Israel-based Teva Needs Strategy Reset With New CEO

Board divided on company's future: steer toward specialty pharmaceuticals or focus on core generics business?

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The new chief executive of Teva Pharmaceutical Industries will have to go beyond cost cutting and lay-offs to fend off cut-throat competition and nurse the drug company back to health.

Teva needs to find new sources of income to offset the impending patent expiry on its multiple sclerosis treatment Copaxone. The company is the world's biggest producer of generic drugs but relies heavily on Copaxone, its most profitable product by far.

The top candidate to lead the charge is Erez Vigodman, the CEO of generic crop protection product maker MA Industries, according to a source close to the matter.

"The announcement could come in a matter of days," the source told Reuters.

Generic drugmakers produce cut-price medicines developed by other companies. They have benefited in recent years from an increased uptake of their products by cost-conscious governments and health insurers.

But competition is fierce. The biggest profits often come from being first to launch a new product when its patent expires, but the number of those expiries has dwindled and impending regulatory changes will reduce the advantage of being first to launch a new generic drug.

In response, generic drug companies including Teva have been doing deals to achieve economies of scale. Many firms have been sold or merged, and those that remain, such as Mylan, nurture promising branded drug businesses.

Turnaround specialist Vigodman took over MA Industries in 2010 and restored profitability by closing production lines, renewing research and development and improving product offerings, all measures that analysts say Teva could benefit from today.

Israeli industrialist Benny Landa told other Teva shareholders in a letter that he met Vigodman for four hours at the request of vice chairman Amir Elstein. The two men discussed the challenges facing Israel's largest company.

"As critical as I am of Teva's board, I think this time they got it right," he wrote in the letter, which was seen by Reuters. "Erez Vigodman is made of the right stuff to succeed. He is a strategic thinker with excellent managerial skills. My sense is that he has the courage to make tough decisions."

A spokeswoman for MA Industries said Vigodman was not commenting on the matter, while Teva also declined to discuss the CEO selection process.

Divided board

The first mission for the new CEO, whether it is Vigodman or a surprise choice, is to get the board of directors, whose members do not see eye to eye on the future of the company, united and functioning.

It was a clash with Teva's Florida-based chairman and biggest shareholder, Phillip Frost, that led to the abrupt departure of former CEO Jeremy Levin in October.

Frost wants to steer the company towards specialty pharmaceuticals while other board members want it to focus on the core generics business, according to people familiar with the situation.

"This division has wreaked havoc on the company in the last couple of years," said Ori Hershkovitz, managing partner at the $350 million Sphera Global Healthcare Fund. "It's by far the worst positioned company in the pharmaceutical sector."

Hershkovitz, whose fund has just over 2 percent of its assets invested in Teva, said Vigodman is considered one of Israel's most charismatic CEOs and up to the task of getting the board in line.

Teva's shares have underperformed the MSCI World Health Care Index by nearly 40 percent in the past two years and the stock trades at eight times forecast 2014 earnings - just over half the sector average. They rose 7.3 percent in 2013 after a 7.5 percent fall in 2012.

Just before leaving the company, Levin announced a plan to lay off 5,000 employees, or 10 percent of Teva's workforce.

But such cost-cutting is a necessity and not a strategy, analysts say.

Jason Kolbert, managing director at investment bank Maxim Group, said Teva must rely less on generics and focus on new branded drugs. It should also focus on new therapeutic entities (NTEs), which are known molecules that can be used in new ways without the need for heavy R&D expenditure.

"Teva will never be an R&D powerhouse like Glaxo but it does have cash to do business collaborations," Kolbert said. "It has to make a couple of the right bets."

He said Teva must find more partnerships like its collaboration with Mesoblast to develop a cell therapy for congestive heart failure patients.

Hershkovitz believes Teva should emulate the model of Canada's Valeant Pharmaceuticals, which lost out to Teva in a bid to acquire Cephalon in 2011.

Valeant's stock more than doubled in 2013 as it aggressively pursued acquisitions, favoring segments where patients often pay out of pocket, like ophthalmology and dermatology, cutting its exposure to cost-sensitive insurers.

"You send everyone home, you let products run their course, you have virtually no R&D expenditures and you are very aggressive with payers," Hershkovitz said. "This might be at least a partial solution to problems that Teva is facing."

An employee arranges medicine bottles inside Teva Pharmaceutical Industries Ltd.'s new factory in Godollo, Hungary, Oct. 2, 2012.Credit: Bloomberg

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