The Collapse of Teva, the Israeli giant generic drug company – a case study in strategy and intelligence

In business, failure of corporations is never a result of one reason. It is always a combination of a few and very often if one looks into the details, he will find a major problem of strategy, and this has to be associated also with unsatisfactory understanding of the competitive landscape. If you add weak board of executives and over confidence of the senior management together with major changes in the markets – clearly the corporation is in a crash course. The tragedy is that internally very few seeing it is coming. This is a strategic surprise to the management as well as to the investors.

Let's see what happened to Teva

The collapse of the Teva share by 24% in trading two days ago is the destruction of the largest value of an Israeli company on one trading day. $ 7.5 billion has evaporated from the value of the company, which is still known, from inertia, probably the flagship of the economy, and sometimes the nation's stock.

The collapse of the share was explained by factors such as the worsening of competition in the generic market in the US, a failed and expensive purchase in a miserable time, a real danger to Teva's debt repayment ability - but the collapse was the concrete manifestation of management failure of at least one decade. Excessive profits from a single original drug (Copaxone for treating multiple sclerosis) and aggressive accounting covered weak implementation of bad strategy and flawed corporate governance.

The failure is registered to some degree in the name of Teva's former CEOs- but the roots of the crisis lie in the managerial and corporate culture by the late CEO Eli Hurvitz, who was responsible for its transformation into an international pharmaceutical giant and the one that led Teva to its actual success.

Hurvitz, who was the de facto controlling shareholder in Teva, established a weak board of directors. The nature of the company's board of directors, whose remains exist to this day, explains not only its failure to prevent an unfortunate purchase, such as the acquisition of Actavis Generics  for $ 38 billion at the very beginning of the decline in prices in the generic drug market in the United States, but also its failure to instruct management to develop original drugs that will be an alternative source of income for Copaxone, and to prepare for changes in the generic drug market.

Teva, which for much of the past decade has been the world's largest generic drug company, has not, for example, been set for an era of biosimilar drugs: simulated versions of genetically engineered mammalian drugs. These drugs, whose patents expire in recent months one after the other (as Herceptin for the treatment of breast cancer) are characterized by significant sales and it is difficult to develop generic versions.

This means that in this area of generics drugs, relatively weak competition and high profits are expected for generic producers. While Teva has almost completely ignored this market, a company like Sandoz of the Novartis group has been launching generic versions of these drugs in recent months. Teva's tough competitor in the US market, Mylan, was also authorized to market Biosimilier. Ignoring this market is similar to a car manufacturer who does not develop a hybrid car or refuses to treat an autonomous vehicle.

This failed board of directors reached an accounting policy that reported inflated profits - which have moved away from economic reality by excluding legal expenses, erasing failed investments and restructuring expenses from the reported net profit. Teva's liberal accounting was accompanied by a systematic policy of minimizing the problems and weaknesses that gradually worsened the company's relationship with the capital market and the analyst community. When a share plunges 24% in one night, it means that Teva has sent a distorted and inaccurate message to the capital market in recent months. This is despite repeated questions by analysts over the past year about price declines in the generic drug market in the US. It is doubtful whether in the foreseeable future Teva will be forgiven for such a fundamental breach of trust.

The collapse of the share led Teva's value to $ 24 billion - a value lower by $ 11 billion than the balance of the financial debt accumulated with the acquisition of Actives Genix. The fall of the share diverted attention from a no less dramatic development: the collapse of the company's bonds. Teva has become the story of a company in financial distress, and for the first time it is already unclear whether it will be able to repay its huge debt.

The company's weak cash flow - $ 742 million in the second quarter and $ 1.2 billion in the first half of 2017 - led to the company's financial debt not only declining in the second quarter, but also slightly increased due to changes in exchange rates. All this happens while the company is enjoying 6 months of grace due to a delay in launching generic versions of Copaxone, the company's main profit center. The company's announcements of a 75% dividend cut, attempts to sell two relatively small divisions (women's health and anti-cancer drugs marketed in Europe) and even the planned layoffs of 350 workers in Israel are seen as a small and insufficient step in light of the huge challenge of debt repayment.

It seems that Teva will be required to sell far more significant parts of its operations in the near term to meet the challenge. It is not by chance that chairman Saul Berer and interim CEO Yitzhak Peterborg refused to rule out the possibility of splitting the company into two divisions, noting that they are consulting with a consulting firm for additional alternatives to selling properties. In the coming year, Teva is expected to experience a difficult process of efficiency that will shrink it to its true proportions: a very unsuccessful generic company that has flourished for two decades as an international pharmaceutical giant thanks to one random success.

Conclusions

For quite a few years, a huge corporation like Teva has a very weak strategic planning unit. It is mainly getting inputs from external strategic consultants but one of its most important units – business development has no strong strategic capabilities and also is not depending on strategic competitive intelligence. This seems to be odd – but when a corporation has a strong feeling that it is doing very well, the senior executives do not feel they need inputs from internal business strategists. I'm sure that a different point of view which appreciated strategic deep thinking internally could help Teva to take better decisions.

Keywords: strategy, Israel, competition, competitive intelligence, Teva.

Avner Barnea, Ph.D. is a senior competitive intelligence strategic consultant and also teaching strategic CI in various MBA programs in the academia in Israel. He is head the track of Corporate Security, Cyber security, Competitive Intelligence and Crisis Management, the MBA program, Netanya Academic College, Israel. He is a former senior officer with the Israeli intelligence community and currently chairman of the Israel CI Forum (FIMAT) and member of SCIP Board of Directors. E-mail: [email protected]