Teva Returns to Roots after 'Nuthouse' Board Ousts CEO
This time last year, the chairman and chief executive officer of Israel’s Teva Pharmaceutical Industries Ltd. (TEVA), the world’s biggest generic drugmaker, were foreigners. Miami billionaire Phillip Frost led the board and Jeremy Levin, a South African, was CEO. They were the first non-Israelis to hold those positions.
Now, Teva’s brief experiment with outside leadership is ending. After Levin made a number of significant changes, such as hiring foreign executives and terminating partnerships with Israeli companies, he was forced out in October. Frost, who picked Levin in 2012, said he may retire before his term ends next year.
At a company whose identity is inextricable from its homeland, foreign management prompted a backlash. According to current and former executives, the upper ranks of Teva were divided, often along national lines, as the business struggled to reconcile local roots with global ambitions. Teva’s bylaws say its CEO, headquarters and a majority of the board must reside in Israel; 11 of the 15 current directors live there. In an interview, one Israeli director, who declined to speak on the record, described Frost’s tenure as the “American supremacy.”
“Levin literally had no idea what he was walking into,” said Ori Hershkovitz, a managing partner at Sphera Funds Management Ltd. in Tel Aviv. “The board of directors is like a nuthouse.”
Frost, 77, denied that there have been tensions between directors.
“The board has been very congenial,” he said in a phone interview on Feb. 21.
Last month, an Israeli board member, Erez Vigodman, replaced Levin. Vigodman will remain on the board. Another Israeli director, Dan Propper, is a leading candidate to take over as chairman, according to people familiar with the matter.
Levin’s ouster exemplifies a dilemma that many multinationals face: the challenge of integrating a foreign CEO. In recent years, a number of global companies have struggled to promote and retain leaders from outside their homelands.
When Deutsche Bank AG named Indian-born executive Anshu Jain as its CEO in 2011, the Frankfurt-based company also hired a German as co-CEO, partly to allay concerns at home. In Japan, it’s rare for companies to hire foreigners as CEO. Osaka-based Takeda Pharmaceutical Co. made waves in November when it picked a French national, Cristophe Weber.
“Teva has an extraordinary record of success operating as a multinational for many years with its base in Israel,” Teva spokeswoman Denise Bradley wrote in an e-mail. Bradley said the company doesn’t discuss internal board matters.
In response to pressure from a group of activist shareholders led by Israeli entrepreneur Benny Landa, Teva has pledged to change its board, reducing its size while adding directors with international pharmaceutical experience.
“The company has the DNA of an Israeli company,” said Chaim Hurvitz, a Teva director. “The people who made it are all Israelis. At the same time, you have to be cognizant that most of our business is outside Israel.”
Analysts have criticized the company for balking at making cuts at home. Ronny Gal, an analyst at Sanford C. Bernstein & Co., said manufacturing costs in Israel are three times greater than they are in countries such as India.
Teva “has not been able to make the transition from being a local company with a global reach to a global company with a local base,” Gal said.
Vigodman, who lacks pharmaceutical experience, is known in Israel as a turnaround specialist -- a skill he’ll immediately have to put to work at Teva. In May, the patent on the company’s bestselling product, the multiple sclerosis drug Copaxone, expires, leaving a gaping hole in profits. Vigodman must execute the company’s $2 billion cost-cutting program, which has met political resistance in Israel.
Teva’s connection to the country runs deeper than the ties that bind most multinationals to their homelands. The company is referred to locally as “the people’s stock.” Its annual revenue of $20 billion equals almost 8 percent of Israel’s gross domestic product. As a result, Teva is a source of national pride and a subject of perpetual media attention.
“There is a saying in Israel,” said Meir Heth, who served as the company’s chairman for eight years. “When it comes to mother and Teva, there’s only one.”
Teva employees typically stress the company’s “Israeliness.” One aspect of this, they say, is chutzpah -- defying convention, slashing through bureaucracy, speaking truth to power.
“Israel is different. It’s not America and it’s not Europe; it has its own rules,” said Ruth Cheshin, a Teva director who served on the board for more than 20 years.
When asked about Levin’s departure, Cheshin offered a simple explanation: “He wasn’t Israeli.”
The 60-year-old Levin declined to comment on the events leading up to his departure and said he intends to continue working in health care.
