Teva still far from recovery

Eli Tsipori

The Israeli pharmaceutical company's aggressive streamlining plan is bearing fruit but the fundamental problems remain.

The first buds produced from the aggressive streamlining by Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) could be seen in the company's first quarter 2018 results. But the troubled Israeli pharmaceutical company still remains mired in the worst crisis it has ever known. Getting out of trouble is not so easy, especially for a giant company like Teva and even more so in the pharmaceutical market in which it operates. Managing a company like Teva, and any major company for that matter, is a long distance race. There are no magic wands to be waved or rabbits that can be plucked out of hats that can make up for so many blunders over so many years and that have taken such a heavy toll on Teva. This recovery cannot be achieved in a quarter and not even two or three quarters but rather it is a Sysiphean task that will take years, and in the case of Teva, its fate is not entirely in its own hands.

After Teva disappointed and erred in the guidance that it gave so many times in the past, one can understand CEO Kare Schultz and Teva lowering expectations so that they could "beat" the low forecasts and restore the company's credibility in the market, credibility that Teva no longer had after a succession of disappointments. One can understand this because those are the rules of the capital market game. But even the rules of this game cannot hide Teva's fundamental long-term problems. The fact is that the markets got enthusiastic after the publication of the first quarter results and the headlines about beating the forecasts (the share price rose 8%) but as trading progressed, the share price started falling (ending trading on the NYSE on Thursday down 4%). The markets also understand that Teva has many challenges to overcome and must provide much more evidence before the markets will push the share higher. Even after recovering from its low-point, Teva is still far beneath its peak and to return there, if it ever can, will be a long and arduous journey.

Teva's essential problem remains its huge debt even though this has been reduced to about $30 billion. Although the company's cash flow is strong, it includes some one-time components so it must be examined over the coming quarters. The erosion in its golden egg - its flagship drug Copaxone for the treatment of multiple sclerosis - must also be carefully watched. Teva has made a point of the relatively good market share that Copaxone has maintained but generic competition is exacting its price, with major erosion in the prices charged for the drug and cutting into the phenomenal profitability that Teva enjoyed over many years. The weakness in the US generics market in particular and the overall weakness in the global generics market and downward pressure on prices is another problem. But in my opinion the biggest problem is that there is no engine of growth and engine of profitability like Copaxone on the horizon. That is the reason that Teva has been fighting for its survival in recent months and aggressively cutting costs (firing 25% of its employees, although the plan is not yet complete), and selling assets.

The branded drugs in Teva's pipeline are very far from Copaxone's performance and it is doubtful that they will ever get there. Approval for Teva's new migraine treatment fremanezumab has been delayed following a warning letter from the US Food and Drug Administration (FDA) to Korean company Celltrion, which is producing the active ingredients for Teva. Rivals are waiting in the wings to take advantage of this delay. After major investment, Teva's other new branded drug for the treatment of Huntington's disease is on the market and will enjoy estimated sales of $200 million in 2018. Not a bad start but a long way from Copaxone's performance.

One thing for sure that can be said about Teva or more precisely its new CEO Kare Schultz. He will earn hundreds of millions of shekels even if Teva fails to take off. When the Dane assumed office on November 1 2017, he was handed a dream five-year package of bonuses and shares that could reach $60 million. Schultz was also given a signing-on fee of $20 million and a similar amount in shares, linked to performance over the next 3-5 years. Under certain circumstances, the grant might also be paid early such as his departure for "good reasons" like the sale of the company. If an offer to acquire Teva does come along, and it could happen (Teva has a market cap of $19 billion, not an especially high price for a takeover), then Schultz could push for the offer to be accepted and walk away with one of the best deals ever achieved by a manager in Israel.

Published by Globes [online], Israel business news - - on May 4, 2018

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