Benny Landa feels confused. The successful entrepreneur, one of the fathers of Israel's digital printing equipment industry, does not quite understand why Israel's Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) insists on acquiring US rival Mylan (MYL).
In late 2013, Landa became an activist investor in Teva because of his dissatisfaction with the performance of its board of directors, chiefly over the ouster of Jeremy Levin as CEO.
Since then, Phillip Frost has been replaced as chairman of Teva by former Cellcom Israel Ltd. (NYSE:CEL; TASE:CEL) CEO Yitzhak Peterburg, and Erez Vigodman, who formerly headed Makhteshim-Agan, took over as CEO fifteen months ago.
"I was surprised, I was very surprised, to hear that Teva really plans to buy Mylan," says Landa in a special interview with "Globes", against the background of the drama that has been unfolding in the past two weeks in the global generic pharmaceuticals industry. Teva wants to buy Mylan for $40 billion, but Mylan says no; Mylan wants to buy Perrigo for $35 billion, but Perrigo says no to that.
"I was surprised by the direction the company chose, 180 degrees opposed to the direction I thought it would choose, namely more investment in original drugs," says Landa, "There's no doubt that generics is Teva's main business, but I think that the company ought to learn the lesson of the Copaxone experience and realize that innovation - in its case, development of an ethical drug - generates far higher rates of growth and profitability than does generics, which is doomed to a future of erosion of drug prices, and competition on price rather than on uniqueness."
Multiple sclerosis treatment Copaxone is Teva's biggest ethical drug, and the main source of its profits. Over the past year, the company's various patents on the drug have started to expire, and generic competition is already breathing down its neck and threatening to take bites out of its profits. Teva has thus reached the most important crossroads in its history, and its takeover bid for Mylan is meant to minimize the damage to its bottom line.
Landa has hundreds of patents to his name in digital printing. His company Indigo was sold to US giant HP, and his current baby, Landa Labs, is looking like a huge success. It's no wonder then that he is "a great believer in patents." "A patent is the only legal monopoly there is," he says, "Generics, by contrast, means that anyone can copy the patent, and then competition is only over price.
"Therefore, when you look at the companies that have really succeeded, commodity companies aren't among them. That doesn't suit the State of Israel. Workers in Israel don't make $200 a month, and Israel isn't a country suited to mass production. This is a country of innovation and of added value. Teva's bid to take over Mylan doesn't mean that it has ceased to be innovative, but such a huge deal, with a debt component of $20 billion, will prevent it from investing much in innovation."
The Teva of today isn't the Teva of 20-30 years ago, when Copaxone started out, and the pharma industry is much more competitive than in the past. How far can Teva afford to gamble on developing original drugs, which means running a marathon and not a sprint?
"I don't say there's no logic in growing via acquisition, but the question is the proportion. If, for example, Teva had put greater emphasis on innovation ten years ago, perhaps it would now have another innovative drug, a successor to Copaxone. I don't want us to look back in ten years' time and say 'What a pity that Teva didn't develop another ethical drug and declined into being a low price commodity producer.'"
Landa, who still holds a stake in Teva (but refuses to disclose its value) stresses that his principle of innovation applies to all industries. "Take Sony, for example, which was really the first to invent the iPod of our day. In 1979, it developed the Walkman, which enabled us to enjoy music on the move, but it did not continue to invest in innovation and was left with the same product, which became generic. All that Steve Jobs, the founder of Apple, did was to take that principle and upgrade it. The upshot is that Sony is now worth $36 billion, whereas Apple is worth $743 billion.
"And that doesn't mean that Sony isn't successful or that Walmart isn't successful. They are just less successful because they compete on price. There are companies that simply stagnate. They have succeeded in one area, and say to themselves, "Hey, it's so successful, let's keep on doing it, and perhaps we'll make it bigger."
So you're implying that Teva has stagnated.
Yes. Teva is strong in generics, but to be generic means to be cheap. If Teva were an Indian company and I were Indian or Malaysian, my position might be different. But Teva is an Israeli company, and to my mind that means innovation. When I ask myself what's good for the company and the country, I feel doubtful whether acquiring Mylan, which makes Teva yet more generic, will really make its Israeli workers much more competitive than Teva workers in other countries."
