As Israelis contemplate the fate of Teva Pharmaceuticals in the wake of the massive cost-cutting exercise announced on Thursday, the date July 26, 2015 may go down as the beginning of what could be the end for the generic drugs giant.
The acquisition of Actavis Generics, the generics division of Irish drugmaker Allergan, is ultimately the reason why Teva value shrank by 200 billion shekels ($57 billion) in two-and-a-half years. That vanishing value makes the losses by bankrupted billionaires Nochi Dankner and Eliezer Fishman look like childs play.
Earlier that month, Teva had published a presentation describing the upside of the giant hostile takeover it was proposing of rival company Mylan.
The Israeli company spent months fighting to acquire Mylan, beginning with a hostile takeover offer it made to the Dutch companys shareholders on April 15. It offered a 20% premium over Mylans share price at the time. Mylans directors unanimously rejected it, but Teva battled on. On July 26, Teva suddenly changed tack, stunning the market with its acquisition of Actavis for $40.5 billion.
Teva had built its phenomenal success, becoming the biggest generic drugs player in the world, based on one single drug, Copaxone, a breakthrough in the treatment of remitting/relapsing multiple sclerosis. It never found another trick. External factors, such as mounting competition in the generic drugs market, exacerbated its problems – as did questionable management decisions.
The question is why a company gets into a deal that will destroy it if it fails, remarked Avi Tiomkin, hedge funds manager, over the phone from New York. Its a risk-management issue. Sixty billion dollars were wiped out at that company, three times Israels national defense budget. Intel bought Mobileye this year, but even if it has to write off the entire $15 billion it invested in it, Intels survival wouldnt be at risk. Gilead Sciences bought Kite Pharma for $12 billion. If it writes it off, the company will take a blow, but it wont disappear. Tevas fall isnt a professional one stemming from the world of medicine. It isnt that the company had problematic drugs. It was a managerial, financial failure, not a technological one.
The acquisition of Actavis, which is probably the biggest value destroyer in the history of Israeli business, had been pushed by then CEO Erez Vigodman, who believed he was turning into a generics giant whose profits would cover for the loss of exclusivity over Copaxone, for which generic rivals began to materialize in 2015. But intensifying competition in the generics market, chiefly in the United States, led Tevas profits to shrink. It may find itself unable to repay the huge loans it took to effect the acquisition.
One amazing aspect is the speed at which the deal was done. Teva wont say how many board meetings it held regarding the acquisition, how long the due diligence examinations before the acquisition took, or which questions the directors asked. Most of the directors we called refused to speak. One estimated that one or two meetings were held in the three weeks preceding the deal, and added that aside from Vigodman, the driving force behind the deal was the head of the Teva generics division at the time, Sigurdur (Siggi) Olafsson. It was also clear that the deal was backed by the chairman, Yitzhak Peterburg.
What we can say is that in its presentation to investors about Mylan three weeks earlier, Teva didnt mention Actavis. The speed at which Teva switched from buying one company for tens of billions to buying another begs questions about the checks it conducted before buying Actavis, which was the biggest acquisition by an Israeli company ever.
Two sources involved in decisions at Teva claim the decision had not been made hastily and that checks had been conducted for a long time in advance.
In fact buying the Actavis generics division had been touted at Teva since 2014. It also had files on Mylan and Sandoz, assuming it would buy one of them. It contacted Actavis before turning to Mylan, and was refused. Throughout the Mylan business, Teva people continued to talk with Actavis as well.
However, looking at the work by the Teva board of directors, the only thing we can definitively say is that three weeks before buying Actavis, Teva preferred to buy Mylan.
In the world of mergers and acquisitions, buying a company with 10,000 employees on several continents can take a year.
The Teva board consists of 13 directors. Only three remain now from the team incumbent when the Actavis acquisition was announced. The ones who left wouldnt talk. It seems the meeting at which the deal was approved didnt leave much of a mark. Two of the directors we did talk with couldnt remember that meeting. One said he was on the board when the acquisition was approved, but said Teva had the option of pulling out of the deal for a year after its approval, and that possibility of manifesting buyers remorse had been stressed during the presentation of the deal to the board of directors.
Teva did not utilize that exit. In the last two years most of the board members were replaced. In a game of hot potato, the original directors seem to have relied on the acquisition process being halted by the new board if necessary, while the new board trusted the judgment of the old board that made the decision to buy Actavis.
