Speaking today at the Globes Capital Market Conference, Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) interim CEO and president Yitzhak Peterburg said, "The business world always features uncertainty, but it has become much greater in recent years, and the task has become more and more difficult. Instead of giving an academic lecture on the subject, I have decided to give a very personal look at the world of a manager trying to navigate a ship in very heavy seas.
"I am familiar with Teva; I have served in a number of positions, both in senior management and on the board of directors. We are now experiencing what may be Teva's most challenging era that we have known. We are facing three types of uncertainty. The first is the inherent uncertainty in the business we are engaged in - the pharma industry. A very expensive development taking years ends in an all or nothing result - a clinical trial that is either a success or a failure.
"Even the generic sector - people do not realize how great the risk is. If you try to explain what the process of launching a generic product consists of, it is necessary to envision a runner who must jump over three hurdles on the way to a successful launch: a favorable verdict in a patents court case, regulation, and finally receiving approval to produce a product under heavy time pressure. Teva has already succeeded in launching a product within five days of the ethical product's expiry date. One of the reasons why the period is a challenging one, which is keeping me awake at night, is that Teva promised investors four new launches, none of which actually came through.
"To use the ship navigator metaphor, it has to be navigated between 'ordinary' waves - regulation, massive consolidation of customers, and tricky exchange rates are only a small part of the problem. The main problem is that when you are sailing, and you think you know what the ocean looks like, you encounter unexpected waves. Who thought that pharma companies would be an important part of the US presidential campaign? Every time Trump tweets on Twitter, the Teva share price goes down 3% or 5%.
"Part of the uncertainty is beyond our control, but I do not want to make excuses. Teva is in an uncertain position because there is no guarantee that things that looked right and relied on many hours of analysis will succeed. Corrections are necessary sometimes. We are focusing on stabilizing the ship, and are starting to see positive results. What is expected of us, and of me as acting CEO, is to show that we are capable of getting all the synergy out of the Actavis deal, and we are doing this more quickly and more effectively.
"I am very proud that we kept every promise we made to the market over the past month: the results for Austedo, the drug for Huntington's Disease, came on the day we promised. We reported amazing results for our migraine drug for both chronic and acute migraines. Together, these results are significant not only for Teva's future, but also for everyone in the world who suffers migraine headaches.
"At the same time, we planned product launches in the US, and we are working on this target. Every day and every hour of my time is devoted to the fact that we are saddled with a $35 billion debt. We are working on the sale of core assets, and are making progress in repaying the debt. Our shareholders do not like uncertainty, either, and it is clear what should be done about this classic uncertainty; not every quarter has a black swan.
"The third type of uncertainty is uncertainty about what the future holds, which is making its mark in the revolution occurring around us. 75% of the companies on the S&P 500 will not be on that list in 2030. The life expectancy of companies is becoming shorter. This revolution features the entry of new models that are disrupting the existing models, especially in the conventional industries. We are a conventional industry, and the bigger you are, the more vulnerable you are. New players, not necessarily small ones, are on the attack, and are trying to introduce a new model with a completely different user experience: Uber, Airbnb, and others.
"The players that you are familiar with can also surprise you. You say, 'This is so simple. Everyone knows that the world is changing, so what's the problem?' There are several problems. The first is in identification. As a large company, you find it difficult to identify the threat - everyone suffers from this - because you are in love with your model. Another thing is the difficulty in making a conceptual change in order to respond. Large companies are used to procedures, the method they have always used. People tell me, 'If you could only go back to where we were 10 years ago, everything would be good.' That only shows that they do not understand the problem. The past will never repeat itself.
"Another problem is that you cannot stop. You do not know when to jump. If you jump too soon, you will crash; if you jump too late, you will cease to exist. The board usually gives incentives for here and now: let's stabilize quickly. This is a short-term incentive that is not always correct over the company's lifespan. How does that work with us? When I was CEO of Cellcom Israel Ltd. (NYSE:CEL; TASE:CEL) , in the telecommunications industry, we underwent similar processes 15 years ago. What do I mean? I am sure you have all been abroad. You stepped into Walgreens, a large chain of pharmacies, but not only that. They acquired distribution companies and changed the entire value chain. In addition to all the large concerns that changed, all sorts of startups came in. There are also large sharks. Amazon understood, and is looking for people in order to enter the pharma market.
"Where are we? At conferences several years ago, I said that Novartis was not my only competitor; there were Google and Amazon. The customer has changed completely. He is no longer willing to talk only about the results of the treatment; he wants a comfortable cost, convenience, and transparency. We wanted to examine the thinking of 10-15 year-old children about the world. It is a completely different world. I have a 14 year-old granddaughter who almost certainly will not go to the pharmacy. There is a new organization, Teva Consumer Solution, whose job is to understand the consumer and utilize digital technology for this purpose.
"Everyone is talking about the share price. I am not indifferent, but Teva has the biggest basket of drugs in the world - about 70% of the existing drugs, a broad community of 200 million customers, an extremely strong management chain, and a widespread geographic deployment. All of these put us in a good position for the new world.
"All industries are changing. In the end, the end customer is changing and leading the revolution. The lessons are clear: do not fall in love with your business model. It is easy to say that it will succeed. You do not want to change it, because when you want to change it, you will not succeed. Your most dangerous competitor is the one you do not expect. I am not ignoring Mylan or Novartis; I am aware of their capabilities, but the most dangerous competitor is the one who suddenly enters and takes your business away. You have to manage the change, before the change manages you."
Published by Globes [online], Israel Business News - www.globes-online.com - on June 13, 2017
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