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TEVA - >>> The Difficulties of Cloning a CEO


Teva Pharmaceutical is a generic manufacturer with a particular problem: It can’t find a leader or a strategy—­at least not in Israel.

By Devin Leonard and Yaacov Benmeleh

August 23, 2017



https://www.bloomberg.com/news/features/2017-08-23/the-difficulties-of-cloning-a-ceo



After the death of its former chairman in 2011, Teva Pharmaceutical Industries Ltd. rechristened its Jerusalem factory the Eli Hurvitz Oral Solid Dosage Plant. It’s fairly ordinary for a company to name a building after a former leader, though—and Hurvitz had been anything but ordinary. He served as chief executive officer for 25 years, transforming a regional business into the world’s largest manufacturer of generic drugs. Seeking an appropriate act of veneration for a man often described as the Steve Jobs of Israel, Teva had workers box up Hurvitz’s belongings at corporate headquarters, transport them to the Jerusalem facility, and re-create his old office on the sixth floor.

On a July afternoon, Ariel Tsiperfal, a member of the plant’s site management team, approaches with a key. “Not many people get to go in here,” he says as he unlocks the glass door of the corporate mausoleum. The office is set up exactly as Hurvitz left it, with his mismatched furniture, family pictures, two briefcases, a computer, business cards, and fly swatters. A desk calendar is open to November 2011, the month he died. A copy of Israel’s declaration of independence hangs on the wall by the door. “Nothing is pretend,” Tsiperfal says. “This is like a museum.” There’s a phone on the desk. He picks up the receiver and holds it to his ear and jokes, “Maybe there’s a line from above?”

Teva could use one. The company Hurvitz built is by many measures remarkable—it had $22 billion in sales in 2016, and the 120 billion tablets and capsules it produces at 69 plants around the world fill 1 of every 6 generic prescriptions in the U.S. But since Hurvitz retired as CEO in 2002, Teva has ground through top executives and grand strategies like so many chewable pills. In that time it’s had four CEOs, the most recent of whom, Erez Vigodman, departed in February after engineering an ill-fated $40 billion deal to buy Allergan Plc’s generics division. Since that acquisition was announced, Teva’s shares have lost nearly three-quarters of their value. The latest plunge came in early August, when Teva lowered earnings forecasts, cut its dividend by 75 percent, and said it still hasn’t found a new CEO. The company is planning layoffs and assets sales to pay down its debt, which Moody’s Investors Service recently downgraded to one notch away from junk.

In Israel, where Teva has long been the most prominent symbol of the country’s entrepreneurial spirit, the turmoil is playing out as much more than a straightforward business implosion. It’s a crisis at the intersection of capitalism and nationalism. So many Israelis own Teva shares that it’s referred to as menayat ha’am—Hebrew for “the people’s stock.” In mid-August, in a dethroning that would have once been unimaginable, those shares dipped enough for Teva to lose its status as Israel’s largest company by market value. Teva directly contributed 1.3 percent of Israel’s gross domestic product in 2015, but Gilead Fortuna, a senior research fellow at the Samuel Neaman Institute for National Policy Research in Haifa, says that doesn’t include the company’s many indirect contributions to the country’s economy. On top of employing 6,800 people in Israel, Teva does business with a network of smaller Israeli companies, funds much of the nation’s academic research, and serves as a spawning place for managers who go on to run other successful businesses, he says.

“You cannot force the company to be Israeli if by being Israeli it will go bankrupt”

Teva’s troubles raise the possibility that it might be acquired by a foreign competitor or even forced to move its headquarters—currently in a kibbutz-like setup in the small city of Petach Tikva—to Europe or the U.S., where it could draw from deeper pools of executive talent. This is something Hurvitz worked to ensure would never happen, even after his death. To him, Teva wasn’t just a company, but a cause. He believed it drew its strength from Israel’s soil—if Teva prospered, so would its homeland. He pushed to keep as much of the company’s operations as possible in Israel, hiring local banks, accountants, and lawyers. Teva adopted bylaws stating that it must be based in Israel and that the CEO and a majority of the directors had to be residents. “For [Hurvitz], that was a sine qua non,” says Manuel Trajtenberg, a former economics professor at Tel Aviv University and Labor Party member of the Knesset. “He managed to convince everybody, from stockholders to the board, that this was the DNA of Teva, and that taking Teva away from Israel would be bad for the company.”