A year did pass until the Actavis deal was consummated, in August 2016. Teva forged on with it and also bought another company for half a billion dollars. Analysts and the media in general applauded. One local paper coined it the deal of the year.
The year before, however, in November 2015, Avi Tiomkin met with Peterburg, then Tevas chairman. The meeting had been initiated by a Teva board member who knew that Tiomkin frowned on Teva making a huge acquisition. At that meeting, Tiomkin analyzed the financial risks, as well as the risk that Hillary Clinton would be elected and press generic drug prices downward. Peterburg listened but never contacted Tiomkin again.
Tiomkin however got quoted in the press and was surprised to subsequently get a phone call from Erez Vigodman, who asked him bluntly, Tiomkin, are you shorting Teva? (Betting against it in the market.) Tiomkin told him how he felt about Teva. Vigodman said that was very interesting and they should meet. But they never did.
Why on earth did the Teva management forge ahead? Tiomkin counsels looking at the mood at the time. The management felt the Copaxone era was over and feared Teva would disappear. I can say to Vigodmans credit that they hired him to do something big that would replace Copaxone. In retrospect, hes an extraordinarily talented man who was tasked with mission impossible. He has phenomenal rhetorical skills, a brilliant man with a first-class mind I can understand how people find him hypnotic, Tiomkin says.
Another key figure in the deal, aside from Vigodman, was Siggi Olafsson, who managed Teva Generics until December 2016. He came to Teva after years of management functions at Allergan, and was responsible for building much of Allergans generics business. Olafsson was expected to integrate Actavis into Teva. At the time of the deal, Olafsson seemed to be the right man in the right place. But with hindsight it seems his opinion of Actavis was biased in its favor.
Tevas board and its unusual characteristics played a critical role in the decision to buy Actavis.
In 2015, the average age of a Teva director was 68, and the average period theyd been on the board was seven years. The legendary Teva leader Eli Hurvitz had designed the board specifically with the idea of protecting the company against hostile takeover. He built a mechanism enabling the board members to be replaced gradually, over years, with board members nominating one another.
In Tevas early days, the directors were also members of the companys founding families, says Ruth Cheshin. A former director, she says she got the job not because of any skills but because she was a member of the Solomon family, which cofounded the company.
In any case, the board didnt necessarily give the CEOs an easy time. For years the company was considered to eat its CEOS alive. Before Vigodman was Jeremy Levin, who lasted a year and a half; before him Shlomo Yanay, who quit after fighting with the board; before him was Israel Makov, who was fired for bucking Hurvitz, then the chairman.
Mylan tells the truth
The one who highlighted the responsibility of Tevas board in the companys ills was none other than the CEO of Mylan, who in early 2015 published a letter, explaining at some length exactly why Mylan didnt want to merge with Teva. Among other things, he wrote:
Bringing Tevas dysfunctional culture to the region could disrupt the core of our business, result in the flight of key talent (in India and elsewhere), and meaningfully and adversely impact the results of the possible combination. This challenged culture at Teva is, we believe, a direct result of a board of directors that refuses to change, lacks adequate global pharmaceutical experience and consistently meddles in company operations. This is the same board that was described as like a nuthouse by an investor in a Bloomberg article.
Tevas biggest investor, Benny Landa, says that after Jeremy Levin was fired, the board announced they were looking for the best CEO around, and were looking all over the world. Finally they came back from their search and said, you wont believe it, he recalls. We discovered that the best CEO is right under our nose – hes a member of the board. True, he has no background in pharma but hes one of us. The board members had decided they didnt want a non-Israeli CEO again after Levin.
Levin had been a man with a strategy, and he was fired not because his strategy was bad, or because he was a bad manager. The board fired him because of nuances, as they phrased it, Landa says. When I asked why hed been fired, a director told me, because he came to work wearing a tie. He thinks hes better than us.
Teva didnt have to buy Actavis. It could have stuck to acquiring small companies with unique original drugs, of which one might one day have replaced Copaxone as a major profit-gainer. Buying Actavis cost Teva its maneuverability, Landa sums up.
Teva stated that it cannot comment on specific discussions on the topic of Actavis or any other specific deal. In every discussion and in general conduct, Teva and the board of directors are always committed to strong principles of corporate governance, and that applied to the Actavis transaction as well, the company stated. Teva carries out extensive, deep checks before making any strategic decision or initiative, to assure the greater good of Teva, its shareholders and its owners, the company said.
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