Teva Pharmaceuticals, Israel’s biggest
company, has seen its share price
halved as generics eat at its profits,
and leveraged buyouts have left it
burdened with huge debts.
By SHLOMO MAITALErez Vigodman(photo credit: WWW.TEVAPHARM.COM)
TEVA PHARMACEUTICAL Industries is in trouble. By definition, when the share price of Israel’s oldest and biggest global company plunges 50 percent in one year, it is time to worry and investigate.Teva’s stock-price chart looks like the Himalayas or the Kingda Ka roller coaster in Jackson, New Jersey, the world’s tallest.Over the past 10 years, Teva’s shares rose from $35 in early 2007 to nearly $64 in March 2010, before plummeting to about $35 in late 2011 and stalling at about $39 for two years. They then rose steeply again to $66 in early 2016 before dropping back to their 2007 level of about $35 at present. The shares were even lower recently on news that Teva’s efforts to prolong patent protection for its blockbuster multiple-sclerosis drug Copaxone had failed.Teva shares are known as “the people’s stock” in Israel because they are widely held by individuals, and pension and provident funds. According to Stocker.co.il, the decline in Teva’s share price cost long-term investment funds losses of 5.5 billion shekels ($1.43b.) Teva shares strongly impact the benchmark Tel Aviv Stock Exchange Index, the TASE 25. The huge market value of the stock gives Teva heavy weight in the index, and has dragged it down over the past year − the last thing the troubled TASE, in decline and with management dissension, needed. Reforms now in progress will reduce Teva’s impact on the TASE 25 Index.Teva’s importance to Israel’s economy is far greater than the value of its common stock, however.My Neaman Institute colleague Dr. Gilead Fortuna, a former Teva senior vice president, together with Yuval Niv and Dr.Daniel Freeman, has studied the overall contribution of Teva to Israel’s economy.Using a tool known as input-output analysis that was developed by Nobel Laureate Wassily Leontief, they found that if Teva were to shift its production out of Israel and close its two huge plants in Kfar Saba and Jerusalem, 41,000 jobs would be lost and gross domestic product would decline by 22.7b. shekels (nearly $6b.). Furthermore, the authors found that Teva’s degree of integration with Israel’s economy, through employers, suppliers, research, etc., is much higher than that of Israel Chemicals Ltd. and Intel Corporation, for instance.So, what then has gone wrong at Teva? A near perfect storm of missteps and bad news.I WROTE about Teva’s tribulations, and perilous dependence on a single product, nearly three years ago (“In search of a cure,” March 10, 2014). The problem I described then has not been solved.
In 1996, Teva launched its first patented name-brand drug, Copaxone, which quickly became the market-leading medication for multiple sclerosis (MS). The drug, at its peak, generated $4b. in revenue ‒ half of Teva’s net income and a fifth of its sales.Copaxone was discovered by Weizmann Institute professors Ruth Arnon and Michael Sela. Arnon was actually seeking a compound that would cause MS symptoms in mice and, instead, found a molecule that prevented MS relapses. It is a complex molecule, actually a combination of four amino acids, and is extremely difficult to manufacture in a manner that preserves its precise uniformity batch after batch.Teva tackled and cracked the problem, and navigated a very difficult series of clinical trials, ending with US Food and Drug Administration (FDA) approval.Patents last for 20 years. As Copaxone’s patents expire, competitors are launching cheaper generic versions ‒ precisely what Teva has done to competitors’ branded drugs for decades.Teva’s legal efforts to prolong the Copaxone patents have largely been turned down. No equivalent replacement for this blockbuster drug is in sight for Teva, although Copaxone’s 40 mg. version remains profitable.CEO Erez Vigodman replaced Jeremy Levin in January 2014. He has since made some costly mistakes.Writing in the business daily TheMarker, Yoram Gabizon lists what he thinks are the key errors that toppled Teva’s shares. One, he says, is that Vigodman sought in vain to acquire global giant Mylan, violating Teva’s long-standing rule not to engage in hostile takeovers, but only friendly ones.When Teva spent $1.6b. on Mylan shares, Mylan CEO Robert Coury fought back with a “poison pill” (a financial tactic to make shares unattractive) and Teva, to date, has lost $756 million on its Mylan stock.Teva, in July 2015, then bought Actavis Generics for $40b. or 17 times Actavis’s operating profit – a highly inflated price, according to experts, requiring Teva to borrow vast sums (another departure from long-standing Teva practice) and burdening it with a total of $36b. in debt, equal to the current market value of Teva shares.US President Donald Trump’s statement, a veiled threat, on January 31, that “drug prices are astronomical” has settled a huge black cloud over the entire pharma industry, including Teva.Vigodman also led the acquisition of the Mexican company known as Rimsa for $2.3b. This turned out to be a huge mistake, and Teva has sued the sons of the company’s founder, alleging fraud and breach of contract. Teva’s “due diligence” investigation of Rimsa before forking out billions of dollars was apparently not sufficiently diligent. Rimsa supplied wrong information.Vigodman in the past had engineered dramatic turnarounds in his previous two companies, Strauss Group and Makhteshim Agan. But in the