Teva Pharmaceuticals (TEVA) has seen its stock make two significant moves away from the S&P 500 over the past six months. In January, the stock took a big jump ahead of the general market move, stayed steady in the higher register (the jump came from the low end of a 40-43 range to the high end of a 43-46 range, about 11%). Then in mid-May the stock plunged back below 40, a two-week dive that sees Teva's share price at 38.9 entering the Monday, May 21 trading week.
(Source: TDAmeritrade: bold green line represents TEVA, black line represents S&P 500 Index)
Each of those moves was in part supported or fueled by the general market rise and fall; January saw the continuance of a 6-month bull-run, while last week was the worst of the year. The negative move also included an ex-dividend date, which tacked on $.2614 to the drop. But in each case, Teva's move anticipated the market, and in between the two poles traded with relatively low correlation.
The low correlation is not out of place. Teva is a low beta stock - Yahoo Finance gives a .65 figure for the beta, TDAmeritrade says .3 - that, like many drug companies, has many independent catalysts that can boost or cut into the share price with no connection to the overall market momentum. Two separate moves away from the market in a half-year period are, while not normal, not extraordinary either.
What's weird about those moves is that the catalyst is the same. Teva jumped on the first trading day of 2012 for the same reason the stock dropped after its Q1 earnings. The main catalyst in Teva's share price independent of the market has been the hiring of new CEO Jeremy Levin, for better and for worse.
There is a degree of irrationality baked into these moves. Analysts and investors got excited when Teva announced the hiring of Levin, hopeful his "Big Pharma" background and especially his recent success at Bristol-Myers Squibb (BMY) would help shake Teva out of its doldrums. Those investors/analysts subsequently became nervous when Levin's "deep dive" review of the business was not complete in time for the Q1 earnings call, leading the new CEO to back away from previous guidance. While Teva should not have backed guidance under the old management in the Q4 2011 earnings call if Levin was not prepared to back it, the inconsistency paled in comparison to the trading community's reaction. (For a look at why Teva's Q1 earnings report itself should not be a viewed as a huge negative, Ron Sommer's article is a top read).
An analysis of what Levin's hiring and outgoing CEO Shlomo Yanai's retirement might mean for the company's near and long-term prospects is worthwhile. Without knowing what Levin will uncover in his investigation, we can at least look into the leadership change's likely impact on the company.
Before addressing the CEOs in question, a word on the transition. All indications are that Yanai left on his own terms, and his staying on for four months to help integrate Levin into the role can only benefit the company. The duo's shared efforts on conference calls attests to the cooperation and shared responsibilities during the interim period, which should make Levin's initial months in charge easier.
Prior to Levin, there have only been three CEOs in Teva's history as a merged company (stretching to 1976). The first CEO was Eli Hurvitz, who formed Teva out of a merger with two other Israeli pharmaceutical companies (and who was son-in-law of one of the original founders of the parent company). Hurvitz led the company for a quarter of a decade and oversaw its growth into an international powerhouse. He was succeeded by Israel Makov, whose five-year term was followed by Shlomo Yanai's turn at the top of similar length.
Yanai, unlike his two predecessors or his successor, had no pharmaceutical experience, instead coming from a military and business background into Teva's leadership ranks. Under his five years, the stock has risen about 11%, well ahead of the market overall. That performance broke into two parts, however: up until early 2010, Teva under Yanai performed extraordinarily as a stock, rising nearly 70% and avoiding the effects of 2008-2009 that crushed the market; since then, Teva has lost 35-40% in value, while the market as a whole has risen nearly 20%. Some of that was reversion to mean, but fatigue with missed estimates and continued concern over the company's dependence on its multiple sclerosis drug Copaxone also contributed.
In terms of revenue and earnings growth, Yanai's time should be viewed as successful. Revenues grew from $8.4B in 2006 to $18.3B in 2011; diluted earnings per share grew from $2.30 to $4.97 over the same time period (data from Teva's annual reports). That growth was steady, as revenue grew every year and earnings only decreased in 2008, due to the costs of acquiring Barr Pharmaceuticals Inc.
Acquisitions were another major aspect of Yanai's reign as CEO. Barr Pharmaceuticals was one of the three major acquisitions under Yanai, along with Cephalon and Ratiopharm. Barr and Ratiopharm were generic companies in U.S. and Germany that allowed Teva to expand its share in the two largest generics markets in the world, and Cephalon was a move intended to give Teva access a strong drug pipeline to diversify the company's portfolio in light of Copaxone threats.
