Opinion |

What’s Ahead for Teva? Four Threats, but No Funeral

The giant drugmaker is in a difficult situation, but not a fatal one. What it needs is a new CEO and it’s a pity the board has spent so much time looking for one

David Rosenberg
David Rosenberg
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Teva's Noah Hovav Plant
Teva's Noah Hovav PlantCredit: Eliyahu Herskowitz
David Rosenberg
David Rosenberg

>> UPDATE: Teva Names Lundbeck's Kåre Schultz as CEO

The way it’s played out in the stock market and the media over the past week, it seems like Teva Pharmaceutical Industries keeled over and died last Thursday when it announced a $6 billion loss and big job cuts.

In the next four days of trading, the drugmaker lost some $13 billion in stock market value, its bond rating was cut to one notch above junk and commentators were speculating about long it could last as a standalone company. Should we be sitting shiva for Israel’s biggest company?

Worse still, should be sitting shiva for ourselves? If Teva is swallowed up by a rival or is downsized in a big way, it will be a big blow to the Israeli economy. It is a pretty big employer in Israel, with close to 7,000 people on its payroll, and it accounts for 11% of industrial exports, not counting diamonds.

The economy could absorb the short-term shock. But the demise or decline of Teva would be an embarrassing reputational setback for Israeli business. Teva will become case in point No. 1 for Israelis’ inability to manage big global enterprises and will give all the entrepreneurs and investors who have dreaming big dreams a pause for thought.

Like biting into a porcupine

Teva’s immediate problems were the drop in prices for generic drugs in the U.S. and the chaos in Venezuelan market, which is hitting revenues and making its struggle to pay off the massive debt it took on buying Activis Generics last year all the more difficult. But all this is a culmination of years of poor or indifferent leadership at the company since its visionary CEO Eli Hurvitz stepped down in 2002.  Teva’s problem wasn’t the second quarter, but the last decade.

The company was lazy in developing new proprietary drugs to take over when its bestselling Copaxone multiple sclerosis treatment’s patent expires (as it is doing now) and spent its money poorly on a string of acquisitions that didn’t really pay off. It has yet to find a CEO of a caliber anywhere close to Hurvitz. All in all, investors have good reason to be skeptical that the company can turn itself around so quickly. But let’s not take out the sackcloth and ashes and mourn Teva just yet.

The immediate threat to Teva is that, battered and beaten and worth less than $19 billion (based on its market capitalization), it will be an easy takeover target.

But that seems unlikely. The company’s charter creates big obstacles to a hostile takeover by a foreign entity and its debt doesn’t make a particularly alluring acquisition. Anyhow, the rest of the generics industry is ailing, too, so there aren’t a lot of potential buyers out there. More likely, some investment fund will offer a cash injection in exchange for an equity stake and help Teva with its debt squeeze.

And that leads to the second threat hovering over Teva, whose debt amounts to $35 billion.

Between declining prices for generics and the resulting hit to revenues and cash flow, Teva is going to be hard-pressed to meet its repayment obligations. But give management credit: They have slashed Teva’s dividend to conserve cash, they’re cutting costs and planning to sell off businesses to raise more money. In any case, Teva’s creditors have no logical reason to play hardball with it if it, even if it is in violation of its debt covenants: Pressuring the company to raise cash at all costs would be a bad bet. Better to leave management to deal with the problem in an orderly way.

The smart side of the Activis acquisition

The third threat is the generics business. This is a problem Teva can’t really solve so long as the U.S. Food and Drug Administration is determined to push down prices and the wholesale market is controlled by four companies. As much as the Activis deal is now being condemned as a dumb move, it has its smart side, which is it ensured Teva’s place as the No. 1 generics maker and puts it in a stronger position to negotiate with the Big Four. Other generics makers realize this and are looking to bulk up.

The fourth threat is competition for the 40-milligram version of Copaxone, its medicine for remitting-relapsing multiple sclerosis (the 20-mg version already has generic competition). That’s a real problem, and not one Teva can do anything about, except hope and pray that generics competitors will encounter problems that delay their product launches.

In these challenging times, what Teva needs more than prayers and forgiving creditors is a CEO. As much as the last one, Erez Vigodman, screwed up with the Activis deal, it was a mistake to let him go and leave a vacuum at the top, especially as the vacuum is now marking its sixth month. Teva needs to make some tough decisions and embark on a new strategy. The interim CEO, Yitzhak Peterburg, has done some of the work, but the job should be left to the person who is going to be in the CEO’s office for the years, not for months, and can see it through. He shouldn’t have to start with someone else’s program.