The day after Jeremy Levin is the day Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) wakes up to greater uncertainty and chaos than it has ever experienced. The company, whose strength when it started out lay in a degree of order and organization yet unknown in the Israeli market, is now showing the world what confusion is.
Investors in the company, why tried their best to feel comfortable with the detailed and orderly plan that Levin presented, even if they did not understand precisely how it would contribute to the company, now find themselves without a plan and without a leader.
The reality at Teva today, as in fact it has been for several years, is as follows: Teva is a generics company that has the market pricing, management style, and costs structure of an innovative company. This is no longer the lean, modest company that Eli Hurvitz ran in the 1980s.
The question of the CEO is bound up with the question of the future direction: whether Teva should be attempting to become an thoroughgoing innovative company an ambitious project with small chances of success; or whether it should wind back and scale down to the dimensions of a generics company, and try to survive as such in a market that has become tougher and more competitive.
Shlomo Yanai, the first CEO who tried to deal head-on with the day after Copaxone (Teva's blockbuster MS treatment), decided that Teva should buy innovative capabilities from outside the company. But the acquisitions he carried out did not lead Teva where he intended, and used up the cash it had available for making such deals.
Jeremy Levin was brought in to perform the same miracle. At Bristol-Myers Squibb he had been responsible for a series of acquisitions of innovative companies that boosted the company's standing in that field at a reasonably low price.
But the direction that Levin chose was actually that of downsizing, cost savings, and lowering expectations, without promising "the next Copaxone". He argued that the company's strength lay in its generics capabilities, and that it should focus on semi-generic, semi-innovative products (NTE), that in his view were more appropriate for the hybrid company that Teva had become. The market, however, remained unconvinced that such products could really distinguish Teva from a regular generics company, and Levin was not given the opportunity to test the thesis in the real world.
All the same, this question of identity - what sort of company Teva wants to be - is the key to most of the decisions that it faces.
Who will be the next CEO?
In the press and media, Levin's successor has already been chosen: Erez Vigodman, currently CEO of Makhteshim Agan Industries Ltd., and a director of Teva.
Vigodman said on Thursday that Teva had not approached him, Makhteshim Agan stated that the matter had not arisen for discussion, and it would not appear that Vigodman has any reason to leave Makhteshim Agan at present. However, according to sources close to him, the Teva post is "an old dream" of his, mainly because of Eli Hurvitz, who was always an inspiration to him. Shlomo Yanai also came from Makhteshim Agan, and that is no coincidence. Fertilizer companies and pharmaceuticals companies have much in common. Both deal with sophisticated chemicals, and both operate in highly regulated environments. At the same time, there are also many differences in the kind of customer, for example. Vigodman also has experience in the food industry, which is similar in its marketing methods to the over-the-counter drugs business.
But if Teva still clings to the dream of being an innovative drugs company, how about a CEO who understands that business? If that is the aim, then Teva needs a CEO with a resumé like that of Levin, if not Levin himself. It needs a CEO who knows how to spot acquisition opportunities in innovatives. It does also need a CEO who will respect its Israeli heritage (Levin said he did, but his behavior sent a different message), but he needn't necessarily be Israeli.
The trouble is that, after the experience with Levin, it will be hard to bring in a CEO with his kind of background. Other respected managers in the pharmaceuticals industry (and before his encounter with Teva, Levin was very highly respected) might not be keen to tangle with the fickle Israeli company.
The appointment of someone like Vigodman would appease those who believe that Teva should be Israeli in character. Vigodman is a person with experience of being number one in an international company, which Levin lacked. Vigodman also knows Teva well. It only remains to hope that, if he is appointed, Teva will not pay too high a price.
Will the current strategy continue?
In the conference call following Levin's ouster, in which Levin did not participate, the board and acting CEO Eyal Desheh declared that they would follow the strategic plan that Levin had drawn up. Teva chairman Phillip Frost said that the dispute was over implementation of the plan, and not over the plan itself. He claimed that it was a matter of disagreement over "nuances", such as how layoffs would be carried out, and not over the company's strategic direction.
I venture to say that the problem was not Levin's style or disagreement over the form that layoffs would take or how Israeli the company should be, but the continuing fall in its share price - 11% from the date of Levin's appointment to today, although in fairness it should be mentioned that 6% of the fall was caused by Levin's dismissal. The board saw the decline as reflecting the market's lack of faith in Levin's strategic plan and in the man himself. The board approved Levin's strategy and signed off on it, and since then the strategy has still not been given an opportunity to succeed or fail. Had the market signaled acceptance of the new strategy, the board would probably have allowed it to proceed to the end.
So what happens now? Levin's strategy is almost impossible to implement without the man himself. It is the product of his mind and of the minds of his closest advisers. As mentioned, it has not won the market's faith. So, despite what was said in the conference call, "Project Spring", as it is called, will probably not proceed as planned.
Jeremy Levin scorched a great deal of what preceded him. He fired managers, closed internal development projects, scrubbed collaborations with start-up companies on potential new products, and narrowed the company's focus. So it's impossible to put the clock back. Teva will now have to construct a new strategic plan.
Will Frost stay?
What has been happening with relationships on the board of directors has given rise to the question whether chairman Phillip Frost will remain. On the face of it, if Frost is behind Levin's departure, his stature should strengthen in the wake of it, but this is not certain.
First of all, there are those who argue that Frost himself is not interested in Teva as much as he used to be. Others say that the board will complain to Frost that it was he who brought Levin in in the first place, and that his stature will thereby be damaged. There have been tensions on the board for some time, and Frost, together with Levin until now, has been considered part of the American faction, which is now weakened.
However, replacing Frost now would cause even greater confusion at the company, and that is what has kept other directors interested in the job quiet up to now. So if Frost does go, it will probably not be in another dramatic ouster, but a gradual fading out.
Could Teva be sold?
One option for Teva's future is that it could be stabilized and sold to another company. The question is, to which company? Most of the innovative companies interested in having a generics division already have one. Anyone seeking just generic activity has pure generics options that are cheaper than Teva (which, as mentioned, is priced as an innovative company). It could be that Teva will be broken up, with each business being sold to a different buyer.
Any such scenario would be bad news for the Israeli economy, despite the tax breaks that Teva receives.
Time and possibilities remain
The bottom line is that, even if Teva sinks, it will take a very long time. Copaxone is still going strong, and has several years to go, and it is not clear how quickly it can be replaced by competing products. The company has generic products, semi-generics, and innovative products that generate large revenue and are very profitable. The problems at Teva are by no means a sign that the company is 'finished' and should be jettisoned immediately. Let's not forget that we are talking about a company that posts quarterly revenue of $5.1 billion and a profit of $1.1 billion, and will not decline from that level at least for a year or two.
Published by Globes [online], Israel business news - www.globes-online.com - on November 3, 2013
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