But it’s not so easy for Teva to uphold Hurvitz’s patriotic dream in the age of ruthless shareholder capitalism. As large as Teva looms in Israel, only about 8 percent of its shareholders are based there. The vast majority—81 percent—are in the U.S., and most rank Israeli pride a long way below their rate of return. In mid-July, Calcalist, an Israeli business news publication, reported that Teva had persuaded Pascal Soriot, the French CEO of Anglo-Swiss drug company AstraZeneca Plc, to be its next chief. Teva declined to comment; Soriot called the speculation “rumors.” It’s unclear whether even a highly regarded executive such as Soriot could please shareholders while maintaining Teva’s Israeli-ness. That was a trick that only Hurvitz, who was known as Mr. Teva, seemed to be able to pull off.

“You cannot force the company to be Israeli if by being Israeli it will go bankrupt,” says Benny Landa, a prominent Israeli technology entrepreneur who owns Teva shares. “You can’t.”

In 1953, Hurvitz, a 21-year-old economics major at Tel Aviv University with thick brown hair and elfin good looks, reported to Assia Chemical Labs in Petach Tikva for work as a part-time test-tube washer. He’d recently married Dalia Salomon: They met while Hurvitz was working on a kibbutz; he traveled to their dates on a tractor, according to his biographer, Yossi Goldstein. Dalia also happened to be the daughter of the CEO of Assia, and once Hurvitz graduated, he ascended into the executive ranks. He expanded Assia’s business into Africa, leading a fleet of the company’s vans into the Nigerian bush, where they supplied missionary hospitals. In 1968 he orchestrated the hostile takeover of Israel’s largest drugmaker—Teva, which means “nature” in Hebrew.

By then, Israel was in the throes of the Arab boycott. American drug companies supported the ban for fear of angering the majority of their customers in the Middle East, but they allowed Israeli companies to manufacture local versions of U.S. drugs. Teva had already been making some generics, but now it was able to expand and refine its copycat business. “We used to get up every morning and thank God for the Arab boycott,” Hurvitz said in 2004. By the early 1980s, Teva was making almost 100 different generic products.

That meant Hurvitz was ready when the U.S. passed the Hatch-Waxman Act of 1984, which loosened restrictions on generics and gave Teva the chance to enter the unbranded-drug market in America. Once the patent expired on a branded drug, the law allowed the first company to win Food and Drug Administration approval for a generic to sell the knockoff version exclusively for six months. That created the opportunity for tremendous profits for copycat medication makers, who after all hadn’t spent fortunes on research, development, and marketing. Teva’s scientists found ways to replicate the effects of branded drugs using different ingredients. And while other generic manufacturers simply waited for patents to expire, Teva had its lawyers hasten the process by persuading judges to invalidate them ahead of schedule.

Teva lacked the funding and expertise to create its own drugs. But in 1987, Michael Sela and Ruth Arnon, researchers at Israel’s Weizmann Institute of Science, approached Hurvitz about a promising multiple sclerosis treatment they’d developed. Hurvitz saw a chance to demonstrate to the world that Israelis could do more than just copy drugs; they could create their own. “He said, ‘This is an opportunity. It will be a blue-and-white Israeli development, and we’re going for it,’?” Arnon recalls.

The medication became known as Copaxone. In 1996 it became the first Israeli drug to be approved by the FDA, and it was a hit. Over the years, it has generated as much as 20 percent of Teva’s annual sales. Hurvitz became a national hero. Friends tried to get him to run for mayor of Jerusalem. Candidates for prime minister tried to enlist him as finance minster. Hurvitz demurred; he didn’t want to get involved in politics when there was so much for him to do at Teva. The roof of the headquarters sometimes leaked, and cooking odors wafted up from the cafeteria below. But Hurvitz took pride in his scrappy operation. His employees dressed casually, dined on simple food, and enjoyed challenging the conventional wisdom of their spendy European and American rivals.

In 2002, Mr. Teva retired as CEO, but he retained his control of the company as chairman. He showed up for work every day, down the hall from his chosen replacement, Israel Makov, the former chief operating officer. But Hurvitz turned out to be much less brilliant at succession planning than generics strategy. He later told his biographer Goldstein that Makov committed the ultimate treason: He tried to sell Teva to a group of investors including wealthy Americans allied with Teva’s competitors. According to Goldstein, Hurvitz short-circuited the deal and arranged for Makov’s toppling in 2007.

