Analysis

Tevas New Danish CEO Passes His First Test: Ignoring Netanyahu

The prime minister wanted Teva director Kare Schultz to shutter lower-cost manufacturing in India, but the executive knows that the banks and shareholders are his real boss

Kåre Schultz, Teva CEO, blond-haired, blue-eyed and with a high forehead, clean-shaven, wearing a sky-blue shirt  and dark tie and suit, pictured in an office.
Johan Wessman / News Oresund

Kare Schultz, the new chief executive of Teva Pharmaceutical Industries, just passed his first test.

The auguries ahead of Schultzs meeting with Prime Minister Benjamin Netanyahu and Finance Minister Moshe Kahlon werent good. The prime ministers associates tried to teach the Danish newcomer a crash course in provincialism, the basis on which the Israeli government operates.

Teva plans to fire 1,700 Israelis, part of a move to lay off 14,000 people to contend with its debt mountain. The Israelis hectored him to close down manufacturing in Ireland and India and keep the loss-making plant in Jerusalem operational, but Schultz would have none of it.

Stories abound about Teva employees whose world has come crashing down; thousands of workers have been demonstrating. If Teva had an Israeli CEO, hed probably haggle out some deal with Netanyahu, chiefly to save the prime ministers face and relieve the public pressure on Tevas management.

But Schultz isnt Israeli and didnt bow to the power or the pressure. He refused to cancel the layoffs and the plan to close the Jerusalem plant.

Teva workers protesting job cuts, December 19, 2017.
Menahem Kahana / AFP

Simply, he has no choice, because unlike Netanyahu and the Israeli government, there are genuine pressures on Teva – in the form of banks and shareholders.

Teva owes $34.7 billion, and in 2018 and 2019 its scheduled to pay back $9.1 billion. By 2021 its due to pay back $17.5 billion. Thats a gargantuan sum, considering that its cash flow is expected to shrink $3.2 billion in 2017 because of declining prices of generic drugs and rising competition to its sole proprietary drug, multiple-sclerosis treatment Copaxone, which lost patent protection.

Teva can be expected to reschedule some debt, but the bondholders and other creditors would be extremely unlikely to agree if the CEO balked at efficiency measures.

If he had accepted the preposterous demand by Netanyahus cronies and agreed to subsidize the failing plant just to keep Jerusalem unemployment from skyrocketing, Schultz would have been personally liable. But unlike Netanyahu, Schultz understands his duty to Tevas American shareholders, who have paid a price for the companys Israeli identity and the sociopolitical obligations entailed. Also, signaling that the blood of workers in Jerusalem is redder wouldnt have warmed hearts at Tevas plants around the world.

In the two days following the companys announcement of its efficiency plan, its stock climbed 18%. After that the share retreated once again as analysts delved into one of the plans stranger aspects: to jack up prices.

Teva said in a conference call that it expects the pace of erosion of generic-drug prices to continue in 2018 (they fell 9% in the third quarter). A bid to raise prices looks hopeless.

Schultz apparently realizes that letting the politicians manipulate him would be a mistake that would be hard to recover from. It would cause a loss of faith in the recovery plan, press even more on the share price and increase the likelihood of a hostile takeover. Yields on the companys bonds would climb. That could lead the credit rating agencies Standard & Poors and Moodys to downgrade Teva bonds to junk, raising its cost of debt even more.

In the past, the state could support Teva through tax breaks. But again, some of the companys factories are losing money, as in Jerusalem. Others, like the plant making Copaxone in Kfar Sava after the drug lost patent protection, are likely to see profits collapse.

Schultz couldnt possibly, and didnt intend to, forgo closing the Jerusalem plant, which makes tablets. At its height the factory made 5 billion pills a year, but it sold them for $15 per thousand – three times the manufacturing cost in India. Meanwhile, the plant has scaled down production because of the crisis in the U.S. market.

Obviously the plant has no future. Teva thought about merging it with a plant making inhalers using advanced Respiclick technology, but there turned out to be no demand. The only bone Schultz could throw the politicians was to forgo closing the plant in Ramat Hovav after efficiency measures. But thats all.