Health

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

When a CEO abruptly steps down after three years in charge, it's a safe bet the new guy isn't inheriting a corporate bouquet of roses. 

That's certainly the case at generics giant Teva Pharmaceutical Industries Ltd. Erez Vigodman's surprise exit Monday afternoon leaves interim CEO and ex-Chairman Yitzhak Peterburg with a struggling generics business, the likely loss of billions in sales from its best-selling product Copaxone after a court invalidated several patents, and a debt load that exceeds the company's market cap.

Teva doesn't have the luxury of waiting for a permanent leader to start making changes. Peterburg said in a statement that the entire business will get a through review. The company's generous dividend should be one of the things on the chopping block. 

No Savior
Erez Vigodman was hired to turn Teva around; the turnaround didn't take
Source: Bloomberg

Teva's massive debt pile was largely raised to buy Allergan PLC's generics business, a deal that closed this summer. That was pricey -- $40.5 billion for a slow-growing generics business -- and now looks even more so, as the business faces delayed drug launches and price erosion. 

Meanwhile, Copaxone's expected decline will leave a big hole. The drug accounts for about a fifth of Teva's sales and more of its profit. Nothing in the company's branded-drug pipeline looks likely to make up for this. 

And Teva has little flexibility to pursue fixes.

A Bloomberg Intelligence analysis recently found Teva could get close to its debt-repayment targets without dipping into its cash pile, even with rising competition from Copaxone generics. But that analysis rests on Teva hitting the midpoint of its guidance. That's a risky assumption for a company that is integrating a big acquisition, losing both its CEO and generics-business head, and has repeatedly been over-optimistic with its forecasts.

There's substantial risk that worse-than-expected Copaxone losses or continued generic struggles will force Teva to push out its deleveraging target, dip into its $1.5 billion cash pile, or both. Investors in the company's debt are already skittish; its $3.5 billion in bonds maturing in 2026 are trading at their lowest level since being issued. 

And in the midst of this, Teva is paying out a rich dividend:

Paying Out
Teva pays a rich dividend despite a heavy debt load and a struggling business
Source: Bloomberg

Getting rid of the dividend or substantially scaling it back would let Teva return to a reasonable leverage ratio more rapidly. It will also give a new leader more flexibility to find a successor to Copaxone or otherwise invest in the business. A healthier balance sheet would also make another oft-theorized next step, splitting Teva into separate branded and generics businesses, easier to accomplish.

It's not a decision to be made lightly, and might disappoint some investors. But the stock is so battered that any downside will be mitigated; shares are down more than 40 percent from summer 2015 highs and recently hit their lowest level since 2007.

A shored-up balance sheet is likely more appealing to many investors than the contortions required to keep paying out a possibly unsustainable dividend. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Max Nisen in New York at mnisen@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net