end, Vigodman’s costly missteps cost him his job at Teva, which announced on February 6 that Vigodman was resigning. His interim replacement is Yitzhak Peterburg, until now the company’s chairman.Celgene CEO Sol Barer, who had been a Teva director since January 2015, was chosen by the board as its new chairman. Celgene is a global biopharmaceutical company, listed on NASDAQ and headquartered in New Jersey. Before he joined Teva’s board in 2012, Peterburg headed Teva’s innovative R&D, as head of global branded products.Some shareholders think Teva is in the wrong business and that the generic drug business is inappropriate for an Israeli company.TEVA SPECIALIZES in rapidly producing non-brand generic copies of patented drugs the moment the patents expire. The key to this competitive advantage is Teva’s speed and low costs in bringing off-patent drugs to market. But the number of blockbuster, patented drugs whose patents are expiring is falling drastically.Fabled entrepreneur Benny Landa (see “Big results from small things,” September 5, 2016), a digital printing pioneer, is a major Teva shareholder and board member.He was critical of Vigodman, the board, senior management, and their generic drug strategy claiming: “[Teva] mustn’t be the Walmart of the drug market. It can’t operate in the cheap mass sector.”Landa told the business daily Globes, “It’s a misguided return to the comfort zone based on the idea that what worked so well in the past will go on working. Generics is now [about] competition over price – who can produce the most cheaply. Is that Israel’s advantage? Cheap production? That’s not what we are.”BUT THE business of developing patented ethical drugs, too, is hugely risky. It can cost up to $2.5b. to develop such a drug, and can take as long as 15 years. Patents last for 20 years. If a new molecule is patented as soon as it is discovered, that leaves only a short time to capture the profits and cash in on a huge, risky, initial investment. And many such drugs fail to pass the regulatory process and never reach the market.Teva is perforce litigious because courts are second homes in pharma ‒ either to challenge patents or to protect them ‒ with billions of dollars at stake. And it has lost several costly law suits.Teva paid Pfizer $1.6b. in June 2013 to settle a patent-violation suit and $1.2b. to settle a class-action restraint-of-competition suit in May 2015. It also paid $519 million in fines to the US Department of Justice for alleged payment of bribes in three countries, Russia, Ukraine and Mexico; the fine was announced at the end of last year.Several key figures have recently left Teva. Dr. Arie Belldegrun resigned from its board of directors and as vice-chairman of the key Science & Technology Committee, on January 26. On December 6, Sigurdur Olafsson, head of Teva’s generics business and the mastermind of the Actavis acquisition, quit As a management educator at Technion Institute of Management, I was privileged to work with Teva senior management a decade ago and came to know Teva well. I saw how CEO Israel Makov boosted the company’s revenues from $1b. to nearly $10b. in five years, through shrewd acquisitions and the smooth integration of the acquired companies into Teva’s ecosystem. I also visited and studied its remarkable Kfar Saba plant whose productivity and efficiency make it a shining star in Israel’s overall low manufacturing productivity.When Makov quit in 2007 in a dispute with then-chairman Eli Hurvitz, a period of turbulence began that has not yet settled down. Except for the short tenure of CEO Jeremy Levin (May 2012 to October 2013), Teva has since been led by CEOs without pharma experience, nor until recently did a majority of its board members come from pharma. This has shaken investor confidence.Chaim Hurvitz, son of founder and former longtime CEO and chairman the late Eli Hurvitz, remains upbeat, however. The Hurvitz family is still the largest private Teva shareholder.“In a company that is 115 years old, you have to look at things in the right perspective,” Hurvitz told the Times of Israel, on January 26. “There are cycles. Good ones and bad ones, and you don’t measure a company by a six- to nine-month period… [Copaxone] is 21 years old. It is unprecedented in the industry to have a product that maintains such a strong position for such a long time. So for [what was once] a crazy small Petah Tikva company, it is not bad.”The problem is impatient investors and myopic stock markets do judge companies by their quarterly statements, and when they dump their stock on bad news, they can endanger a company’s name, credibility and even its future.So, will Teva survive? Of course. Its middle management is world class. And Teva has a strong “pipeline” of 29 drugs in development of which 21 will be submitted for regulatory approval in the next five years – though none are potential blockbusters, like Copaxone. Teva has a strong focus, with nine of the 29 drugs aimed at migraine and pain, and 10 at neurology and psychiatry. It also remains highly profitable, with gross profit margin exceeding 50 percent. I doubt Teva will be a takeover target, because the generic drug business has for many become a sunset industry, whose best years and high profits are in the past.Israel has a deep and abiding interest in a strong, profitable, healthy, growing and, above all, independent Teva ‒ our global eyes and ears in an increasingly tumultuous world.The writer is senior research fellow at the S. Neaman Institute, Technion and blogs at www.timnovate.wordpress.com