The Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) share price plummeted 6% in Wall Street trading yesterday following the resignation of CEO Erez Vigodman, lowering the company's market cap to $32.4 billion. On the TASE, where the share fell "only" 3% yesterday, the share fell today by a similar amount.
Wall Street's sharp response to Vigodman's resignation indicates that the market believes that Teva's problems are deeper than its CEO, and that Vigodman's resignation indicates continued chaos in the company's management, not the beginning of a solution.
The immediate concern of the analysts covering Teva is that the company will lower its forecasts when it publishes its 2016 financial statements next week. Teva already downwardly revised its forecasts for 2016 when it published its third quarter results, and later also revised its forecasts for 2017. If it is obliged to lower its forecasts still further, it will be another blow to the company. If it does not meet its revised forecasts for 2016, the blow will be twice as severe.
According to a survey by Evercore analyst Umer Raffat of his colleagues, 70% of them believe that there will be some downward revision of the forecasts, and all of them cite this as an alarming point (if no downward revision occurs, the share price may be able to rise). The scenario feared by investors is a kitchen sink scenario, in which the company puts everything into its write-off items, including the kitchen sink, in a period in which it cannot be attributed to a specific management team, thereby cleaning house and enabling the company to show renewed growth starting with the first financial reports signed by the new CEO.
At the same time, Raffat says, this scenario is unlikely, given the fact that Teva still has covenants to meet for its debt. The company cannot throw everything on the equity investors under the assumption that they have already reached their floor. Raffat adds that Teva has already taken into account in its calculation the possibility of a steep drop in its generics business, and has given guidance for the possibility entry of competitors for Copaxone, so it has no reason to lower forecasts, except perhaps in the new generics investments item.
Israel Police getting into the investigation act
At the same time, Israel Police has begun to investigate the accusations that Teva allegedly paid bribes in development countries. Teva reached a compromise settlement on these accusations with the US Department of Justice several months ago, and an Israeli shareholder has already filed a derivative lawsuit against the company. According to the allegations, parties acting on Teva's behalf made illegal payments in Russia, Ukraine, and Mexico for illegal promotion of the company's leading drugs. Teva's compromise with the Department of Justice, which included a $519 million payment, did not require a confession on its part, but the company declared that it had conducted a comprehensive reform of its procedures, and that none of the people involved in the affair were still working at Teva.
Teva thereby in effect admitted the accusations. The Israel Police could not have ignored this, because Israel has signed a convention requiring it to take action against Israeli companies paying bribes, even if the bribe was paid outside of Israel. The derivative lawsuit filed by Israeli shareholder Ra'bcca Technologies revealed the quality of the accusations drawn up by the US Department of Justice. As reported in "Globes," the Ra'bcca Technologies lawsuit alleges that Teva paid senior Russian government official Boris Shpigel to influence the Russian government to buy large quantities of Copaxone.
Shpigel allegedly received the payments through the Biotec company, which distributed Copaxone in Russia, and was registered in the name of Shpigel's wife at the time. Shpigel denied this in a "Globes" interview, but said in a previous interview that he had made efforts on behalf of Teva in Russia out of Zionist motives. Teva yesterday stated, "The company can confirm that, to the best of its knowledge, an investigations is being conducted in Israel regarding the same issues that led to a settlement with the US justice authorities. The settlement referred to events that occurred in 2007-2012, and none of the people involved in the improper payments is currently employed at Teva."
Published by Globes [online], Israel Business News - www.globes-online.com - on February 8, 2017
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