Yanai squandered Teva's Copaxone profits

Shiri Habib-Valdhorn

Excellence analyst Gilad Alper: The five good years of cash flow from Copaxone were wasted on an incorrect strategy, and expansion in the wrong areas.

Shlomo Yanai managed Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) for five years, and he was always considered a strategist who plans for the long-term. Yanai was hired as someone who was meant to define the companys strategy, post-Copaxone - the proprietary Multiple Sclerosis drug upon which Teva is so very dependent. Already then it was clear that its place in the market would not last forever. In 2010 Yanai presented his strategic plan; his vision of what Teva should look like in 2015. A little more than two years later he was already on his way out and, today, 18 months after Jeremy Levin replaced him, not much is left of his grand vision.

It is a good thing for a company that a new CEO with a new vision should step in every few years, said Yanai on the day the company announced his departure and Levins appointment, but its doubtful that he thought that this new vision would change Teva so drastically, so quickly. Yanais strategic plan effectively died on the day Levin assumed his post. It envisioned Teva in 2015 as a larger and more diverse company, and sought to address its main problem: its tremendous dependence on its proprietary Multiple Sclerosis drug, Copaxone, which is responsible for roughly 50% of the companys profit. However, as we know, more than three years later, Levin is trying to address this very problem, as the dependence still exists. Additionally, while in the past Teva was optimistic and estimated that the risk of generic competition for Copaxone was very low, today an awareness that the competition is getting closer is spreading, and the laying-off of 10% of the companys workforce is a direct result of this.

Yanais plan no longer exists because it was based heavily on generics, on biosimilar [generics for biological drugs] and on major acquisitions. All these things no longer exist at Teva, says Excellence Nessuah Investment senior analyst, Gilad Alper.

How is todays Teva different from Yanais Teva? First of all, its definition has changed. During Yanais tenure, the emphasis was always on generics - that was Tevas origin. Teva is a generics company; that is our nature and our core business, said Yanai repeatedly, and this was the basis of his strategy.

Of course, Teva benefited from its branded drugs as well (foremost, Copaxone), but it never defined itself as anything other than a generics company. Today, it seems that the definition is more fluid. Levin placed greater emphasis on innovation - development of branded drugs, which is the field from which he came. Alongside this, he also placed emphasis on NTE - combinations of existing drugs, which has been marked as an important growth engine. Levin also continues his focus on OTC (over-the-counter medications), which Yanai introduced to Teva through his strategic partnership with Proctor & Gamble (NYSE: PG). The biosimilar market, which is considered an interesting growth engine, and was supposed to reach sales of $800 million in 2015, was essentially neglected, and the joint venture in this field with Lonza Group (OTC: LZAGY), signed by Yanai, was recently cancelled.

Ratiopharm is bad, Cephalon is worse.

Another difference is that in Levins Teva there are no more massive acquisitions to generate growth. Acquisitions such as Barr Pharmaceuticals, Inc., Ratiopharm GmbH and Cephalon, Inc. from Yanais period, each of them in the billions of dollars, will not happen again anytime soon. Cephalon, manufacturer of proprietary drugs that was bought for $6.5 billion, was meant to diversify the product offerings and to reduce the dependence on Copaxone but, in retrospect, it seems that its main products are not taking off, and Teva even had some accounting write-offs related to some of them.

According to Alper, Ratiopharm is a bad company and Cephalon is even worse. The five good years of cash flow from Copaxone were wasted on an incorrect strategy, and expansion in the wrong areas. Incidentally, the write-offs related to Cephalons products joined the house cleaning that Levin is executing, which also includes write-offs related to the settlement with Pfizer, Inc. (NYSE: PFZ) over Tevas launch of a major generic during Yanais tenure.

Tevas close relationship with the local biomed industry is also not what it once was. Teva, once a natural partner for Israeli biomed companies, jettisoned a few joint ventures with local companies last year, as part of Levins portfolio restructuring.

There were also personnel changes: nearly the entire corporate management was changed (as is common when a CEO is replaced), and some of those who stayed took on new roles. Another change, though a technicality, is the market in which Teva is traded - its stock was moved from the Nasdaq to the NYSE (Teva continues to be traded on the TASE, as well).

Teva is a company in crisis, without a doubt, says Alper. The company is at a crossroads: One possible direction is generic competition for Copaxone in the near future - though, in my opinion, the chances of this are low - and that would amount to an existential crisis for the company. The other possibility is that the generic will be delayed, and then the company will have some breathing room.

Looking ahead it will become clear to you that the Teva of the future will be a very different company from the Teva of the past, said Levin a few months ago. It seems he is working strenuously towards this end.

Published by Globes [online], Israel business news - www.globes-online.com - on October 16, 2013

Copyright of Globes Publisher Itonut (1983) Ltd. 2013

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