Teva announced last week that its CEO, Jeremy Levin, is to resign with immediate effect. This reportedly follows disagreements with the Teva Board over the implementation of the company’s strategy, as well as a slating from analysts and investors. Employees are also unhappy, after Teva announced a 10% reduction in headcount, triggering strike threats in Israel. On an interim basis, Dr Levin is to be replaced by CFO Eyal Desheh, while a search is carried out for a permanent appointment. In the meantime, Teva will continue to move forward with its current plan of cost-cutting combined with selective acquisitions, mostly of branded products/development projects, and the development of supergenerics (or New Therapeutic Entities – NTEs – as the company calls them).
Back in the 1990s, when Eli Hurvitz was the CEO of Teva, there were four notable things about the company’s Board: a) it was very large, b) It was very Israeli, c) the members were very old, and, d) quite a few of them appeared to be either friends or relatives of Eli Hurvitz (or of each other). This was not actually surprising, because Teva was initially formed by the merger of several family-owned companies and it was those families that still partially populated the Board of the day. Twenty years later, some changes are visible. The Board remains large, rather elderly and very Israeli, but it has professionalised. Most of its members have a background in science and/or the pharmaceutical industry and several of them are ex-Teva managers who have been elevated to the Board. Among these is Chaim Hurvitz, Eli’s son, who has held various roles within Teva and at one point was widely expected to be installed as CEO. But whereas Eli himself was a Board member as well as the CEO, his successor in the role (who turned out to be Israel Makov rather than Chaim) was not given a Board seat. This left Eli, as Chairman, in a very influential position, but meant that none of the CEOs who followed him has had the same cosy relationship with the Board that he had himself. Indeed, the composition of the Board of today makes it less like a group of family friends and more like a bunch of back-seat drivers who can’t agree on where they are trying to go. This impression was given credence on the conference call that Teva held to discuss Dr Levin’s departure, when one analyst mentioned an Israeli TV report saying that the entire Teva management team had written to the Board, asking it to leave them alone to get on with running the company. Several other analysts suggested indirectly that Chairman Dr Philip Frost (who, it should be recalled, was a notable micro-manager when he was running Ivax, frequently bypassing, over-ruling or simply ignoring his reporting managers) might also like to consider stepping down
Of course, in Eli Hurvitz’s day, life was relatively simple. Teva was a much smaller company and a pioneer in the new and booming generic market. Copaxone was either not launched or (even by the end of his tenure) relatively insignificant and Teva’s management was clear that innovative drugs were strictly a sideline to the core business. More generic products in more markets was pretty much all the strategy that was required and a combination of R&D, in-licensing and acquisitions delivered precisely that. Under Israel Makov, Teva carried on with more of the same and the bandwagon trundled on through the Shlomo Yanai era. In retrospect, the acquisition of ratiopharm in 2010 marked the end of the road. With ratiopharm, Teva had effectively become as big as it was going to get in generics in the western world, with a dominant position in almost every market. But in the meantime, the environment in which the company was operating had changed dramatically. Pipeline products were no longer so easy to find and in any case, Teva’s quest for size had somehow distracted it from developing many of the smaller but harder-to-make products, with the result that it was relying on the boom and bust of blockbuster 180-day exclusivities to drive US sales while its rivals were coming out with more defensible products that had much longer lifetimes. At the same time, Teva was battling lower prices, higher quality and pharmacovigilance requirements and intense competition. In addition, the company had developed an unhealthy dependence on Copaxone (together with the magic of acquisition accounting) for its profits growth. With lifecycle management efforts for Copaxone having failed and patent expiry looming, and in the absence of any obvious large generic targets to buy, Teva was in trouble.
With the earliest realistic date for generic competition to Copaxone being in mid-2014, Teva has – or had – two options to deal with it. One was just to wait it out and focus on positioning the company for steady growth thereafter. The other was to try to buy something big enough to replace Copaxone. Shlomo Yanai clearly favoured the second option, but the purchase of Cephalon, a company with a weak pipeline that was facing its own patent issues, proved too much for the Board. All the more so given that by this time Teva was really struggling to integrate all the companies that it had bought previously and was starting to suffer from supply chain problems, not to mention quality issues. Shlomo got the push and the Board decided to bring in someone whose experience was in innovative pharma, perhaps in belated recognition that Teva was falling behind in the development of differentiated products. Hence the appointment of Jeremy Levin.
