Analysis

The Dubious Missteps That Muddled Teva CEO's Promising Start

Erez Vigodman restored investor confidence, but then went on a questionable acquisitions spree.

Erez Vigodman, CEO of Teva Pharmaceutical Industries Ltd., speaks at the 16th Nikkei Global Management Forum in Tokyo, Japan.
Kiyoshi Ota/Bloomberg

When Erez Vigodman assumed the role of CEO of Teva Pharmaceuticals three years ago, the company was in dire straits.

His predecessor, Jeremy Levin had left the company amid bitter infighting between management and the board of directors after just 18 months on the job. Teva’s share price was just $38, cheap enough to attract a hostile takeover, and its multiple sclerosis drug – the source of 40 percent of its operating profit – faced generic competition.

Vigodman had the pedigree Teva needed. He sat on the board of directors and Eli Hurvitz – the legendary CEO who had turned Teva into the world’s biggest manufacturers of generic drugs – had wanted him for the job four years earlier. As CEO of Makhteshim-Agan, now called Adama, Vigodman had turned the company around.

When Vigodman arrived, he acted fast and delivered the goods. To help restore the stock market’s confidence in Teva, he hired Sigurdur (Siggi) Olafsson, a highly respected drug executive, to head up the generics business. Vigodman also oversaw a successful transition of Copaxone users from the original 20-miligram formulation of the drug, which was facing generic competition, to a 40mg version that the company was confident would enjoy patent protection until 2030.

Within 18 months, Teva’s share price had soared to a record high $70, giving the company a valuation that would make it too expensive for another company to swallow.

Ten years of Teva

But that was about the time that the Vigodman magic began to disappear. He remained anxious that Teva – Israel’s biggest company and a major exporter – might still find itself targeted by a rival for acquisition and he began searching for ways to bulk up the business even more.

In December 2014, Teva made an offer to buy Activis Generics, but it was rejected – and that is when things went awry for Vigodman and Teva.

He now turned his sites on another big generics company, U.S.-based Mylan, which Teva offered to buy for $82 a share, a 125 percent premium over Mylan’s market price at the time. Mylan’s chairman, Robert Coury, mounted an aggressive defense, including some name-calling. But Vigodman wouldn’t back down and spent $1.6 billion buying Mylan shares in the stock market in the hopes of surmounting Mylan’s poison-pill defense.

By July 2015, Teva admitted failure and was left with losses on the Mylan shares that today amount to $756 million. Soon, however, Vigodman was back on the acquisitions trail, this time with a renewed offer for Activis, which had merged with Allergan, changed its name to the latter company’s and was now ready to spin off its generic roots.

Vigodman didn’t negotiate hard and agreed to pay $40 billion for Activis Generics in July 2015. That was a generous 17 times operating profit, even though the deal didn’t include Activis’ promising biologicals business.

Worse still, in September U.S. presidential candidate Hilary Clinton set off a year-long decline in drug stocks with a tweet about high drug prices. The Activis deal began to look even less worthwhile than it had when the two sides had reached an agreement, but Vigodman never acted to back out of the deal or renegotiate the price.

The market grew even more anxious as it became increasingly evident that the enormous debt Teva had taken on to finance the deal would weigh heavily on the company in the future.

Teva has had some other missteps along the way. It bought a Mexican company Rimsa a year ago for $2.3 billion, which Teva now says defrauded it. Teva has agreed to pay out hundreds of millions of dollars in an antitrust settlement in recent weeks. And now came the Copaxone decision.

Some analysts say Teva is in need of a management shakeup. Others, like Andy Summers, a pharmaceutical specialist for Janus Capital Management, says the time has come for Teva to rethink its core strategy.

“They should split up the company into two separate companies: a generics company and a branded specialty company. That would allow for greater management focus and improved capital allocation,” he told Reuters on Tuesday.