Finding a new CEO was harder this time. The natural candidate—George Barrett, president of Teva’s North American divisions—was an American and wouldn’t relocate. So Hurvitz recruited Shlomo Yanai, a square-jawed former major general in the Israeli Defense Forces. Yanai didn’t know the first thing about pharmaceuticals, but Hurvitz was certain he could teach the newcomer anything he needed to know. That was true enough until Hurvitz, who’d been diagnosed with cancer, relinquished his position as chairman in 2010. Without Mr. Teva to guide him, Yanai engineered the $6.8 billion acquisition of Cephalon Inc., a U.S. drugmaker. The deal was rushed—Teva spent only a month on due diligence—and the consensus on Wall Street was that it had exorbitantly overpaid. Three months after the deal closed, the company said Yanai was leaving.

The next CEO was Jeremy Levin, former director of strategy at Bristol-Myers Squibb Co. in the U.S. Born in South Africa and educated at Oxford and Cambridge, Levin had spent his summers working on a kibbutz in Israel and was a Zionist. He was more than happy to move to Tel Aviv. But almost immediately he found himself at odds with Teva’s Israeli-dominated board, which included Hurvitz’s son, Chaim. The directors found Levin’s suits and ties too formal, his accent too British, and his $4.5 million renovation of the Petach Tikva headquarters far too extravagant.

“We used to get up every morning and thank God for the Arab boycott”

It didn’t seem to matter that some investors believed Levin had the right strategy. Back in 1984, when the Hatch-Waxman law passed, generics accounted for 19 percent of U.S. drug sales. Their share had since passed 70 percent, and the space was more competitive and less lucrative. Levin wanted Teva to focus more on developing its own specialty drugs such as Copaxone. That impressed tech investor Landa, who bought a stake in Teva—only to watch as Levin was forced out by the board after just 18 months on the job. “He wasn’t Israeli,” Ruth Cheshin, a former Teva director, said at the time.

Landa contacted other investors and started agitating for corporate governance reform. “It’s like a banana republic,” Landa says in an interview at his office on the outskirts of Rehovot, a town near Tel Aviv. “It’s so demeaning to have the board of Israel’s only global company behave in such an unprofessional matter.”

In January 2014 the board selected yet another CEO: Erez Vigodman, who’d been a Teva director since 2009. He’d run a company that exported hummus and another that dealt in generic agricultural products but had never managed a drugmaker. Landa was again infuriated. “The board announces, ‘We’re doing a global search, and we’re going to find the best possible candidate to run the company,’?” he says. “And then they come out and they say: ‘You know what? You won’t believe it. He’s been right under our very noses all the time. He knows nothing about pharma, but, hey, he’s one of us.’?”

A broad-shouldered technocrat with a centurion’s helmet of gray hair, Vigodman lacked Hurvitz’s charm. He tended to speak in jargon, even in private, and when he gave speeches, he sounded like a drill sergeant. But Vigodman emulated Mr. Teva as best he could. He hired Hurvitz’s former chauffeur and secretary. “He started off on the right foot,” says Peter Langerman, CEO of Franklin Mutual Series, one of Teva’s largest shareholders. It helped that Teva introduced a popular version of Copaxone in 2014 with a patent that extended to 2030.

During the Levin era, Teva had forsworn large acquisitions, but that changed under Vigodman. Pfizer Inc. expressed interest in buying the company in 2014, and according to someone who spoke frequently with him, Vigodman became obsessed with doing a big deal to keep Teva out of the hands of a foreign company—in effect, by making itself too big to swallow. Vigodman approached Brent Saunders, then CEO of Actavis Plc, a drug company headquartered in Ireland, about acquiring his company, which focused heavily on generics. But Saunders was in the midst of merging Actavis with Allergan, the maker of Botox, and politely declined the overture. Vigodman ended up making a $40 billion hostile bid for Mylan NV, another drug company specializing in generics that’s based in the Netherlands.

“Every morning I wake up, and I have to resist the forces trying to move Teva out of Israel?”

Mylan’s brash chairman, Robert Coury, was pursuing a hostile bid of his own for Perrigo Co., an Irish company. He sent Vigodman a scalding letter that referred to Teva as “dysfunctional” and noted its CEO churn. “We believe that these rapid changes in a short period of time have left the company with a complete lack of long-term strategic focus,” Coury wrote.