“The experience at Teva was both interesting and, from my perspective, offered me an opportunity to see many different aspects of the industry I wouldn’t have otherwise seen,” he said.
Based in Petach Tikva, an industrial town outside Tel Aviv with a population of 210,000, Teva’s headquarters is in a two-story stucco building. Employees dress in jeans and sneakers. No one bats an eye when a peacock saunters near the entrance.
The informal culture belies Teva’s size. The company produces one of every six generic drugs prescribed in the U.S.; flip over a drugstore brand pill bottle and there’s a good chance its unobtrusive green and white logo appears on the back.
Founded in 1901, Teva boomed under the leadership of Eli Hurvitz, its CEO from 1977 through 2002, and then chairman until 2010. During his tenure, the company employed aggressive legal tactics to obliterate drug patents, launching copies faster than its peers and producing them in larger quantities. In 1996, the company introduced its first major proprietary drug, Copaxone.
Hurvitz, who spent his formative years on a kibbutz, started washing test tubes for the company in his early 20s. In Israel, he is a business icon -- the local equivalent of Steve Jobs. When Hurvitz died in 2011, Prime Minister Benjamin Netanyahu called him “one of the greatest industrialists the state of Israel has ever known.”
Hurvitz’s shadow looms over Teva’s headquarters, where black and white portraits of him hang on the walls. Employees quote his favored aphorisms, such as, “It’s better to get a speeding ticket than a parking ticket.” The company maintains an empty office in Hurvitz’s memory at its Jerusalem facility.
After Hurvitz retired as CEO in 2002, he still showed up daily at Teva’s offices. Eventually, the chairman clashed with his successor as CEO, Israel Makov. In 2007, the board replaced Makov with an ex-Israel Defense Forces major general named Shlomo Yanai.
Yanai worked hand in hand with Hurvitz until the chairman stepped down. Soon after, the company made a crucial misstep. Teva spent $6.8 billion on Cephalon, a specialty drug manufacturer in Pennsylvania. Former executives say the deal was rushed, as they spent less than a month conducting due diligence.
Today, most analysts say the company overpaid for Cephalon, which saddled Teva with debt. Between 2005 and 2012, the company’s revenue more than tripled to $20 billion while profit failed to grow at a corresponding rate. Even worse, it has failed to find a substitute for Copaxone.
In 2011, the board decided to look for a new CEO. Two directors flew to the U.S. to court Levin, then the head of strategy, alliances and transactions at Bristol-Myers Squibb Co. Levin engineered Bristol’s “String of Pearls” approach to acquisitions, forgoing big, expensive takeovers in favor of carefully orchestrated buyouts and licensing agreements.
Unlike Yanai, Levin was a dealmaker who was well-known on Wall Street. Born in South Africa, he obtained degrees at Oxford and Cambridge while spending summers working on a kibbutz in Israel. A self-described Zionist who speaks Hebrew, he was enthusiastic about moving to Tel Aviv.
Levin ran into cross-winds before he even started. According to several current and former executives, Levin’s appointment as CEO leaked to the Israeli press before he could inform Bristol that he had taken the job. He was furious.
After breaking the news to Bristol, Levin flew to Tel Aviv with Frost on the chairman’s private jet on New Year’s Day. On Jan. 2, he delivered a hastily composed speech.
Teva’s U.S.-traded shares rose 6.8 percent the next day.
“He was very well liked,” says David Maris, an analyst at BMO Capital Markets in New York. “You only have to meet him once to see he’s the real deal.”
A few days after Levin started as CEO, Frost, the chairman since 2010, mentioned at a news conference that he was interested in serving for another term. His comment was a shot over the bow; two Israeli directors, Chaim Hurvitz and Amir Elstein, also were interested in the job, according to several former executives. Frost won in the end.
The episode aggravated already tense relations between some of the Israeli directors and Frost, a cigar-smoking doctor who lives in a $53 million mansion on Miami’s Star Island.
“The board is kind of split, in conflict with itself, which was one of Jeremy Levin’s problems,” said Jonathan Kreizman, an analyst at Bank of Jerusalem.
Their disagreements encouraged distrust. Leaked announcements popped up in the Israeli newspapers, over items as minor as Teva’s decision to shift its U.S.-traded shares listing from the Nasdaq to the New York Stock Exchange. At one point, the board conducted an internal investigation into the issue.
