Teva’s Paranoid Downfall

Ousted CEO Erez Vigodman’s policy of acquiring competitors before they ate Teva ultimately left the Israeli drug company weaker.

Erez Vigodman, former chief executive officer of Teva Pharmaceutical Industries Ltd., in Tokyo, Japan, Nov. 12, 2014.
Kiyoshi Ota/Bloomberg

More than anything, the story of Teva’s vanishing market value is a story about paranoia. If the ousted CEO Erez Vigodman, chairman Yitzhak Peterburg and the directors had taken a dose of that, the whole crisis might have gone otherwise.

It’s hard to swallow that paranoia could have been the strategy of a company like Teva, but that’s the truth.

Whence this paranoia? To understand it, let’s revisit just how Teva became a gigantic company and the pride of Israeli industry.

Two things made it: One was Copaxone, its proprietary drug for remitting-relapsing multiple sclerosis. Originally developed at the Weizmann Institute of Science, the drug made billions upon billions of dollars for Teva. Two was buying other generic drug manufacturers around the world.

The more companies Teva bought, the more it wanted to buy. Mergers and acquisitions became part of its hallmark, and every time, it bought ever bigger companies, based on the perception that he who does not eat other companies gets eaten. Either you are the hunter, or the prey.

April 2015 brought the Mylan deal that wasn’t. Teva tried to buy it in a hostile takeover for $40 billion. The strategy was to buy a huge company that would boost Teva’s market value to over $100 billion, thereby preventing any other company in the world from so much as dreaming about eating Teva itself.

Vigodman showed analysts presentations describing the background to the hostile takeover attempt. He showed how the drug companies most likely to be taken over were up to $40 billion in value, hence the conclusion at Teva’s top that the company had to quickly snap up another company to reach that $100-billion company value mark, from which point they’d become untouchable.

Everybody knows the strategy of “too big to fail” in banks. But the model of “too big to buy” is less familiar, at least to people who aren’t market animals.

Teva grew through acquisitions, a strategy based on experience. Mylan’s management however had no intention of being swallowed alive by Teva, and its leader, Robert Coury, fought back.

Vigodman was left with an appetite to acquire and a strategy, but no target. He was tapped to replace Jeremy Levin after just a year and a half on the job as CEO of Teva, based on his experience in business. Vigodman was expected to usher Teva to the shores of safety through acquisitions, giving it more drugs in its arsenal and making it, as said, too big to buy.

Great strategy, to be sure. If one finds the right company to buy, for the right price, at the right time. But buying Actavis Generics, the generics division of Allergan, in July 2015 for $40 billion (in cash and shares) met none of those criteria.

That deal jacked up Teva’s debt to $35 billion. From a not especially leveraged company it became an enormously leveraged company, and debt needs servicing. That in turn put even more pressure on profits and cash flow.

There were unexpected potholes in the road, too, one being that the U.S. elections were bad for drug stocks, after the candidates vowed to lower the price of medicines. There were overly optimistic forecasts for Actavis, and that $40 billion was just too much. Teva meanwhile dealt with blowback from an abortive attempt to buy a Mexican company for $2.3 billion and its failure to protect 40mg-dose Copaxone from generic competition.

And thus Teva’s stock fell to a 12-year low point, and it looks beleaguered, too. It has no protection for the most important drug in its portfolio, Copaxone, Actavis hasn’t led to any particularly significant achievements, and it has to service that $35 billion debt. It’s higher than its market cap. Vigodman is gone but the board, which was partner in reaching the paranoid decision to buy Actavis, remains.

Anybody holding Teva shares has some hard questions now.

Should the directors remain, considering their role in decimating the company’s value? Should only the CEO pay the price? Did the board’s strategy in fending off acquisition at any price actually cost value?

In schools, two kinds of test cases are taught. One ends well, one doesn’t. The strategy designed to fend off hostile takeover of Teva itself achieved that end, but doesn’t necessarily mean the Teva story will end happily ever after. As long as the present board remains and does not pay any price for this tremendous flop in business, it is hard to see how it could end well.