Teva Pharmaceuticals (TEVA) announced Wednesday that its CEO, Jeremy Levin, has stepped down after a tumultuous 18-month tenure. The question now is how long will it take the Board to find a successor without significant changes in the company’s culture?
Levin joined Teva in May 2012 from Bristol-Myers Squibb (BMY) where he successfully used a string of acquisitions to reposition BMY as it lost patent protection for its blockbuster blood thinner, Plavix. The strategy of small acquisitions came to be called “string of pearls.”
At first, it appeared that Teva, the Israel-based generic drugmaker, presented Levin a similar challenge. Teva is facing growing competition in the generic business and a loss of revenue for its patent-protected multiple sclerosis drug, Copaxone. However, unlike Plavix, Copaxone faces the additional challenge of a therapeutic shift from injectable MS treatments to oral medicines. Not only do patients prefer the simplicity of oral dosing, insurance companies like that oral medications don’t require the high costs associated with specialized handling for injectables. This therapeutic shift has increased pressure on revenues ahead of the patent expiries – accelerating the drug’s obsolescence.
Levin planned to use the same “string of pearls” approach to revive Teva in three ways: making small technological and product acquisitions; stepping up Teva’s commitment to internally-developed compounds; and cutting costs. While Levin’s business plan was a dramatic departure from Teva’s strategy over the past decade, publicly, Levin appeared to have full Board support as recently as late August.
At least, that’s what Teva’s Chairman, Philip Frost, would have you believe. Frost owns over $500M in Teva shares and plays a significant role in the company’s strategy. In August, Frost commented that he had purchased over 1 million additional shares of Teva stock, noting in an interview with Bloomberg TV that, “We need to do what’s important for the company and I personally have expressed my confidence in the way I know how to do it, and that’s by buying shares.”
But its clear that Frost’s support for Levin only went so far. And, the future of Copaxone seems to be the key sticking point. In order to get ahead of the revenue drop for Copaxone, Teva announced early in October that it would cut 10% of its global workforce (5,000 employees) by the end of 2014 as part of its overall restructuring plan. Anecdotal evidence suggests that the cuts would be concentrated in Teva’s existing products (primarily Copaxone) and the savings would be used to fund Teva’s generic and proprietary research and development.
It appears that Levin wanted to adopt a worst-case approach to managing the pending drop in Copaxone sales, while Frost still believes that the drug has more life in it. On yesterday’s conference call Frost characterized the conflict as, “…differences were over nuances rather than disagreement about the strategy itself.” Less than a year ago, Frost commented that Copaxone “will be around for awhile” and pointed to efforts to reduce the frequency of dosing from daily to several times a week.
Teva faces a number of challenges to attracting a new CEO and it appears clear that the greatest challenge will be finding candidates who are capable of implementing significant change within a company where certain reasonable options appear to be “off the table.” At this point, we believe that the markets will take a “wait and see” approach to any new candidates. Internal candidates may appear capable of dealing with the culture, but they will likely face the perception that they simply will do as Frost bids. External candidates will be hard pressed to convince investors that real change can and will happen – especially as the Company faces a rapidly-expiring window of opportunity.