Meaning that this is a deal that will lead to layoffs of workers in Israel.
"Maybe. Teva claims that the deal will generate annual savings of $2 billion within three years of completion, and savings like that mainly come from closing plants. And that's what concerns me, because as long as the decision made is purely a business one, it's not certain that the Israeli worker will have an advantage over his Indian counterpart."
What part do you think that pressure from the capital market to do some deal that will minimize the damage from the expiry of the patent on Copaxone has played in Teva's decision to buy Mylan?
"It has played a significant part. It's clear to me that there are institutional investors and banks putting pressure on Teva, because most of them will make a short-term profit on such a deal. The share price will automatically rise after a deal like this, and so investors will make money. And investment banks will make a huge amount on fee. The ones that will not profit from it are the State of Israel and long-term investors."
A month ago, Teva reported the acquisition of Auspex for $3.2 billion. This is a company developing drugs to reduce involuntary body movements, and which has already passed all the clinical trial stages for the main indication and is waiting for FDA marketing approval. Is this the kind of acquisition that you would like Teva to do more of?
"Yes. More and more like this."
But acquisitions like this carry risk. The FDA might not approve the drug, or it could fail commercially.
"True, but any acquisition is a gamble, and there's a difference between a gamble of a few billion and a gamble of tens of billions. There's no innovation without risk, but every risk has to be calculated."
Is Teva CEO Erez Vigodman making a mistake in his attempt to buy Mylan?
"I have great confidence in Erez. He has very good judgment, he's a strategic thinker, and I believe that he is very committed to the State of Israel. I supported his appointment, and so I'm surprised by the move."
Have you had a chance to speak to him since Teva announced its bid for Mylan?
"No, and I hope that I'll have an opportunity shortly. I want to understand the logic of the deal as he sees it. I've been quoted lately as saying that the deal will give him heartburn, but, to be honest, heartburn is the least of it."
Beneath criticism
Landa also comments on the response by Mylan chairman Robert Coury to Teva's bid. Coury wrote Vigodman a letter that was exceptionally sharp, needling, blunt, and some might say even humiliating for both Vigodman and Teva. "If anyone thought that that it was possible to bridge the cultural gap between the two companies, Coury's response demonstrates that it's impossible," says Landa, "Never, but never in my life have I read such a crude, insulting and ad hominem business document, so inappropriate for Erez, who in my view is a polite, cultured, fair and honest person. Coury's response is simply beneath criticism. There's no place for it in business, whatever the circumstances. No-one should descend to that level."
Perhaps Coury's motives were not just business ones. Some say his Lebanese extraction affects his attitude to Teva.
"I don't know - it's still an inappropriate response."
If we discount Coury's uncouthness, some of his claims about Teva, such as an unstable management and a late reaction to the expiry of the Copaxone patent, have some grounds in reality.
"True. Coury was not mistaken about the facts, but the way he said what he said was not right."
Knowing Vigodman as you do, how much was he insulted by Coury
"I'm not worried about Vigodman's feelings or those of Teva's management in general. Vigodman is a big boy, and I don't see him being hurt by this or that insult aimed at him. Still, in his place, I'd wonder whether it was right to merge with a company where this is its style of talking. A company's culture begins from the person at its head, and if this is Coury's way of speaking, one can only presume that the entire company's culture is similar."
Coury didn't completely slam the door in Teva's face. He said he would enter into negotiations starting from $100 per share for Mylan. Do you think he meant it?
"I don't think so. He threw out a price that he knew Teva couldn't meet. $100 per share is not a sane price."
What are the chances of Teva getting into a proxy fight with Mylan, that is, a battle for control through the shareholders' meeting?
"In my view, forced acquisitions are unsuccessful acquisitions. Taking someone over by force is never a good start, and I hope it won't come to that."
Is there a chance of a chat with Vigodman changing your mind?
"Yes, certainly."
Published by Globes [online], Israel business news - www.globes-online.com - on May 4, 2015
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