A year ago, on March 1, 2007, Shlomo Yanai's house in Raanana was inundated with bouquets of flowers. That's what happens when you become the skipper of the Israeli aircraft carrier Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA; TASE: TEVA), one the world's top 20 pharmaceutical companies. One of the bouquets also had a gift attached to it - a cylinder with an authentic conductor's baton inside. It was a gift from Teva chairman Eli Hurvitz. "He said, 'Please take it, I'm not actively involved in managing the company," says Yanai in an interview with "Globes." "As for me, I don't believe I'll pass it on to my replacement; I'll take it with me."
Globes: And when will that happen? When will your replacement come along?
Yanai: "I don't know. I've only just started at Teva. Do you already expect me to be thinking about the end?"
The first year following a changeover in CEO is a crucial period in a company's life, certainly one the size of Teva. One year is no indication of the future, but Yanai has ended 2007 with a pretty good score in terms of meeting targets, increasing revenue, expanding into new regions, increasing market share, as well as stock performance. The stock price has soared by more than 40% since Yanai took over. What did he personally contribute to this ? It's hard to tell, and perhaps it doesn't even matter.
Yanai, for his part, weighs up all the figures and declares with satisfaction that the past year was "very good." Although he does not say so explicitly, it is as if he is proving wrong all those who foresaw a dire future for the company when he took over as CEO. He can now show them that he did not "ruin the company", he didn't "bring Teva down," nor did he "cause it to lose it competitive edge in the crowded generics market," or any of the other scenarios the pessimists had predicted.
The cherry on the cake came last month, when he also demonstrated his abilities as a strategist, abilities which Hurvitz frequently stressed as an advantage. And so, at a packed analysts conference in New York, he presented a detailed five-year plan, with sales and profit targets, and provided some color about the development of the pharmaceuticals market.
One issue overshadowed all the impressive figures - Teva's investment in a financial instrument called Auction Rate Securities (a debt instrument such as corporate or municipal bonds that have a long-term nominal maturity, but are refinanced as often as every week). Aside from this, Teva wore long-range lenses, with talk about a sales target of $20 billion in 2012, meaning double the current level, with profit reaching 20% of turnover - meaning $4 billion. All this is just from organic growth, which will be supported by complementary acquisitions amounting to tens of millions, or at the most, hundreds of millions of dollars. If Teva decides to make large acquisitions, the forecasts will be revised upward.
These results are far superior to those of any other generic company. "It's hard to compare us with other companies," says Yanai. "since in some respects, there's not even anyone to compare us with. There is no company like Teva, nor will there be another company on the planet that will produce drugs in the quantities we will in a few years time, or that it will have a generic R&D operation the size of Teva's."
Burden of proof
Yanai landed the position of Teva CEO after serving as CEO of agrochemical company MA Industries (Makhteshim Agan) (TASE: MAIN), which he joined in 2003. Before that he was a major general in the IDF, serving first as OC Southern Command, and later as head of the IDF Planning Branch. Makhteshim, which produces chemicals for crop protection, was having a tough year when Yanai left it, and this fact exacerbated fears about how Teva's future would look with him holding Hurvitz's baton.
Had Teva given the matter some thought - or at least thought along the right lines - it would have carried out the changeover between Yanai and his predecessor as CEO and president Israel Makov more smoothly, as befitting a company worth tens of billions of dollars - currently $39 billion. It might, perhaps, have prepared the market for the switch, and explained to the company's key investors why Yanai was the right choice. But the entire process was very messy - and came across as something they did sneakily and were not proud of at all.
Yanai is unwilling to talk about Makov's departure, and in any case this is all now water under the bridge. The question now is whether Yanai too has taken into account that the day might come when the Teva board will carry out a management shakeup and show him the door as well. Apparently, he has, and he feels entirely at ease about it. "A CEO of a public company is subject to a highly measurable system of results and achievements. He is subject to constant scrutiny," he says. "There are no breaks. Every quarter I am assessed by the board for what I have done, and by shareholders, managers, and staff as well."
If your performance falters, will it surprise you if you are asked to leave?
"No. I certainly won't be happy about it, but that is the duty of any board."
And is that what actually happened with Makov? A departure because of poor performance?
"It would not be right for me to put myself in his shoes and say things instead of him. It is inappropriate."
How are relations between you today? Do you still talk and consult each other?
