Teva: The Wrong Prescription

By Dror Halavy

In many ways, Teva was the biggest and best thing ever to happen to Israeli business — the country’s first multibillion-dollar company, the biggest made-in-Israel company to operate successfully for decades in the world, and a homegrown giant in a mature but still-growing industry. Plus, it was a company that did good by making drugs to help sick people. But like so many good things, Teva’s good fortune was too good to last. The company has been the victim, according to many economic commentators, of poor planning, overextension, and a hubris that is often the lot of organizations or individuals who feel they are “too big to fail.”

In Teva’s case, according to economists who have spoken out in Israeli media in recent days, it was the company’s dependence on the profits of a single drug — Copaxone — that led it down the “garden path” of unwieldy acquisitions that left the company drowning in debt. Copaxone alone netted Teva $20 billion in the 20 years since it was approved by the FDA in 1997 — straight through until October of this year, when the FDA approved a generic version of the multiple sclerosis drug, after Teva’s patents finally ran out earlier this year. There are now several competing generic versions of Copaxone available, and already they have begun eating into Teva’s share of the market.

Now, facing debt and a stock in freefall, Teva management, now led by CEO Kare Schulz — the first non-Jewish CEO in the company’s history (but not the first non-Israeli) announced last week an ambitious revitalization program that will see the layoffs of as many as 14,000 of the company’s nearly 60,000 employees worldwide, 1,700 of them in Israel. But many economists believe that this is just the beginning. Without another Copaxone up its sleeve, Teva is fated to fall from prominence as the largest generic drug company in the world, and will eventually return to what it was before the Copaxone era — a small generics firm that found opportunities with cheaper versions of drugs that had lost their patents.

Teva, as we know it, was organized in 1980 by businessman Eli Hurvitz, who led and nursed the company until his death in 2011. Hurvitz was CEO until 2002 (he remained Chairman of the Board of Directors for Teva until he passed away), and it was under his watch that Copaxone was developed, and the pattern for Teva’s rise as a huge pharmaceutical firm was set.

Copaxone, the brand name for Teva’s version of Glatiramer acetate (also known as Copolymer 1) is considered the premier drug to treat multiple sclerosis, approved by the FDA for reducing the frequency of relapses. It is not approved for reducing the progression of the disability, although some studies indicate it does so. Glatiramer acetate was first discovered by a research team at the Weizmann Institute, and approved for marketing in the U.S. in 1997 by Teva.

Until Copaxone, Teva had concentrated on generic versions of drugs whose patents had expired, or had otherwise become generics themselves. With Copaxone, Teva became a company with a valuable asset that earned it the kind of money of large pharmaceutical firms abroad, which had the billions to spend on researching and patenting new drugs. But Hurwitz did not go that route; in numerous interviews, he said that Teva was not in that “league.” Instead, he concentrated on acquiring new companies to expand Teva’s portfolio of drugs, especially generic drugs. Between 1980 and 2015, Teva made 15 acquisitions, bringing into the fold companies like Cephalon, Ratiopharm, Barr Pharmaceuticals, and many others.

Despite its growing ties to businesses abroad, Teva remained a strictly Israeli company. Management was for the most part Israeli (before Schultz, the only non-Israeli to lead the firm was American Jeremy Levin, for about a year and a half). But the company’s innate Zionism, and a desire to remain in Israel, didn’t stop management from negotiating with the government for tax breaks, development grants, and other benefits. The government offered, and Teva took, in exchange building production facilities and development centers in far-flung places, like Kiryat Shemona and Be’er Sheva, where local officials were thrilled to have a firm of the caliber of Teva open up shop, bringing jobs, prestige, and optimism to areas that needed a boost.

Next to the development of another blockbuster drug, expanding the company’s portfolio by acquiring generic drugmakers was the best growth engine that Teva could conceive of. And it worked; investors rallied to the company each time it made a new acquisition, with the company’s stock price in 2015 reflecting a valuation of $60 billion (it’s worth less than half of that now). According to Globes, in fact, one reason Jeremy Levin stepped down as CEO was the tension between him and the Board of Directors, which wanted a more aggressive acquisition campaign than Levin thought prudent.

The board got what it wanted — in spades — when Levin was replaced in January 2014 by Erez Vigodman, a veteran Israeli businessman who had run several companies, including Makhteshim Agan and Strauss Group. It was during his aegis that Teva made its biggest buy ever — for Actavis Generics, the generic drug unit of U.S. firm Allergan. That deal cost Teva $40 billion — a high price for a firm with a $60 billion valuation altogether. Management realized that it was taking a risk — but surmised, according to economists quoted by Globes, that the deal was worthwhile because it would greatly expand Teva’s generic offerings, enabling it to compete more effectively in a post-Copaxone era.

But generic drug prices have been falling (in part because pharmacy chains like Walgreens and CVS are negotiating tougher deals with generic drugmakers). As a result, the company announced a huge drop in second-quarter earnings in August, sending the stock’s price shooting downward — for losses that it has yet to recover from, with share prices falling to what they were nearly two decades ago. And with Copaxone profits set to diminish, the crutch that the company was able to hold on to in order to replenish its war chest can no longer be relied upon.

Hence, the revitalization plan, and the mass layoffs. While the announcement of the layoffs in Israel has sparked angry political reaction and at least one nationwide sympathy strike (which took place Sunday), investors see the company as finally moving in a positive direction (shares on the NYSE rose from below $15 last Wednesday, before the plan was announced, to $18.61 by Friday, after the announcement). Analysts believe that the company may be able to make the turnaround Schultz and management are hoping to engineer. But in Israel, the sentiment among economists quoted in the financial press is that however Teva emerges in the future, it won’t be the Teva Israelis knew for decades, the one they could point their finger at and marvel at how a homegrown company could compete against pharmaceutical’s big boys — and win.