Vigodman responded with his own letter. “We, like every company—including yours—have had issues and front-page ‘black eyes’ in the past,” he wrote.

As Teva’s pursuit of Mylan devolved into volleys of insults, Saunders came to Vigodman’s apparent rescue. He’d completed the merger of Actavis and Allergan. At a conference in New York hosted by David Maris, then a drug industry analyst at BMO Capital Markets, Saunders coyly let it be known that he was open to shedding his generics business. According to Maris, Michael Hayden, Teva’s head of R&D, happened to be in the audience. Maris says Hayden got up, walked out of the auditorium, and called Vigodman, urging him to go back to Saunders. As Maris recounts it: “Erez says, ‘Look, I’m not going to do it again. I’ve already asked him two or three times, and he’s already said no. I’m making Teva look stupid now.’ Michael said, ‘You know what? The way he said it today, I think there’s an opening.’?”

Vigodman met Saunders for lunch at a location where no reporters or investors were likely to spot them: a restaurant along Interstate 78 in New Jersey. Within two weeks they’d thrashed out a deal, which they announced on July 27, 2015: Teva would acquire Allergan’s Actavis division for $40 billion.

That month, Teva’s shares peaked—and then began a slide that continues today. Scandals erupted around drug pricing, and U.S. presidential candidates from both parties threatened to regulate the industry more aggressively. Separately, Teva was subpoenaed by the U.S. Department of Justice as part of an investigation of alleged price-fixing in the generics sector. (Teva says it has done nothing wrong.) The company had to lower its revenue and profit forecasts for 2016 because of product launch delays and other problems. And in September, in a cosmic twist, Teva lost a U.S. federal court case challenging its patents on its newer version of Copaxone, opening the door for competitors to do what Teva itself had enjoyed doing for so many years: rush generic versions to market.

As the company’s stock sank in late 2016, Allergan’s began to recover. “Brent Saunders did one of the best deals of the last few years in health care,” says Maris, now an analyst for Wells Fargo & Co. “He sold something at a great price right when the sector was turning out to be a lot less profitable.”

“We will get a high-quality CEO. We will find one, and we will bring that person to Israel”

By last winter, Vigodman was spending much of his time in the U.S., trying to mollify shareholders increasingly inclined to see the company’s presence in Israel and insistence on Israeli-minded executives as a liability. Back in Tel Aviv, in a meeting with journalists at the stock exchange, Vigodman said, “Every morning I wake up, and I have to resist the forces trying to move Teva out of Israel.” In early January he appeared at the J.P. Morgan Healthcare Conference in San Francisco. “He looked terrible, exhausted, worn out, tired,” says Andy Summers, a money manager at Janus Capital Management. He says investors told Teva directors who’d come along with Vigodman that he had to go. The following month, Teva announced that he’d resigned. But investors knew the score. “He got pushed out,” says Tim Call, chief investment officer at Capital Management Corp. (Vigodman declined to comment.)

Once again, Teva embarked on a global search for a new CEO. In March, Sol Barer, the company’s chairman, acknowledged that Teva would look outside Israel. “We have strong Israeli roots,” he said in an interview at the time. “It’s actually a competitive edge. But at the end of the day, we’re going to bring in somebody from around the world. The choices will be from around the world. That’s the first priority.” On Aug. 16, Barer gives an update by phone. “We will get a high-quality CEO,” he says. “We will find one, and we will bring that person to Israel.”

“Sol, Sol,” interjects a public-relations liaison. “The last thing you said was, ‘And we will bring that person to Israel.’ I think what you meant to say was, ‘We will bring that person to Teva.’?”

“I’m sorry,” Barer says. “Yes, to Teva. Ha, ha, thank you. I’ve had a long day.”

Some Teva employees may not be around to see another CEO. The company plans to lay off 7,000 worldwide before the end of the year. At Teva’s Kfar Saba plant north of Tel Aviv, the workers have hung banners in the hallways reading “We won’t be the victims.”

“My heart hurts with what’s happening to Teva,” says Eliran Kozlik, chairman of the factory’s labor union. “Every day, I’m following the stock.” In the lobby a little later, he checks Teva’s share price on his phone and groans. It’s down an additional 4 percent so far that day. Behind Kozlik, there’s a portrait on the wall of Hurvitz looking skyward, as if for deliverance.

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