"Yes, we're friends, we meet. I only got to know Israel in the trying circumstances of the changeover, but his attitude was very businesslike and correct. We continue to exchange views on all kinds of matters."
One of the fears that surfaced among investors as the result of the process was that Hurvitz, who served as CEO for 26 years, still retained executive powers, that he still pulled the strings as CEO, rather than as en executive chairman. Yanai denies this vigorously - as far as he is concerned, it's a complete myth. "Where did people get that from?" he muses out loud. "Does anyone have information that the board or Eli himself don't have? There's always speculation, commentary, and analysis, some of which reflects objective reality, while the rest are a figment of the beholder's imagination.
"Eli makes a point of maintaining this separation. He is involved in Teva, because the board is very active and meets once a month, and I myself update him regularly. But I can say, categorically, that Eli does not interfere in the day-to-day management of the company, even if he is informed and up to date with developments."
Yanai is not bothered by the talk at Makhteshim that he is a soloist, that he takes decisions on his own, that he has no time for anyone else, and that he wants to do things his way only. "I haven't heard all this," he claims, when we reel off the superlatives used about him in the past. "You undoubtedly heard it in the gossip rooms. I, on the other hand, heard good things about my time at Makteshim from the people who are the company's owners and who bear responsibility as board members. Speaking generally, I left behind a good company at Makhteshim, and I still think of it as such."
Yanai also presented a strategic plan at Makhteshim, a year after taking up his post, just like at Teva. This, apparently, is his forte. "I implemented it in the three years that followed," he says. "Despite all the criticism you mentioned, the company doubled in size, and people tend to forget this. The year in which I left was one single year in the evolution of a volatile industry, and the truth is that the agricultural industry is now thriving exactly as the forecasts said it would then. I don't follow events at Makhteshim now since I am 120% involved with Teva, and also for the prosaic reason that I don't even have the time for it."
Yanai had a lot of studying to do last year and has more to come. After all, what d Makhteshim and drugs have in common? Almost nothing. He had to learn everything. "The main area that I had to study and bring myself up to speed on was pharmaceuticals. I read materials, I talked to people both inside the company and elsewhere, and I visited all Teva's sites. I was an unusual student. I sat on my own with sometimes as many 20 lecturers - internal, and external from firms such as McKinsey. Naturally, in addition to all this, I had countless meetings with Eli, Israel, and all the team here, who rallied round to help."
So from February, the company has a strategic plan and targets. "It makes things easier for the employees," says Yanai. "We have 28,000 staff across the entire planet, and it is important that everyone knows which way this ship is headed."
Focusing on the capital market
Teva is the people's share. That, at least, is how it is commonly described. It has made an impressive climb over the years, more than 8,000% in total since 1990, so $10,000 invested then could be worth $825,000 today. Yet despite this, Yanai still does not have a rapport with investors. He leaves the work with the capital market and investor relations to Teva's CFO, Dan Suesskind, and the company's managers in the US. He himself has remained, to large extent, unexposed so far. "Internal company matters were at the top of my agenda this year. There were complicated launches, and also attention focused on the acquisition of the Merck generics division, which ultimately didn't go through," says Yanai. "But the capital market is an inseparable part of a CEO's duty, certainly at Teva. I will expand my contacts this year, since essentially, my shareholders are also my bosses."
People often talk about the secret of Teva's success. Have you, as someone who came from the outside, managed to crack it?
"Maybe. It's a combination of several things. Firstly, Teva is outstanding in that it has a long-term strategy, in the real sense of the word, and not in the way it is bandied about all the time. The second thing is that it has a practical attitude. This does not mean there's no internal criticism. There certainly is. Go out into the yard and take a look, there's no shortage of gossip in Teva either, but everything is businesslike. The third thing is that there are some fantastic people here, and the fourth thing is modesty. We're not ascetics and we haven't made an ideology out of it. We don't get up in the morning and pour a bit of sand on ourselves to make us feel humble, but look around - we don't have swank offices, the modesty impacts on all our decision making. We have not let ourselves become dazzled, and the sense of pride is in the right place."
The coming year, 2008, will be an extremely challenging for an additional reason. Yanai will part company with two of Teva's top managers - Suesskind, who is due to retire after 32 years of service, and George Barrett, who was a candidate for the post of CEO while the company was looking for a replacement for Makov, and served as Yanai's unofficial no. 2 (or official, depends whom you ask). "The departures are unrelated," says Yanai, "I am grateful to George for being with me over the past year. It helped me a lot."
