Accusations of insularity and interference haunt the Teva board

December 29, 2013 6:09 pm

Accusations of insularity and interference haunt the Teva board

By Andrew Jack

Even by the standards of the regular leaks of sensitive corporate material from Teva, images on Israeli television last October showed a letter from senior management to its directors was still explosive.The executive committee at the world’s largest generic medicines group wrote that it “respectfully urges the board to reassess their involvement in the ordinary course of business matters that in our opinion has been prevalent in recent months and hindered management’s ability to effectively manage Teva and implement the approved strategy”.

Two days later, just in advance of a scheduled investor call, the directors dismissed Jeremy Levin as chief executive. That sparked the current search for the fourth head of the company in seven years, as it struggles to regain investor confidence and to boost its lacklustre share price. It could yet trigger a broader shake-up in the boardroom.

At a hastily convened conference call, Phillip Frost, Teva’s chairman, told bemused analysts that Mr Levin’s departure reflected “nuances rather than disagreement about the strategy itself”.

Many saw it instead as the result of a growing rift between the two men, and of broader governance problems at the company, which has become a global giant while retaining a large and Israeli-focused group of directors with little global experience of pharmaceuticals. While they are apparently involved in management, no executive sits on the board.

“Is the management team going to be able to run the business or is the board essentially going to call the shots and [to] try to run this by committee?” asked Ronny Gal, an analyst with Bernstein, on the call.

To his critics, Mr Levin failed to secure acquisitions that would boost Teva’s pipeline of new medicines. He frustrated investors by missing earnings targets; antagonised the board; spent heavily on consultants; was in charge when a legal ruling sharply accelerated the threat of competition on Copaxone, its most profitable medicine; and threatened the company’s historic Israeli base with planned job cuts.

To his defenders, he clashed with the directors as he sought to overhaul a company he found ill-prepared for the drug’s patent expiry, with large debts amassed from disappointing acquisitions – notably its $7bn purchase of Cephalon in 2011 – and affected by the discovery in 2012 of alleged corruption in subsidiaries now under investigation by US authorities.

In an email to fellow Teva investors just after Mr Levin’s dismissal, Benny Landa, an Israeli entrepreneur who is seeking to change the directors, wrote: “The board is comprised – apart from chairman Phillip Frost and those on his payroll or who are otherwise beholden to him – entirely of local directors, none of whom have any pharma experience.”

Mr Levin had an early hint of the troubles ahead in late 2011, when his appointmentwas reported in the press even as he was still negotiating his departure from his previous employer, Bristol-Myers Squibb. In the following months, there were destabilising leaks about Teva’s plans to delist the company from the US Nasdaq exchange, about planned job cuts, and about potential acquisitions being considered by the new senior team he had hired.

Some insiders say Mr Levin irritated board members by demands for greater autonomy and transparency, leading to fuller disclosures including that of Mr Frost’s compensation. The latest annual report shows that Teva pays him $900,000 a year, provides a further $700,000 for use of his private plane to travel to Israel, and $412,000 to rent an office in Miami owned by an entity he controls.

Neither Mr Levin nor Mr Frost would comment, but one external consultant who knows both of them and describes a deteriorating relationship between them says: “Levin would have to go to Miami to kiss the ring each time he wanted a decision.”

Mr Frost, who is based in Florida, joined Teva’s board when it acquired his generics business Ivax in 2006. He is the largest shareholder in Opko, a pharmaceutical business with which Teva already conducts business and which some analysts suggest could ultimately be acquired by the Israeli group.

The board has never attempted to manage the company; is not managing the company now; and is fully co-operating with the management with respect to their respective roles

– Phillip Frost, Teva’s chairman

Since he became chairman in 2010, there has been little sign of greater diversity of independent views on Teva’s 16-strong board. Most are based in Israel, and no others have experience of large-scale global pharmaceutical companies outside Teva. Other directors include Richard Lerner, an Opko director; Roger Kornberg, a director of two companies in which Opko and Mr Frost both have investments; and Arie Belldegrun, chairman and shareholder in Arno Therapeutics, in which Mr Frost also built a stake.

Mr Frost himself told analysts on the October conference call “the board has never attempted to manage the company; is not managing the company now; and is fully co-operating with the management with respect to their respective roles.” He said Opko operated in areas “not of great interest at the moment to Teva,” and emphasised that the board was “very, very careful” about ensuring scrutiny of any related party transactions.

In the coming weeks, Teva is bracing for intensifying demands from investors for boardroom changes as it seeks a new chief executive, to retain the management team that Mr Levin hired, and to project greater confidence about its future.

For David Maris, an analyst with Bank of Montreal, boardroom change will be essential. “If you have a group of world-class surgeons around an operating table and the patient is butchered, it may be very difficult to attribute blame but you know the group hasn’t done a good job,” he says. “If the patient is in critical condition, you step away and get some new people.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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