Teva Loses Status as Biggest Firm on TASE as Israelis Sue Too

Israeli institutional investors seeking class action in the U.S. estimate that price-fixing inflated Teva's profits by $2.3 billion

Teva CEO Kare Schultz meets with reporters in Tel Aviv, February 19, 2019
Ofer Vaknin

A group of Israeli institutional investors has filed a motion to pursue a class action suit against Teva Pharmaceutical Industries, and some of its former executives, for allegedly colluding with other drugmakers to “fix” prices of generic drugs in the United States. The suit would be filed in Connecticut, which is leading a group of 44 states in legal action against the manufacturers. Teva is dual-listed for trading on the NYSE and Tel Aviv Stock Exchange.

The motion seeks damages for investors who put money into the company, the world’s biggest generic drug maker, between the dates of February 6, 2014 and December 9, 2018.

Investor concerns over the lawsuit following the announcement by 44 U.S. states over the weekend that they would seek damages and penalties for the alleged price-fixing by Teva and 19 other pharmas sent Teva shares tumbling by close to 11% on Sunday in Tel Aviv Stock Exchange trading.

The drop was so precipitous that for the first time in years, on Sunday the drug maker lost its crown as the biggest company traded on the TASE by market capitalization. That honor went to the U.S. company International Flavors & Fragrances, which began trading in the bourse after buying the Israeli company Frutarom last year.

By the closing on Sunday, IFF had a market cap of 51.51 billion shekels ($14.4 billion), versus Teva’s 50.97 billion. On Monday, however, Teva shares rebounded, trading at 47.05 shekels in the late afternoon, a gain of 0.8% for the day.

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The class—action motion claims that Teva inflated profits by $2.3 billion during the relevant period by coordinating prices, and dividing up markets, with rival companies, starting in 2013.

The Israeli institutionals’ motion is based on the same allegations in the suit announced over the weekend by 44 U.S. state attorneys that put the Israeli company at the center of the alleged price-fixing. The suit claims Teva executives personally fixed price hikes on 76 products.

Teva executives have denied that the alleged price-fixing weas responsible for a big increase in Teva’s U.S. generic drug business at the time. But the plaintiffs point out that there no other obvious explanation comes to mind for the price hikes, such as a shortage of drugs or a sudden increase in demand.

Among the plaintiffs are the Harel insurance mutual funds group, pension and provident funds controlled by the insurer Migdal, and the Hebrew University employees’ provident fund. Their motion to file a class action suit in the U.S. is being conducted by the U.S. law firms Pomerantz and Scott & Scott.

The executives named in the class action suit are Erez Vigodman, who had been CEO until 2017; Sigurdur (Siggi) Olafsson, the former head of Teva’s generics business; Dipankar Bhattacharjee, who succeeded him in the role; and Prof. Yitzhak Peterburg, a former chairman who took over as acting CEO after Vigodman stepped down.

A similar suit had been filed earlier in the U.S. in the name of all Teva investors, but it covered dates that were not relevant to the Israeli institutions because they hadn’t in most cases bought Teva shares during the period. In order to pursue their claims, the Israelis dropped out of the original class action and prepared their own suit.

The suit cites remarks by Olafsson in a conference call with investors in February 2016 made in response to a question as to how Teva how been able to boost U.S. generic profits by $500 million. He denied it was price rises and instead attributed it to the right mix of products, new drug and efficiency measures.

In fact, a fourth-quarter price rise had accounted for $155 million, or more than 30%, of the profit increase Teva had generated for all of 2015.

The lawsuit asserts that Teva sought to boost prices in order to increase profits and the price of its shares. That, in turn, would give the company currency to make the big corporate acquisitions it was planning.

The biggest of those was the 2016 purchase of Activis Generics for $39 billion.

The Israeli suit also cites remarks by Eyal Desheh, who was Teva’s chief financial officer, made in 2014 about how the share price increase over the previous 12-24 months could be used as currency to make M&A deals. It also cites a statement by Olafsson from early in 2016 that while other generic makers had disappointing results amid political pressure to lower prices Teva was feeling the same pressure.

In the same conference call Vigodman, who was then CEO, denied that a 4% to 5% drop in generics prices would not affect Teva. In fact, the company later reported a 45% drop in first-quarter 2016 profits.

Not long after, in June 2016, the U.S. Justice Department instructed Teva to provide documents and other information on marketing and pricing of certain products and its relations with competitors. In July, the Connecticut district attorney issued a similar order.

Neither the demands issued by the U.S. nor by Connecticut was mentioned when in July 2016 issued a prospectus to raise $20 billion in debt to help fund the Activis acquisition.

The plaintiffs assert that the company committed fraud in four ways – first by attributing Teva’s financial performance to legitimate business practices, second by failing to acknowledge the contribution of price rises to its profitability, third by misrepresenting its competitive position and finally by failing to make full disclosure in its 2016 bond offering.