Unfortunately for Dr Levin, he was faced with an investor base (and possibly also a Board) that was looking for a miracle as much as a strategy. They wanted him to come up with a plan that would not only give Teva a clear long-term growth path but would also take away the pain and uncertainty of the genericisation of Copaxone. This was asking a lot and inevitably, once he actually articulated his vision at his first Investor Day, there was severe disappointment. Dr Levin and Teva’s Board appear to have been in complete agreement that the time for big deals was past and that the focus should be on streamlining operations and developing products with some IP around them, but this was not what shareholders wanted to hear. Not, we presume, that shareholders are against the idea of Teva becoming either more efficient or more brand-focused. It’s just that they want results now rather than later and they are really not happy with the idea of Teva’s earnings falling off a cliff at some unknown point next year and not recovering before 2016 at the earliest.
So while Teva’s Board may say – and even believe – that Dr Levin’s defenestration has nothing to do with strategy, we disagree. It has everything to do with strategy. If Teva’s share price had been outperforming its peers, it is unlikely that the company would now be searching for a new CEO. But no amount of talk about the billion-dollar potential of Teva’s NTEs is going to compensate for a lack of profits today (and an even greater lack tomorrow). So, should Dr Levin’s as-yet unknown successor happen to be reading this, here’s our suggestion of how to keep the shareholders happy while still delivering on the better parts of Jeremy’s plan at the same time.
– Recognise that generics are not dead, it is just that the game has changed. Teva remains a global market leader, albeit with a footprint that is disproportionately weighted in the US and Europe, and it can use this fact (and its balance sheet) to its advantage;
– Clearly separate brands and generics, but not in the way that Teva does at present, with everything that has any kind of promotional need being allocated to brands and the pure commodity business being left in generics. The local country managers need access to all the possible tools at their disposal in order to maximise their sales, but products with real IP (Copaxone, Azilect etc..) need to be managed differently;
– Plug the current gaps in the development pipeline. Teva has allowed Sandoz, Mylan and Actavis to move far ahead of it in developing harder to make products, other than in the respiratory area. Teva needs to strike some deals (in-licensing would be fine) that enable it to catch up;
– Most crucially, reinstate a proper biosimilar development programme. Buying Hospira might be the fastest route – at least it doesn’t have too much manufacturing infrastructure. Almost all Teva’s current biosimilars come from ratiopharm, as Teva itself has so far been almost totally unsuccessful in developing any biosimilars of its own. Moreover, the pipeline is pretty much bare as Dr Levin has switched the focus to biobetters, stating that he doesn’t believe that biosimilars can be developed safely for chronic indications. While this may be logically consistent with his conviction that a generic Copaxone should never be allowed on the market without full clinical trials, it is nonsense. The reality is that the first biosimilar mAb (with a chronic indication in rheumatoid arthritis) has already been approved in the EU and expectations are that there will be substitutable generic Copaxone on the market in the US within a year, without full scale trials. We have argued previously that biosimilars will be driven more by economic need than by science and the numbers make it clear that biologics dominate both pharma sales today and patent-off opportunities for the foreseeable future. If Teva is going to remain a dominant force in generics then it has to have a proper biosimilars programme and since it is too late to start from scratch, it needs to buy or in-license whatever it can;
– Drive growth outside the US and Europe, in parts of the world where Teva lacks a presence and hence still has plenty of room for growth. While this is easier said than done, the ideal route involves Teva buying the established product division of one of the big pharma companies. GSK would be a good candidate, as it is just creating a new division to house its smaller, off-patent brands. A deal such as this would solve many of Teva’s problems at one stoke, since it would a) give it critical mass in a number of Asian markets (and hence a base from which to sell its NTEs globally), b) allow it to compete in the branded arena in emerging markets rather than directly in generics, which tend to be both competitive and – frequently – low priced, c) avoid the need to make piecemeal acquisitions at high valuations, and, d) (if the deal timing is right) give it a big enough profit boost to enable earnings to continue to rise despite Copaxone having generic competition. All the more so given that we don’t believe that the launch of Copaxone generics will be devastating anyway, so long as Teva cuts its price to compete head on. Copaxone is effectively a retail product and users are likely to be loyal to the brand so long as their health plan allows them to continue taking it. It is also hugely profitable, so Teva should be able to weather lower prices rather better than its competitors. But as we have said before, it is not the reality of the situation that matters, it is the perception and what investors want most of all is certainty.
Or alternatively, the Board could simply hold off appointing anyone until Copaxone generics are already on the market, which may well happen anyway, given the time that it is likely to take to find someone suitable. That way, the new incumbent can start afresh with a re-based business and one fewer problem to deal with than the unfortunate Dr Levin.