Teva's Woes Extend Beyond CEO's Sudden Departure

If Teva's next chief fails to put the drug giant on a growth track, the Israeli firm may end up in foreign hands.

There was no lack of drama and ego. Only two days after telling the entire world that there was no conflict between him and the board of directors, Jeremy Levin, the CEO of Teva Pharmaceutical Industries, announced his immediate resignation.

It turns out that Levin and Chairman Phillip Frost couldn't agree on how to implement the aggressive streamlining recently announced by the company. Frost demanded firmness and Levin sought moderation - until he was forced to turn in the keys. He will be temporarily replaced by Chief Financial Officer Eyal Desheh, and Teva will look for a new CEO.

As expected, the market didn't like the story and Teva shares dropped 8% in Tel Aviv and New York, but in addition to the job-cuts issue and the victory by the chairman (who holds about 1.5% of the company's shares), could Teva be in bigger trouble than previously thought? Could the company's financial stability be in danger in the future? If so, what would be the effect on the common Israeli?

It's no secret that Teva isn't going through a good period; the patent for multiple sclerosis drug Copaxone, responsible for about 70% of the company's profits, is expiring. So Teva embarked on job cuts (today it's call "streamlining") of about 5,000 employees worldwide, about 800 in Israel. Investors were enthusiastic, and Teva shares reached their highest level in a year.

But the focus on the profit and loss account is no more important than the balance sheet, which spells out liabilities and assets. Teva has liabilities of about $17 billion, about $12 billion in long-term debt. To whom does Teva owe this money? Some is to banks, but most stems from bonds sold to private savers around the globe.

Today Teva has no problem meeting these obligations; the company is profitable and its executives promise that it will remain so even after competition to Copaxone goes on the market. The question is what happens over the longer term; for example, in five years.

Because Teva has no interesting drugs in the pipeline, because the development time for a new hit takes many years, because there are also threats to drugs other than Copaxone, and because management made plenty of mistakes in recent years, the question is whether investors will one day start talking about the company's financial stability. Again, that's not happening today, as is made clear by the prices of Teva bonds in the United States. They're rated at a respectable A-, and their slightly higher yield compared to U.S. Treasury bonds conveys confidence in the company.

The fallout for Israel

But such doubts would be very bad news for Israel. First, Teva is the most commonly held stock in Israeli investment portfolios, including mutual funds and provident funds. Just about every Israeli owns Teva shares, maybe a Teva bond as well, even if doesn't realize it. The erosion of Teva bonds, God forbid, would have a far worse effect on Israeli savers than what they suffered with Israel Discount Bank or Africa Israel.

Second, Teva is a major employer in Israel, with about 7,000 employees, and if the company goes through a crisis, many of them will lose their jobs and have a hard time finding a new one.

For years Israel encouraged its citizens to study biotechnology, in part via special study tracks in high schools, and almost everyone who acquired higher education in the industry went to work for Teva. So it's not surprising that there's already great concern among students and professionals in pharmaceuticals, biology and biotechnology, because Teva is one of the few major employers for people in those fields.

And there's another issue. Although Teva is registered and managed in Israel, most of its shareholders aren't Israelis. They want what's best for the share price in the short term, and they have no sentiments or special devotion to Israel.

So if Teva's board begins to feel that the company is on the decline, it would be only logical for it to seek a company to acquire it before its value erodes. Such a search, whether passive or active, would probably bring offers from all types of companies - American as well as Chinese or Asian in general. How would the acquiring company behave? It could transfer its headquarters and/or operations to other countries. That wouldn't be good for Teva's Israeli employees, or anyone here linked to the drug industry.

Frost has told investors in a conference call that the company does not want to be acquired, but we've learned not to take such declarations too seriously. Some investors note that Frost isn't exactly focusing on Teva's future; he has a far larger investment in a company called Opko Health, so lots of his time is allegedly devoted to that outfit.

Will a new CEO be able to return Teva to a growth track? Well, Teva is a knowledge and technology firm; its present situation stems from the mistakes of previous managers, and a manager who does the right things could succeed. But it's hard;  developing a new drug takes at least 10 years. Even if a talented savior arrives, his mission will be very difficult.

Reuters