New York court dismisses most of Teva claims against Mexican drugmakers

Judge rules against Israeli pharma firm in its suit over alleged fraud by Espinosa brothers; Teva posts disappointing 2Q results

Shoshanna Solomon is The Times of Israel's Startups and Business reporter

The Jerusalem office of the Israeli drug company Teva Pharmaceuticals (Yonatan Sindel/Flash90)
The Jerusalem office of the Israeli drug company Teva Pharmaceuticals (Yonatan Sindel/Flash90)

New York State’s top court on Wednesday dismissed almost in its entirety the suit of Teva Pharmaceutical Industries Ltd. against the former owners of a Mexican drug manufacturer that the Israeli firm had bought for $2.3 billion.

The Supreme Court of the State of New York rejected the claims of two Teva subsidiaries against Fernando and Leopoldo Espinosa Abdala (the Espinosas) and PPTM International S.a.r.l. (PPTM), the former owners of drugmaker Representaciones e Investigaciones Medicas SA, known as Rimsa, which Teva acquired in 2015.

Specifically, the court dismissed Teva’s claim that the Espinosas and PPTM defrauded it; it dismissed Teva’s claim that PPTM breached the sale agreement; it dismissed Teva’s request for rescission, or unmaking, of the contract which would result in Rimsa’s shares returning to the Espinosa brothers and money returning to Teva; it also dismissed Teva’s request for indemnification and a declaratory judgment to help Teva reclaim all of its damages.

The court did not dismiss Teva’s claim that the Espinosas breached the sale agreement.

Erez Vigodman, former CEO of Teva Pharmaceutical Industries (Miriam Alster/FLASH90)
Erez Vigodman, former CEO of Teva Pharmaceutical Industries (Miriam Alster/FLASH90)

Teva said in a statement on Thursday: “The decision does not eliminate all of our claims. Our breach of contract claim against the Espinosas, arising out of their misrepresentations, will continue to proceed with the benefit of discovery.”

“Litigation regarding this limited issue will move forward and the Espinosas will continue to vigorously challenge Teva’s claim that they breached the sale agreement,” a spokesman for the family said in an email.

Jerusalem-based Teva has been engaged in a legal battle of nearly a year against the Espinosas, from whom they bought Rimsa.

In September 2016, the Espinosas filed suit in a New York State court against Teva’s subsidiary Lemery S.A, saying Teva was suffering from “a classic case of buyers’ remorse” and was therefore alleging that the Espinosa brothers fraudulently induced it to purchase the Rimsa companies. Teva was looking to get “what is in effect a retroactive discount” on the deal, the court document says.

In its countersuit against the Espinosa brothers, also filed in September, Teva, the world’s largest maker of generic drugs, alleged that Rimsa, with the knowledge of the Espinosas, was engaged in a years-long scheme to sell defective and unlawful products and to conceal those violations from Mexican regulators.

Teva’s suit claimed that the Espinoza brothers misrepresented facts during the due diligence process; said there was a breach of the representations and warranties in the agreements; and requested indemnification from the losses incurred due to the breaches of the representations and warranties. The firm also sought a declaratory judgment to help Teva recover all of its damages.

The Espinosa brothers denied all of the allegations.

The New York court ruling released on Wednesday implied that Teva’s due diligence process may have been lacking.

“Teva is a sophisticated entity. If it had wanted to include a carve-out that it could rely on the materials presented to it, or information included in the due diligence, or a representation that the material it viewed during due diligence was correct, it could have done so. It did not,” wrote Justice Peter Sherwood in his decision, dated July 31 and released on Wednesday.

“Teva provides no reason that it could not have discovered the truth. It only states that it did not discover the truth. Plaintiffs have failed to allege facts to support their argument that the merger agreement cannot be enforced. Accordingly, the first cause of action alleging fraud shall be dismissed,” the judge wrote.

The decision comes as a blow to the Israeli drugmaker, which is still on the hunt for a new chief executive officer after Erez Vigodman stepped down in February, three years after he took his post in an effort to turn around the fortunes of the company. Vigodman was the architect of the Rimsa deal, and also spearheaded the acquisition of drug company Actavis Generics for $40 billion.

Teva’s shares on the New York Stock Exchange have declined 39 percent in the past 12 months. Teva shares are also traded in Tel Aviv.

On Thursday, Teva reported disappointing second quarter results, due to the performance of its US generics drugs business and the continued deterioration in Venezuela. These factors also led to a lowering of Teva’s earnings outlook for the remainder of the year.

“All of us at Teva understand the frustration and disappointment of our shareholders in light of these results,” Yitzhak Peterburg, interim president and CEO of Teva, said in a statement. “We will continue to take action to aggressively confront our challenges.”

Revenues in the second quarter rose 13 percent to $5.7 billion, compared to the same quarter a year earlier, and the firm posted a net loss of $6 billion, compared to a net income of $188 million in the same period a year earlier.

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