The New Year has arrived with a bang, as Teva put out a press release on Jan 1st revealing that its CEO, Shlomo Yanai, is stepping down in May, to be replaced by Dr Jeremy Levin, a former executive with Bristol-Myers Squibb. Given that Mr Yanai had only been in his position for five years this comes as a surprise, even if there had been prior rumblings of investor discontent. Local Israeli press reports suggest that he may be considering a move into politics, but also highlight the poor performance of Teva’s share price (down 22%) during 2011 and the fact that the company, despite the major acquisitions made in recent years, still has nothing in its pipeline that can replace its leading drug, Copaxone, which is expected to face generic competition in 2014.
In the UK, there is an aphorism: ‘from clogs to clogs in three generations’, summarising the typical trajectory of a family company, whereby the first generation founds it, the second builds it up and the third spends all the money. Teva is not a family company, but it has some of the characteristics of one, and if we consider Eli Hurvitz and Israel Makov as its founders and Shlomo Yanai as the builder, this leaves Jeremy Levin in an interesting position. In general, the track record of big pharma execs running generic companies has been poor, mostly because the characteristics needed to succeed in the two industries are completely different but partly because, deep down, most people seeped in the culture of big pharma companies think that generics are cheap and nasty and hence their heart isn’t really in it. At the moment, Teva is primarily a generics company, albeit with a very profitable sideline in selling original drugs. However, its recently-completed purchase of Cephalon swings the balance more towards the specialty pharma side of the business. This is particularly true in R&D, since Cephalon owns a large pipeline of compounds going through clinical trials, whereas Teva has historically held its costs down by only really working on one original drug at a time. It could therefore be argued that this is the right moment to bring in someone with a pharma background, who can weed out the less promising development candidates and just focus on those that could really make a difference. Dr Levin is also likely to be more comfortable with the cost structure of Cephalon, since he hasn’t come out of the lean and mean environment of the generics industry, which could help with integrating Cephalon into Teva.
Even so, it is never easy running an effective generics operation alongside an innovative one. Teva has managed it by allowing the generics part to dominate: so far, there isn’t a truly successful model of a company that has done it the other way round. Novartis/Sandoz and sanofi/Zentiva (which has just supplied Teva’s new European head, Rob Koremans) are the obvious candidates, but the disparate elements don’t sit easily together in either of them. The risks to Teva of absorbing a big pharma mindset are therefore obvious – it could end up losing some of the ruthlessness and aggression has served it so well in the past, thus compromising its ability to compete in generics, while simultaneously investing increasing amounts of money into developing and marketing innovative products that then fail to deliver in the market place. But on the other hand, Teva is already finding it increasingly difficult to grow its generics business, so its only real hope of delivering better returns to investors is to increase its exposure to branded products, despite the risks. Dr Levin appears to be both highly experienced and extremely well qualified, so he can hardly fail to spot the challenges inherent in his new job. At his first press conference this morning he said that he does not see a strict division between branded and generic drugs, which is probably a fair reflection of the direction that Teva is going to have to travel in, even if it also rather reinforces the concern that he doesn’t actually understand generics – yet.
Posted on 2nd January 2012