Teva doesn't need a star - it needs a buyer

Eli Tsipori

The time has come to jettison sentiment and recognize the reality of Teva's position. 

If proof were required that the Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) board has simply lost direction and is wallowing in impotence; if proof were required that the corporate governance at Teva is simply not suited to a company of its size, along came the affair of the new CEO, who perhaps signed and perhaps didn’t, who may have decided and who may not, who withdrew or didn’t withdraw, to bring home what has been going on at Teva for many years. This is a company that couldn't decide which direction it was going in, that failed to formulate a clear strategy, and that has been trying to find itself for a long time.

Teva has changed CEOs three times in five years, lost investors' confidence, and seen its share price decline by 50% from its peak. The board and management made questionable decisions that have cost the company dearly, billions of dollars. So far it has at least managed to protect its golden egg-laying goose Copaxone. Is this what it needs right now? A savior in the shape of a stellar CEO, or one with a stellar image, and a compensation package to match?

At the root of previous CEO Erez Vigodman's thinking was a logical idea: to consolidate Teva's independent standing. Vigodman thought, rightly, that at the price levels at which Teva's stock was traded when he took up his post it was liable to become someone's prey. A company worth $35-40 billion looked like an easy takeover target, given the mergers and acquisitions activity in the pharmaceuticals sector at the time. In private conversation, Vigodman more than hinted that Teva had rejected several acquisition offers.

With this in mind, Vigodman decided to storm the mergers and acquisitions market himself. Instead of being the prey, he would be the predator. The hunting impulse, the urge to make a huge acquisition that would supposedly fortify Teva's independence, the pressure to make such an acquisition come what may, have brought Teva to the position it was in before the great deal: a potential takeover target. It is certainly liable to lose its independence.

In Vigodman's defense it is possible to cite the share price, which soared dizzyingly at the time along with the rest of the pharmaceuticals sector. There's nothing like a stock that keeps rising and rising to convince company managers of the rightness of their approach. This conviction quickly turned to hubris. Vigodman and Teva at first aimed at a hostile takeover of Mylan, and when that failed, they put together within days a huge deal for the acquisition of Acatvis, the generic division of Allergan, for $38 billion, mostly in cash.

The current position at Teva is as follows: it has been run by an acting-CEO, Yitzhak Peterburg, for five months; its market cap is $32 billion, and that after a $7 billion share offering to finance part of the Actavis acquisition; its debt stands at $40 billion, mostly because of that deal. Fortunately for Teva, it obtained the finance for the acquisition in a low interest-rate environment very cheaply, but could this debt endanger Teva? Not at the moment, but it is certainly carrying a heavy burden.

Teva has lost years in planning its future. It has been in continual managerial crisis that is only worsening. It has wasted months is searching for a star to lead it like AstraZeneca CEO Pascal Soriot, who now does not look as though he will in fact take the job. The way his putative recruitment was dealt with looks altogether unprofessional for a company of Teva's consequence. Spurred by the hope that the star would come, Teva's share price jumped 3-4%, only to fall back again when it turned out that the move was in doubt.

To my mind, Teva needs something else, and Benny Landa, a major Teva shareholder who has rightly been goading Teva's management for months, needs to understand that more than enough time has been wasted. Teva needs a savior of a different kind: it needs a buyer. Yes, it should be a takeover target for one of the pharma giants. The shareholders would be able to receive some kind of premium, perhaps even a generous one, over the market price. A pharma giant that buys Teva will put its house in order. Order will mean layoffs, cutbacks, and streamlining, which any new CEO will carry out in any case.

Anyone alarmed at the loss of Teva's Israeli identity can quell the sentiment and the nostalgia. Teva has not been Israeli for a long time. Most of the shareholders are foreigners. Most of its business is outside Israel. The proportion of Israelis in its workforce has steadily fallen over the years following a long list of acquisitions. Their number has even fallen in absolute terms. Furthermore, Teva's influence on the Israeli pharmaceuticals industry has declined. It is no longer a dominant player in investment in that industry.

Teva's memorandum and articles contain "poison pills" designed to thwart a hostile takeover and transfer of the company outside Israel. These are obsolete devices that are irrelevant to the present state of the company. The board of directors cannot use loss of Israeli identity as an excuse when it has to discuss the bids that are likely to come. The current board played a large part in the probable loss of Teva's Israeli identity by approving the Actavis acquisition. The time has come to liberate Teva from Israeli sentiment, and, instead of bringing a new CEO with a bloated signing-on payment of $20 million, to put the company on the block and appoint an investment bank to manage a sale to the highest bidder.

Published by Globes [online], Israel business news - www.globes-online.com - on July 18, 2017

© Copyright of Globes Publisher Itonut (1983) Ltd. 2017

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