Teva CEO pressured to restore stock price
Israel-based drug maker's new Chief Executive Jeremy Levin must prove to investors that it will be a very different company going forward
Levin's ability to paint a bright future for the world's biggest maker of generic drugs at a meeting with investors and analysts on December 11 in New York became a bit more difficult last week, when Teva issued a 2013 earnings forecast that fell short of Wall Street estimates.
Levin, a big pharma veteran, is expected to shift Teva's focus to branded drugs even as its most important such product, top-selling multiple sclerosis treatment Copaxone, faces new competition and a 2015 patent expiration. Investors are also hoping for a meaningful boost to the annual dividend while new management works to jumpstart a stagnant share performance.
"I've made a lot of money in Teva and I've seen this company wither in front of my eyes," said Dan Hunt, a co-portfolio manager for RCM Capital Management's Wellness Fund. Hunt's fund no longer includes Teva shares, but RCM has small Teva holdings.
"The most important signal (shareholders) need to hear on the record from Levin is 'whatever it takes I will protect you,'" Hunt said, adding that Teva has not delivered for its shareholders in years.
Teva's US shares are up about 2% in 2012 after falling 22.6% in 2011. They are off 35% from a 2010 peak at about $64. Shareholders of smaller Teva rivals Watson Pharmaceuticals Inc and Mylan Inc have fared far better with Watson up about 45% this year and Mylan shares up about 27% over the same period.
Levin has taken some preemptive steps to placate investors ahead of the meeting by announcing that the company plans to cut $1.5 billion to $2 billion in costs over the next five years, streamline operations and discontinue some research programs.
Morgan Stanley estimated that Copaxone sales account for 58% of Teva's projected 2013 earnings. Levin will have to reveal how he plans to make up for the anticipated decline in Copaxone revenue beyond cost-cutting efforts.
Generic drugs accounted for 56% of Teva's revenue last year, but the company faces obstacles to generic growth in the United States, the world's largest market.
Following a wave of major patent expirations, the number of multibillion-dollar drugs going generic will diminish after the next couple of years. And new generic drugs are facing competition sooner along with faster price declines. Generic drugs are also facing considerable price pressure in Europe.
Small acquisitions
South African-born Levin, a former senior vice president for strategy at Bristol-Myers Squibb Co, took over as CEO of Israel's biggest company in May, replacing Shlomo Yanai.
In five years at the helm, Yanai engineered a number of large acquisitions, including last year's $6.5 billion purchase of US drug maker Cephalon, which has been viewed by some analysts as a disappointment. The company last month took a $481 million impairment charge related to the Cephalon deal.
Levin last week signaled a desire for more targeted acquisitions focused on Teva's core areas of expertise, such as central nervous system disorders and respiratory diseases.
He has begun to whittle away at non-core businesses, selling Teva's US animal health unit to Bayer for up to $145 million. Investors said Teva needs to improve production efficiency and downsize or close some of its plants.
Levin, who implemented at Bristol-Myers a series of deals and alliances with small and large companies, has been credited with helping to guide Bristol through its enormous patent cliff as the blood clot preventer Plavix, which had been the world's second biggest selling prescription medicine, lost exclusivity.
"The key is smart deals and getting an estimate of what a reasonable growth rate is going forward," said Robert Caravella, equity research analyst for Victory Capital Management, which holds about $9 million in Teva convertible bonds.
"The biggest issue is there's not an understanding of where revenue and earnings are going to go and how we're going to get to that point," he said.
Bigger dividend?
Shareholders would also like to see Teva raise its dividend, which provides only a 2.5% return on the stock, below the industry average of about 4%. Alternatively, the company may decide to increase shareholder returns by boosting its $3 billion share buyback.
Steven Tepper, an analyst at brokerage Harel Finance, said Levin must demonstrate how Teva can again become a growth company or that it will be a value investment going forward through a significant dividend increase. "This plan will have to convince investors it's making that move," Tepper said.
RCM Capital's Hunt said Levin must present "a strong, formed, clear strategic vision" of where the company is headed.
The question is whether it will be enough to convince disenchanted investors such as Stewart Capital, which has more than $1 billion in assets under management but sold its Teva holdings shortly after Levin took over.
Matthew DiFilippo, chief portfolio strategist for Stewart, was skeptical that one individual could affect the change necessary to transform Teva back into an industry darling. "So while we recognized his talents, we also recognized the challenges they face and we sold," he said.
A lot of money remains on the sidelines waiting for what Levin has to say, said Ori Hershkovitz, managing partner at Israel-based pharmaceutical hedge fund Sphera. Levin needs to say he is committed to replenishing Teva's branded pipeline and will do whatever it takes to replace those lost sales by 2016, Hershkovitz said, and he must "make the market believe it".