It was claimed that Barrett was ruled out as a CEO because he didn't want to move to Israel.
"Even if that was a factor, I'm not sure that it was the sole reason. Ultimately, they chose me, not him, and he decided to move forward with another company. There is a constant movement of executives, and when a new CEO comes in, more notice is taken of it. There are those who were aiming to become CEOs, and then leave the moment someone else gets the job, and there some who have other reasons. I have to say that all these changeovers get a lot more attention here than they do in the US. I was never asked these questions there."
If you wanted to move up, there isn't anywhere else to move to here. Teva is the largest company in Israel.
"I don't think about it. At my age, I don't think I can expect to have another career beyond Teva. After I retire, I will probably spend more time at home in my garden and with my grandchildren. I might even do a bit of painting."
Yanai is married to Ahuva (56), who is CEO of Matan -Your Way to Give, an organization founded by Shari Arison, which advises corporations, on social responsibility. Their eldest son Rafi (34) is a software engineer who works as R&D team leader at Zend Technologies Ltd.. Their daughter Michal (32) is also the mother of their two grandchildren Shira and Aya. Their youngest child is Ariel (22), who was recently discharged from active military service in the IDF Tank Corps, "and as we speak, is making his way from Costa Rica to Nicaragua," says Yanai proudly. He has lived in Raanana since 1972, but is due to move to Moshav Ramat Raziel in the Judean Hills, after he recently bought a farm there.
Teva beats other generic companies for both the number of prescriptions issued and for its generic drugs backlog, which totals $100 billion in terms of brand product sales. And what are its challenges for the coming years? "First, to reach the volume of sales we set ourselves. Second, to put into effect all the launches and sales resulting from our products. To develop them, reach the market shares we've set ourseleves, and do this in a highly competitive environment. So this is a daily challenge, not just a yearly one. A further challenge will be to lay the foundations that will make this growth possible, meaning the support for our growth engines," says Yanai.
At present, the generic part of Teva's activity is larger than the innovation, the development of ethical drugs, one of these growth engines. "Generics is our core business and will continue to be in the coming years," says Yanai. "We see it as our field of expertise, and it will continue to be the hub of our activity. Alongside it we have an interesting innovation business which is developing, and we have a lot of hopes and expectations for it." Teva has said in the past, that from the end of the decade, it will launch at least one innovative drug every year.
By the end of the decade, Teva will have grown yet another arm - biogenerics, which is, in effect, a hybrid of generics and biology. "It's the next thing in pharmaceuticals," says Yanai. "Drugs based on synthetic-organic chemistry are reaching the end of the road, and we can see this by the falling number of new drugs receiving approval every year. On the other hand, biology, or drugs based on live organisms, are growing at a faster rate. The current debate on this issue is complex. The question isn't settled, including in terms of regulation, but we're gearing ourselves up.
"One of the moves we recently took was the acquisition of CoGenesys which has developed a technology that fuses human albumin with biological molecules. Since the patents in the field will only start lapsing towards 2013-2014, drugs will not become available en-masse until then. We believe, however, that our first biogeneric drug will come onto the market in Europe before then, in 2009.”
In the meantime, the sole best selling drug to come out of Teva’s ethical arm is Copaxone, for the treatment of multiple sclerosis. Sales of Copaxone totaled $1.7 billion in the first quarter, yet despite this some analysts have voiced concern recently that it may have stopped growing. Some even fear a strengthening of Tysabri, the drug jointly developed by Biogen Idec Inc. (Nasdaq: BIIB) and Elan Corp. plc (NYSE: ELN), which was recently recalled following a number of deaths, and returned to the shelves under restrictions.
“Every so often, they tell us that the growth has stopped and that Tysabri will overtake Copaxone,” says Yanai. “Or they think that another player will enter the market and challenge our patents. Well, Copaxone is protected by patent through 2014, unless someone challenges the patent earlier. And even if that does happen, the law prescribes a waiting period of 36 months before the challenger can bring his product onto the market. We are ‘Mr. Generics’, and so when the generic era arrives, you can be sure we’ll already have a few ideas.
“Beyond that, Tysabri is a very strong drug, very potent, with severe side effects. Therefore, it will continue to be prescribed in cases where other drugs don’t work, and they need something strong. It has caused death in the past, and there was also talk recently linking it to skin cancer. Now there’s a case concerning damage to the liver. Tysabri has a limited market and I do not believe its market share will exceed 10%.”
