Two years ago, there was much fanfare in Israel. Teva (TEVA) successfully recruited Dr. Jeremy Levin, a senior executive at Bristol-Myers-Squib (BMY), to help jumpstart the fledgling generic drug maker. It was thought that Levin could help with expanding Teva's brand name drug portfolio and secure development deals with other manufacturers. Especially on the heels of the Copaxone patent expiration, which accounts for about half of earnings, Teva needed to send a signal that the company was not resting on its laurels. By thinking somewhat outside of the box and hiring a manager who never ran a large organization and had no experience in generics, Teva took somewhat of a risk. This week, it looks like the move backfired. But why?
Tensions between Chairman Phillip Frost and Levin became quickly apparent. A decision by the executive committee to fire 5,000 employees in order to save about $2 billion set off a firestorm in Israel. Levin was forced to backtrack and agree to a voluntary retirement program for the dismissed employees. But the real issue is a row between the Executive Committee, comprised mostly of managers from other drug manufacturers, and the Board, composed of mostly Israeli former Teva executives. Born in South Africa, Levin would always be the proverbial "outsider". In many ways, prescient analysts could see a rift with the board brewing before Levin's first day on the job.
The Executive Committee recently sent the Board a letter outlining their concerns. The following paragraph is notable:
"However, the TEC respectfully urges the board to reassess their involvement in the ordinary course of business matters that in our opinion has been prevalent in recent months and hindered management's ability to effectively manage Teva and implement the approved strategy."
Levin released a statement reiterating his commitment to the company and denying the rumors about his resignation. For those of us accustomed to corporate speak, this meant a resignation must be on the way. It arrived two days later, on the morning of October 30.
Now, everything is in flux. The problem is that this wasn't a mere culture clash between a CEO and the Board. This is a fundamental rift in Teva's strategy moving forward. What kind of a company do they want to be? What is their direction? Will they focus on generics or branded drugs? How will the remaining Executive Committee work with the board now that all the dirty laundry is out in the open? It is not a simple process to steer a $32 billion company in another direction. It seems as if Teva wanted to be two things at the same time, yet struggled with difficult choices.
Investors are pummeling the stock today. It's down about 7.5% at the time of writing. Typically, CEO changes by struggling companies are met with applause by investors, as it signals a shift in strategy. The markets understand that this is about something fundamentally deeper than who is running the ship. It's about Teva's strategy and identity. Unfortunately, Frost seems to be about as confused as anyone.
From a fundamental perspective, Teva is still fairly shareholder-friendly. Piggybacking on another authors recent valuation analysis, this may be a good entry point for patient investors with a high tolerance for risk and ambiguity. Not many companies are at 52-week lows right now. Having said that, I believe that the troubles have only begun and this will take months to play itself out. Good management teams are able to articulate their strategy throughout the value chain and efficiently allocate capital. Right now, Teva falls short.