Teva should ditch generics, focus on branded drugs, activist investor says
Entrepreneur Benny Landa calls on new CEO, Kåre Schultz, to sell Teva’s generics business or split company in two
Shoshanna Solomon was The Times of Israel's Startups and Business reporter
Teva Pharmaceutical Industries Ltd., the world’s largest manufacturer of generic drugs, should “wean itself” from its generics business and focus instead on developing specialty medications, activist shareholder and tech entrepreneur Benny Landa said in an interview with The Times of Israel.
“For the long-term health of the company, in my opinion, Teva has to carve out generics and remove it from the focus of Teva’s business,” said the 71-year old entrepreneur and investor who is reportedly estimated to own tens of millions of dollars’-worth of Teva shares.
Landa declined to detail the size of his stake in the Jerusalem-based drugmaker, but said that he holds “enough shares in Teva to have a voice, to get the board’s attention.” He also emphasized that he is not an activist shareholder in the true sense of the word, and that he doesn’t trade in Teva shares but just holds on to them.
“An activist shareholder is someone whose motive is profit. Somebody who wants to restructure the company, change the board, do things in order for the share price to go up. That is not my objective,” he said by phone.
“My purpose is to try to influence the course Teva takes, because for me Teva is Israel…Teva is Israel’s only truly global company, not just because of its size but because it is the only large Israeli company that develops, manufactures and markets globally. So Teva is a symbol of Israel and it is vital that Teva succeed. That is my interest in Teva.”
Landa, a technology entrepreneur who sold his digital printing company Indigo to Hewlett-Packard for $830 million in 2002, led a proxy fight in 2014 in an effort to shake up Teva’s board and get management to listen to the concerns of investors.
He whipped up the support of 37 percent of Teva shareholders, and the effort indirectly led to the board improving corporate governance, cutting down the number of directors and seeking more board members with pharma experience.
Landa’s comments to The Times of Israel came as the pharmaceutical firm, which has seen its shares decline some 65 percent in the past 12 months, announced the appointment of a new CEO, Kåre Schultz, a former chief executive at Denmark’s H. Lundbeck A/S. Teva has also been offloading assets — for some $2.48 billion – to repay massive debt of $35.1 billion as of the end of the second quarter of the year.
The new CEO, Landa said, will have to prioritize setting out a strategy for the company. “The company has lost its way, primarily because it did not have a sensible, clear strategy.”
Teva’s former CEO, Erez Vigodman, stepped down in February, three years after he took his post in an effort to change the company’s fortunes. Vigodman was appointed by Teva because of his reputed ability to turn companies around and spur growth. He replaced the company’s first non-Israeli CEO Jeremy Levin, who was ousted in October 2013 because of differences with the board regarding how to lead the firm.
Levin had spearheaded cost-cutting measures and was pushing the company to develop and acquire more branded drugs. Vigodman felt the right move was to lead Teva back to basics, its generics business. And, while increasing efficiency at the company, he also set out on a shopping spree. Vigodman was the architect behind the $40 billion merger with generics drug maker Actavis Generics, which turned out to be an expensive deal for the company in light of the drop in prices of generics drugs due to higher competition.
Yizhak Peterburg has served as interim CEO in Vigodman’s stead, while Sol Barer was appointed chairman.
Landa said Vigodman’s bet on re-channeling Teva toward generics rather than focusing on branded, or so called specialty, drugs, as proposed by Levin, was “really a mistake.”
“Anybody with eyes in his head can see just by looking at the charts of the past 10 years: the trajectory of the generics drugs business has been in a steady decline in terms of margins and pricing,” he said. “It was clear that generics will end up totally commoditized, and whoever can produce the products at the lowest price wins. That is not Teva. There are Malaysian, Indonesian, Mexican and Indian companies, that all have relatively cheap labor, mass producing generic drugs more competitively than Teva, especially Teva as an Israel-based company.”
Landa says Teva shouldn’t totally abandon generics, because there is a lot of “creativity and innovation” that can be done with generic drugs. But for the most part, he said, “Teva has to refocus on specialty drugs.”
The company already has the “all the pieces in place,” including the “talent, the infrastructure, the pipeline of promising drugs,” he noted.
Focusing on generics will inevitably lead to closures and restructuring at the firm, especially if it continues to be Israel-based. “Mass production of cheap goods is not Israel’s strength. We just don’t do that. Salaries in Israel are too high to produce commodity goods competitively.”
To play the field in both the generics and specialty drugs, as Vidogman tried to do, simply cannot be done, Landa added. “A company has to be focused. The business of generics and specialty are so totally different that you cannot manage to do both with the same management team. You cannot focus on everything. If everything is important, nothing is important. You have to have priorities.”
The massive acquisition of Actavis, and the debt it entailed, meant that Teva “would not have the ability to continue making acquisitions in specialty, which is what the company should have been doing,” he said.
Weaning Teva from generics
To “wean itself from generics,” Landa said, there is no other way but for Teva to either sell its generics business or split the company into two, he said, with each arm specializing in either branded drugs or generics medications.
If the new CEO is to be successful, Landa said, the chairman of the board, Barer, will need to pave the way by “getting rid of the old guard directors, lest they undermine this CEO as they did the last time an ‘outsider,’ a non-Israeli CEO, took charge. Teva survived Jeremy Levin’s sudden ouster because the company was flush with cash and could weather the storm. Today’s Teva could not survive a repeat of that fiasco.”
“Teva’s board is an old boys club that needs refreshing,” he added, with too many directors having served for too many years. “The fact is, this board brought the company to its knees… This CEO still needs sober guidance from a seasoned board and still needs people on this board who understand big pharma.”
Even so, Landa said, the market is now “much more optimistic about Teva” because of its new chairman and CEO. “It certainly won’t be clear sailing ahead, but I think the company is on a much better footing than it was a year ago. “
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