Teva chief leaves as drugmaker struggles to take its medicine

October 31, 2013 9:49 pm

Teva chief leaves as drugmaker struggles to take its medicine

By Andrew Jack

Wanted: chief executive with global vision, ideas for developing new medicines, experience in cost-cutting, ability to cope with a hands-on board, no desire to be a director and a willingness to move to Israel.

When Jeremy Levin headed into a meeting with the board of Teva on Tuesday at its headquarters in Petach Tikva, he sought to end months of tensions by winning their full confidence. Instead, they ended up negotiating his departure and scrambling to begin the search for a replacement.Mr Levin, a veteran pharmaceutical executive headhunted from Bristol-Myers-Squibb 18 months earlier, had faced the prospect of explaining a drop in third-quarter profits to analysts troubled by media reports of a split over governance at the company.

The underlying question for many was whether the problem was with the chief executive or with Teva’s board.

“When you see a change agent hired by the board come in, try to change things and after one and a half years get so frustrated that he’s fired, it tells you something is wrong,” said David Maris, an analyst with Bank of Montreal in New York.

Teva is the world’s largest generic medicines company, and has expanded rapidly through acquisitions, low prices and aggressive legal challenges to patents on innovative drugs, making it the largest supplier of treatments in countries from the US to the UK.

On Thursday, its third-quarter earnings showed non-Gaap net income down 4 per cent to $1.1bn on sales up 2 per cent to $5.1bn.

But the greatest irony and biggest open secret in the drug industry is that much of its profit derives from one of its own drugs, itself protected by patent: Copaxone – a treatment for multiple sclerosis.

When Teva lost a court battle to defend this intellectual property earlier this year, the threat of competition from rival generic producers advanced to as soon as next spring.

Mr Levin, who was architect of the “string of pearls” strategy of acquisitions and licensing deals that helped revive BMS’s pipeline of new medicines, had hired a fresh team of senior executives, lined up a series of deals for Teva, and devised tactics to slow generic rivals from eroding Copaxone’s market share too rapidly.

Yet investors remained frustrated, and he was forced to begin work earlier this year on a 10 per cent reduction in the 47,000 worldwide workforce. For a company more used to expanding, that triggered tensions linked to Teva’s unusual structure and the generous tax breaks it enjoys.

Israeli television reports last weekend suggested conflict over the extent and pace of the job cuts, notably for its 7,000 staff based in Israel. Leaked documents revealed frustrations among senior management over interference of the board in day to day decisions while plans to cut about 800 domestic jobs led to an outcry from politicians and trade unions.

People liked Jeremy because he brought regular models of operating from traditional pharma with a Teva flavour, but for the old guys he was moving away from some of the heritage

– Teva executive

One Teva executive said: “People liked Jeremy because he brought regular models of operating from traditional pharma with a Teva flavour, but for the old guys he was moving away from some of the heritage. The company has a very strong board and you have to work very hard to keep them onside.”

The company’s chief executive (who is required to reside in Israel) is not a member of the board. The 16 directors include four former Teva executives and one who has served on the board since 1981. In addition, Phillip Frost, the chairman, previously ran Ivax, which Teva acquired in 2006.

“There’s a reason a restaurant doesn’t have 16 chefs,” said Mr Maris, who lists concerns over conflicts of interest, lack of representation of shareholders, and a resistance by the directors to transparency.

In filings last year, Teva disclosed collective pay of $3.2m for the board while not listing their individual remuneration or stock holdings. Mr Frost received $900,000 in fees plus a $700,000 allowance for use of his private aeroplane to take him to company meetings.

For now, he and his fellow directors will need to focus on selecting a replacement for Mr Levin, and minimising investor uncertainty during the interim months. They may yet end up picking a Teva insider, such as Eyal Desheh, the chief financial officer currently left in charge, or Erez Vigodman, who sits on the board.

If so, boardroom relations will improve. But the new chief executive will not necessarily provide a sufficiently fresh perspective to address the underlying issues of the company or to placate investors. That may require changes to the board’s composition and operating style too.