recently downgraded Teva, as did several other brokerage houses. Barron’s published an article titled “Teva: Another Day, Another Downgrade.”
According to Morgan Stanley’s announcement, Barron’s concluded that poor pricing pressures on generics and looming generic competition to Copaxone (Teva’s blockbuster multiple sclerosis drug) “will constrain Teva’s ability to acquire future growth drivers.”
What caused this situation, and what does it mean to “acquire future growth drivers?”
To quote a 2010 article in Seeking Alpha, which offers some insight: “It is difficult to characterize Teva (NYSE:TEVA) — is it a generics company or a biopharmaceutical? It would appear it is the best of both worlds, a hybrid of the two.”
Traditionally, there were pharmaceutical companies — such as Pfizer, GSK, and Merck — and there were generics companies — such as Sandoz, Mylan, and Actavis. Historically, Teva is one of the world’s leaders in generic sales. According to Teva’s website, their history is one of consolidation of the Israeli pharmaceutical industry through merger and acquisition, entry into the U.S. generic market, and the acquisition of the rights to Copaxone from Yeda, the commercial arm of The Weizmann Institute. Teva’s extended history is one of acquisition after acquisition. This was driven by revenue from the acquired generics, as well as from sales of Copaxone.
Then, things went sideways when a Delaware Federal District Court held that four of Teva’s Copaxone patents were invalid and unenforceable. In addition, Teva, along with other generics companies such as Mylan, faces a U.S. Department of Justice antitrust investigation.
Last December, Teva agreed to pay $519 million to the U.S. government to settle allegations that Teva bribed officials in Russia, Mexico, and Ukraine. A similar probe is ongoing in Israel.
As reported in Investor Daily in early February 2017, Teva CEO Erez Vigodman stepped down just two months after Teva’s former generics CEO, Sigurdur Olafsson, left the company. Teva Chairman Dr. Yitzhak Peterburg replaced Vigodman on an interim basis. Vigodman was CEO since February 2014, while Peterburg served as chairman since January 2015.
So, is this a free fall for our hero Israeli drug company, or is this just the typical downturn that will be followed by another upswing?
If new upper management comes in and makes the right moves, it will certainly be the latter. If the company stock price stays depressed and revenues steady out, and there is product in the pipeline, then Teva may be a possible acquisition candidate itself.
But I am not here to give investment advice; rather, I am interested in what caused this situation, and which growth drivers might be the means of reversing the situation.
The cause of the situation is partially the passing of time. Copaxone is a daily injection therapy for the treatment of MS, and since winning FDA approval in 1996, Copaxone has become the most widely prescribed therapy for this indication. That adds up to billions of dollars in sales. In combination with revenues from generic sales, Teva has acquired a good deal of revenue-generating assets. But it is the success of Copaxone that caused Teva’s corporate instability. With the passing of time, the expiration of the Copaxone patents allowed others to enter the Copaxone market, cutting into Teva’s profit.
Patented pharmaceuticals go through one type of development, marketing, and distribution pathway, while generics go down a different path. Similarly, regulatory approval for new drugs follows a different pathway from that of generics. Inconsistencies between internal drug development and the acquisition of generics leave Teva vulnerable to error. These errors were reflected in loss of patents, poor strategy leading to antitrust issues, and questionable marketing practices. Without management at the top, as chief executives have jumped ship, the cause of Teva’s decline is visible in macro terms.
Lack of top management results in lack of strategy, so that middle management has no direction. They do not know which areas will be pursued and which will be dropped under new top management, nor who will stay and who will be let go (sounds like corporate Yom Kippur). So, corporate strategy is presently stagnant.
Based on Teva’s history, their growth was a result of acquisitions. If Teva cannot afford further purchase of outside companies and technologies, they cannot acquire further growth drivers. Hence, they appear to be in a nosedive.
Teva knows generics, but they got a taste of the pharmaceutical blockbuster with Copaxone. They have new drugs in their pipeline, but the lack of direction from upper management leaves question marks in their forward strategy.
This can be cured a few different ways.
One approach is for Teva to bring in new upper management that sets clear, attainable goals. This will help them regain corporate health and the concomitant wealth. Then, Teva will be able to acquire more companies and technologies. This new revenue will pay for their longer-term strategy, based on their pipeline of new drugs.
Another approach is for Teva to follow the Dow advice, return to being a generics company, sell off its pipeline, and do what it used to know how to do best. Alternately, another company may purchase Teva.
No matter which way it goes, Teva’s stock will swing back up.
By Kenneth I. Kohn
Kenneth I. Kohn is an intellectual property attorney specializing in biotechnology. He received his law degree as well as a doctorate in pharmacology and immunology from Wayne State University in Detroit, Michigan.