Teva Is Taking on Water, but Don’t Blame the Captain

Israel’s biggest company is in trouble, but CEO Erez Vigodman has been a victim of circumstance, not ineptitude.

Erez Vigodman
Reuven Kapuscinski

It’s not hard to imagine Erez Vigodman, the CEO of Teva Pharmaceuticals, sitting down with Prime Minister Benjamin Netanyahu to share their tales of woe and drown their sorrows in pink champagne.

Both men have become the whipping boys of the media:  the prime minister for his dubious dealing with the wealthy and powerful and the CEO for letting his company’s share price fall to its lowest point in a decade.

But there’s a big difference between the two men. On the whole, Bibi has done a good job of running the country and is being brought down by his personal flaws; Vigodman made all the right moves, but Teva has been overwhelmed by circumstances beyond his control.

Bye bye, Copaxone

Vigodman’s latest setback – and it’s a whopper – was a U.S. court’s ruling on Monday that four patents relating to the most widely used version of its Copaxone multiple sclerosis drug are invalid.

Teva is the world’s biggest maker of generic drugs, but Copaxone, a branded drug for the treatment of remitting/relapsing multiple sclerosis, is by far its biggest money maker – it probably generated about 40% of the company’s profits last year.

Without the patent protection, however, rivals are free to offer generic versions of the drug that will cut sharply into Teva’s sales and profits, starting as early as the next few weeks.

Teva’s problems, however, are bigger than that. Last year the company shelled out close to $40 billion to buy the generics business of Allergan, buying the company at a time when drug stocks were at highs and taking on tens of billions of dollars of debt. Today, Teva has one of the biggest debt burdens relative to its size in the pharma industry and is going to have to work hard to repay it.

Beyond that, Teva has agreed over the last several weeks to pay out close to $750 million in settlements with the U.S. government over  bribing overseas officials to buy its products and for colluding with another company to delay launching a generic drug. In December, Teva was named in an antitrust suit targeting the generics industry.

Embarrassingly, Teva claims it was defrauded when its bought the Mexican drug maker Rimsa in 2015 for $2.3 billion. Vigodman, meanwhile, expended a lot of time and money in a bid to buy rival generics maker Mylan before giving up on the whole thing.

Teva’s share price was trading on Tuesday in New York at just over $33, down $5 from when Vigodman took over as CEO three years ago.

An accident of timing

It looks like Vigodman hasn’t been exactly a stunning success, but he shouldn’t be judged harshly. Except for Rimsa fiasco, the CEO has been a victim of circumstance. The drug industry has been hit hard over the last year and a half by accusations of price-gouging and by calls from elected officials (including Donald Trump himself) for prices to come down and rules to be tightened.

Pharma shares have dropped sharply, generic drug prices have been coming down and competition has grown more intense, which is one reason Teva now finds itself overwhelmed by its Allergan debt.

More than that, Vigodman inherited a company that had been badly managed for years.

The lawsuits Teva is dealing with now are connected with things the company did before he arrived or by companies before Teva acquired them. Teva’s paltry pipeline of new generic drugs in development is because management in the pre-Vigodman years failed to invest in R&D. Acquiring Activis was supposed to solve the problem.

That acquisition was also meant to ensure Teva’s No. 1 position in the generics sector. In 2015 when the drug industry was in the midst of a mergers and acquisitions surge, it was eat or be eaten – and Vigodman chose to be the predator.

When he struck the deal in the summer of 2015, things looked very different and the same analysts and investors who are now tut-tutting Vigodman were lauding the deal and Teva’s share price touched $70. 

As for Copaxone, that wasn’t Vigodman’s fault at all: He has done was he can --and quite successfully, so far -- to keep the generic competition at bay by introducing a new formulation and getting users to move to it from the old one whose patents ran out two years ago. Alas, the judge disallowed the new formulation’s patents, too.

Teva’s problems aren’t over. By cutting into the company’s cash flow, the Copaxone loss will make servicing its debt even harder, and the attacks on the drug industry are far from over. But there’s no good reason why Vigodman should be stepping down. Teva would not benefit from another leadership shakeup just three years after the last one that brought him into the job.