“Every side of the board of directors was trashing each other,” Hershkovitz at Sphera Funds said.
A divided board wasn’t Levin’s only challenge. After making a series of massive acquisitions, Teva had become highly decentralized, with different regions largely responsible for their own procurement, human resources, and business development. In some cases, purchasing officers in different countries would buy the same raw materials at different prices, while business development teams competed for the same targets.
Levin revamped Teva’s organizational structure, hiring executives to run global functions. He brought in an Italian, Carlo De Notaristefani, to run operations, hired a Canadian, Michael Hayden, to head R&D, and chose an American, Jill DeSimone, as head of women’s health.
“He brought in guys with pharmaceutical experience,” said Gal at Bernstein. “That should have been done years ago.”
Still, the moves irked some longtime executives in Israel, several of whom were fired or left. Levin also hired a firm in the U.S. to help handle investor relations, a move that angered the company’s Israeli CFO, Eyal Desheh, according to several former executives. The company declined to comment on the incident.
Others were upset when Levin started to unwind some of the company’s partnerships with local biotech firms, effectively shuttering an initiative called Teva Innovative Ventures. Former executives say there were more than 30 of these investments, many of which seemed unlikely to bear fruit. Local investors were shocked that “Mother Teva” was breaking ties.
“They cut their blood stream -- many Israeli companies stopped living because Teva ended deals with them,” said Eldad Tamir, CEO of Tamir Fishman Group, a financial services firm in Tel Aviv. “I don’t think people thought it would be that dramatic.”
Unlike the lavish world of Big Pharma where Levin cut his teeth, Teva has a reputation for extreme frugality. According to former executives, its U.S. offices in Pennsylvania were cramped, with sparse furnishings; staffers had to borrow chairs from the cafeteria when visitors swung by.
Shortly after Levin arrived, the CEO, who was often the only person to wear a tie to work, set about renovating the Petach Tikva office at a cost of about $4.5 million. Some employees saw this as profligate.
Levin started an initiative called Project Spring, inviting 200 Teva employees from around the world to a retreat near the Dead Sea, where they worked on a new strategic plan. He enlisted the help of Boston Consulting Group and formed task forces around issues like regulatory affairs. The CEO picked a German executive to run the task force for culture, a move that one former vice-president says raised a few eyebrows among the Israelis.
The board thought Project Spring took too long, according to former executives and directors. When Levin unveiled the strategy at a packed auditorium in Manhattan in December, the reaction was underwhelming. After the CEO said about $2 billion would be pared from costs, analysts complained that he didn’t announce a major acquisition.
“People thought there would be some grand strategy. There wasn’t a lot of meat on the bone,” BMO’s Maris said.
Maris also was unsettled by the presence of several Teva directors, who he said were scrutinizing Levin.
“Ordinarily, that could make investors feel good, if the board is super engaged,” Maris said. “But instead it came across as, they’re watching the new CEO. They’re going to handcuff him.”
During Levin’s first few months at Teva, Frost was his ally. After the December presentation fell flat, the duo had a falling out. Some executives attribute the rupture to a clash of strong-willed personalities. Others said Frost felt Levin was taking too long to execute his strategy.
There was another, more controversial, source of friction. According to several current and former executives, Frost occasionally asked the deals team at Teva to look at companies in which he had a financial stake, a practice that made them uncomfortable. One of those targets was Prolor Biotech Inc., an Israeli company that Frost partially owned. Eventually, the chairman used his own holding company, Opko Health Inc., to buy out Prolor -- though not before encouraging Teva to look at it, according to several people familiar with the matter. Levin turned the deal down.
While Frost declined to comment on whether Teva evaluated Prolor, he said the subject was “definitely not a source of tension” between him and Levin.
Teva “looks at a great variety of companies,” he said.
A closer look at Teva’s board reveals numerous financial relationships involving Frost, the likes of which could affect directors’ independence. Since Frost became Teva’s chairman, Opko has invested in companies associated with current Teva board members Richard Lerner and Arie Belldegrun, the chairman of a small biotech called Arno Therapeutics Inc. Such liaisons date back to 2006, when Frost took a stake in a small company called Protalix Biotherapeutics Inc. Its chairman at the time was Eli Hurvitz. Frost said such relationships are always disclosed to Teva’s board.