You mentioned CoGenesys earlier. What are you missing now, as far as acquisitions are concerned? And what’s happening with the German market, where your presence is negligible?
“The five-year plan we presented consists almost entirely of organic growth. Large acquisitions were not included in the outline we presented, but the acquisition strategy exists; we simply didn’t present it. The cash we have is earmarked, first and foremost, precisely for this. Germany is the largest country in the generics market in Europe and the third largest in the world, We have marked it as one the of the countries we need to grow in, and we’re constantly looking at possibilities there, acquisitions included.”
And what about an acquisition of Teva itself? You could be attractive to a company like Pfizer, for example, or other large companies whose generic business is weak.
“I find it hard even to imagine that happening. But Teva is not for sale.”
A military career in focus
“Anyone who reaches senior positions in the military, is probably aiming to reach the top of the pyramid,” says Yanai, about the end of his illustrious military career. “I had completed a tour of duty as Head of Planning, after serving as OC Southern Command, and I saw myself as a candidate for the post of deputy chief of staff, as a step on the way to becoming chief of staff. When they chose someone else, I had to decide whether I wanted to wait, or whether to take the hint. This is a matter of conjecture now, since the choice was unmistakably clear. I decided that this was the time to end my military service and make a fresh start.”
When Yanai says “someone else” he refers to the appointment by former Chief of Staff Moshe Yaalon of Gabi Ashkenazi as deputy chief of staff. “I stayed in the army all those years, not because I wanted, from the outset, to pursue a military career. I never had any plans at all to stay in the IDF. I completed my compulsory service when the Yom Kippur war broke out, and I was wounded quite badly during the war and lost many of my friends.
“My first injury was on October 8, 1973, a traumatic day in the Yom Kippur War, when the IDF attempted to launch an all-out attack. I was wounded by shrapnel after my tank took a direct hit by antitank missile, and I was evacuated to Beersheva.”
What was your role then?
“Good question. It’s hard to tell. I began the war as a deputy platoon commander, and after a few hours there were just a few tanks left. There were no longer any roles by this stage, we called each other by name. My battalion consisted of 13 tanks, after starting the war with 45 tanks. In any event, after two or three days in Beersheva I decided that it was not as dramatic as it looked to the doctors, and since they wouldn’t discharge me, I slipped out of the sick bay, and somehow found my way back to my regiment in Sinai.
“They were, naturally, delighted. I was given a tank and I fought with the battalion. We crossed the canal and the Chinese Farm, and went deep into Egypt to a location which was one of the furthest West that we reached. And it was there that I really did get hit, this time by a missile that landed inside our tank. Three of my crew were killed and I was badly wounded. I managed to climb out of the tank but I was suffered severe burns.”
How did they evacuate you?
“You couldn’t land a helicopter at the site where we were, so we traveled over the bridges and I was evacuated by helicopter from there to Refidim - then the capital of Sinai - and by aircraft from there to Beersheva, to the very same place I was taken after the previous injury. Inside the emergency room I met the same nurse who received me the first time and she was really mad at me. There then followed long months of surgery and then rehabilitation of my burns.
“I subsequently decided that I would contribute a few years to assist in the rehabilitation of the IDF and the Tank Corps in particular, since we were in a profound crisis. The IDF entered the war with 2,000 tank crews and ended it with 800 crews no longer part of the standing forces. More than one third were killed, or wounded to a degree that ruled them out of further service. For the next two to three years afterward there wasn’t any manpower from which to choose battalion commanders, and the system didn’t feel the shortage until a decade later.”
And so, according to Yanai, “The years turned into more years and more after that. When I look back at my long service, most of which was spent in field units, and included involvement in virtually every significant thing the IDF did during those years, I feel satisfaction and pride.” Yanai thought his military career was over when he retired in 2002, and then the door was thrown open once more. “In 2006, when they were busy looking for a replacement for Dan Halutz as chief of staff, I received a phone call from someone senior, whose name I will not reveal, who asked me if I wanted to put my name forward. I said that under the present circumstances, I wasn’t interested. It happened in February, when I was in the US preparing to take over at Teva. I took up my post shortly after.”
Published by Globes [online], Israel business news - www.globes-online.com - on March 12, 2008
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