Teva: Right person, wrong time?

Shiri Habib-Valdhorn

Kåre Schultz has turned a company round before, but the challenge at Teva is huge.

Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) chairman Sol Barer kept his promise to find a person of standing in the pharma industry to lead the company. The process was neither simple nor short. Seven months went by after Erez Vigodman left Teva's offices in Petah Tikva, and the company's position continued to deteriorate during that time. Its share price, which was at $30 in February this year - down 50% on its 2015 peak - collapsed to $15.5, a fifteen-year low and almost 80% below the peak. Teva's market cap is currently just $15.7 billion, a year after it took over Actavis in a near $40 billion deal.

In the course of the search for a new CEO several names arose. Jacqualyn Fouse of Celgene and Pascal Soriot of AstraZeneca reportedly refused to take on the job. Because of the dimensions of the crisis at Teva, and the market's general lack of confidence in the company, many investors apparently believed that Teva would not find a CEO of outstanding repute. The jump in Teva's share price on the Tel Aviv Stock Exchange today can be regarded as a sigh of relief by the market.

Kåre Schultz is seen as the right person for Teva. The question is whether he comes at the right time. He faces many challenges, chief among them a burdensome $35 billion debt. Two rating agencies downgraded Teva after it warned in early August that it might not meet the financial covenants relating to part of the debt at the end of the current year.

Even before finding a permanent CEO, Teva took several steps on the financial front. It cut its dividend, put non-core assets up for sale, and announced layoffs, in order to boost its ability to service its debt.

Schultz has a successful record in leading a restructuring. In 2015, shortly after he was appointed CEO of Lundbeck, the company announced a program of 1,000 employee layoffs with the aim of saving $450 million. Two years on, Lundbeck is in a quite different position, as is its share price, which has more than doubled in the interim. Teva shareholders would no doubt be happy to see a similar result.

Low expectations could help

The crisis of confidence between Teva's management and board on the one hand and the capital market on the other has gone on for some time, but it has become especially acute in the last six weeks, ever since the release of the company's weak second quarter financials. This is another of the challenges that will greet Schultz. If Teva wants, for example, to improve its financial flexibility by raising capital, it will need the market on its side. It could be that the fact that investors' expectations of the company have reached such a low level after the recent disappointments will actually help him.

Schultz signed a five-year employment agreement with Teva. His predecessors, Jeremy Levin and Erez Vigodman, did not last that long. Besides dealing with all the immediate financial and operational challenges, the expectation is that Schultz will also present a long-term strategy, and it will be interesting to see in what direction he will seek to take the company. Although Teva points out that Schultz has experience in generics, the companies he comes from (Lundbeck and Novo Nordisk) are essentially producers of brand drugs, and that could be significant, especially at a time when Teva is dealing with the integration of its largest ever acquisition - generics company Actavis.

Published by Globes [online], Israel business news - - on September 11, 2017

© Copyright of Globes Publisher Itonut (1983) Ltd. 2017

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