“It’s only natural that some of the people who know one another will invest together. It’s very normal,” he said. “These are minor investments.”
In an e-mail, Belldegrun wrote that he hasn’t spoken with Frost about Arno since the chairman’s “relatively minor investment” in the company. Lerner didn’t respond to a request for comment.
In 2013, the board began to intervene more often in routine company business, current and former executives said. A recent filing shows that Teva’s directors met 82 times that year, up from 53 in 2011. By comparison, the board at Merck, whose revenue is more double that of Teva, met 27 times in 2012. Several of the executives said they often had to prepare reports for the directors, who were paid $2,000 per meeting.
During Levin’s tenure as CEO, Teva did only a handful of deals with small specialty drugmakers. Former executives say directors were gun shy after the Cephalon acquisition. In addition, as Levin clashed with the board, analysts began to wonder if the rift was hampering the company’s appetite for acquisitions.
“One part of the board brought him into be the deal guy, and the other side didn’t let him do deals,” said Hershkovitz.
According to current and former executives, Levin wanted to buy a San Diego biotech called Receptos Inc. (RCPT) Several directors traveled to San Diego to assess the company, which would have cost Teva about $700 million, the executives said. In the end, the board said no.
The tension between Levin and the board bubbled over in 2013. When Teva learned that patent protection for Copaxone, which was supposed to expire in 2015, would actually end in 2014, it accelerated its cost-cutting plans. In October, Teva announced it would lay off 5,000 employees.
The news that Mother Teva might let go a few hundred people in Israel caused an uproar. The chairwoman of the country’s Labor Party called the announcement “an act of cannibalism,” criticizing the company for paying Frost $700,000 for use of his private jet.
“The payments for the use of my plane covered a fraction of the actual costs, and frequently included other Teva employees or directors,” Frost wrote in an e-mail.
At the end of October, Teva’s executive committee -- referred to internally as TEC -- requested an urgent meeting with the board. On a Thursday afternoon, the entire management team except for Levin met the directors at the Hilton Tel Aviv, which overlooks the Mediterranean Sea.
Allan Oberman, the head of the company’s Americas generics division, read a letter aloud. He told the directors that the team was united behind Levin and that the dissent was endangering Teva’s prospects.
“TEC respectfully urges the board to reassess their involvement in the ordinary course of business,” Oberman said.
When he finished, Frost awkwardly thanked the team for the comments. The meeting lasted less than 20 minutes.
Five days later, Levin met with the directors for their usual monthly meeting. After it started, Frost called an executive session and asked the CEO to leave the room. A few hours later, several directors emerged and told Levin that he was out.
The day that Teva announced Levin’s exit, the company held a heated conference call. Maris, the BMO analyst, accused the board of running a “dysfunctional organization.” Another analyst asked Frost about the letter, which had leaked to a local television station.
“First of all, not that it matters, but there was no letter,” the chairman replied, according to a transcript of the call. When asked about his comment, Frost would say only that the directors “received no letter.”
In recent months, talk has increased that Teva was vulnerable to a takeover. Valeant Pharmaceuticals International Inc. (VRX), a specialty drugmaker, has been on an acquisition spree; generic producer Actavis Plc announced last month the $25 billion purchase of Forest Laboratories Inc. Gal at Bernstein wrote in a note that Teva could enter into a merger of equals with a rival like Mylan Inc. or Actavis, adding that the buyer would have to overlook “home country concerns.”
In an interview at Teva’s headquarters, Desheh, Teva’s CFO, disputed the idea.
“I don’t think it’s practical,” Desheh said. “If [the U.S. government] allowed it, they would put so many constraints on it, it would take most of the value out.”
After two years of relative inaction, Teva will accelerate its pace of acquisitions this year, Desheh said.
“We have the capability, we have the capacity, we have the managerial experience,” he said. “We’re also welcoming a new CEO that believes that’s a way to grow.”
Since Vigodman’s appointment was announced in January, Teva’s American depositary receipts have rebounded 20 percent to $49.41 as of yesterday’s close in New York. George Soros’ fund recently boosted its stake in the company.
Levin hasn’t taken on a new role. Three weeks after he left Teva, he gave a speech at Tel Aviv University and jokingly called himself an unemployed immigrant. He told the crowd that he planned to spend more time in the country.
“There is special warmth and love in Israel,” he said.
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