Ultimately, Yanai did well by shareholders and Teva's business as a whole. All the same, the market was ready for him to go. The drag on the stock for the past two years and the initial positive reaction to Levin's hiring stand out as evidence of this sentiment. But while Yanai's leaving represents the push factor driving the stock up, Levin's hiring as a pull factor factored into that January spike as well.
Levin's background provides plenty of positive signs for Teva's future. An outsider to the company, like Yanai, Levin brings with him experience from a long pharmaceutical career, unlike Yanai. Levin has worked as both CEO at smaller companies (Cadus Pharmaceuticals Corporation and Physiome Sciences, the latter an Israel-based company) and an executive at larger companies (Global Head of Business Development at Novartis (NVS) and Senior VP of Strategy, Alliances, and Transactions at BMY). With a medical degree and a PhD in molecular biology to back his business credentials, Levin has a near-perfect profile to head Teva.
When discussing Levin's credentials, most analysts and articles discuss his work at BMY. Levin is given credit as a "key architect" for BMY's vaunted "string of pearls" strategy, wherein Bristol farmed out research projects to smaller firms with the option of acquiring those firms or the product results upon fruition or maturation of the research. For what it's worth, over his time at BMY, the company's stock rose 22.28% vs. a negative run of about 20% for the S&P. Levin's successful role in the development and implementation of this strategy has many expecting him to lead Teva towards a more brand-name approach to drugs.
In Levin's initial conference calls, both upon the announcement of his hiring and in reviewing Q1 results, he has been very consistent on several points. He has repeatedly stated that he is looking at everything in the company to understand it fully and to develop the strategy he wants to implement for Teva. He has cited Teva's commitment to patients and the company's global footprint. Levin has also been clear about a preference to service customers' needs through whatever means necessary.
Reading into Levin's comments as Teva CEO to date, I find two key quotes that hint where he might lead the company. The first comes from the Q1 earnings call in response to a question about what Levin sees as Teva's needs:
"Having seen a number of other companies, Teva's footprint is most unusual. I think (the) global footprint (is) … extremely, extremely important to the company. Geographic dispersion, as well as the capabilities that underline not only its manufacturing commercial, but also its generic research, very, very unusual."
The insistence on unusual and the way he paints the whole company as global suggests Levin sees the company as somewhat unwieldy, suggesting Teva will focus on consolidating its recent acquisitions and streamlining its business. Teva hired Dr. Michael Hayden as President of Global R&D, and Levin suggested on the call that Hayden's role would at first center around this consolidation in the research wing of the company. This theme of consolidation makes sense after the growth of the Yanai era, and may bode well for the company as a way to focus its efforts.
Levin has also been vocal about his relative indifference between branded or generic drugs, stating upon his hiring that:
"I have a very deep philosophy in that medicines are medicines, it doesn't matter whether they are branded or generics. The key question is, can you make them affordable, can you provide them to patients, and I believe the elements that are within Teva provide exactly for that."
This suggests that Teva, in refocusing, will not get too concerned in following directly on Levin's work with BMY, or in developing new big-name drugs to rely on once Copaxone loses its singularity. The continued filling out of the company's drug portfolio will involve both sides of the drug equation, a pragmatism that is always convenient when running a large organization.
While the timeline on Levin's assessment of the company has been unclear, which spooks analysts and investors eager to confirm their models and pin their estimates off of guidance, the thorough and deliberate nature of Levin's review seems appropriate. Teva has become an industry giant, and it should take time for an outsider to grasp the business as necessary. If that leads to uncertainty for the stock price in the near-term, it also means that the shares are available at a discount; Teva's low valuations remain attractive as ever.
The company faces headwinds, between Copaxone, Europe, and industry-wide challenges. But Levin's background, experience, and initial comments reinforce the idea that he is the right person to lead Teva forward. The company is not at all broken, but the stock could use some repairs, and Levin's tweaks to the former should help the latter. Good company/broken stock is the sort of profile that should excite value investors.
It's hard to predict what Teva's stock price should be without hearing news on Copaxone and Levin's strategy. There's not much more room for the stock to go down, however, and if the CEO has been the main catalyst for the price this year, his performance will in large part dictate how the stock does going forward. With Levin's credentials and Teva's strong position, the stock looks like a winning play.
Disclosure: I am long TEVA.