bring the smile back to a family sitting somewhere in America or in other distant lands.

Image Credit: Lori Greig under Creative Commons license

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