Teva CEO: "The company played not to lose, now we’ll play to win"
Teva CEO: "The company played not to lose, now we’ll play to win"
Richard Francis' decision to focus on innovative drugs has boosted the stock by 40% since he took office. However, the high debt is still burdensome and the realization of the potential depends on the success of developments that are still in the laboratory
"In recent years, Teva has played not to lose, but now we are shifting to play to win. Sometimes we will lose, but we will not play defense anymore," this statement is a distilled summary of the plan Richard Francis, who assumed the position of CEO of the Israeli pharmaceutical giant a year ago, has got for the company.
"I know that for decades Teva was considered the 'people's stock' and I take this responsibility very seriously. I also believe that Teva should be valued higher and I believe that it will be worth more than today. Investors' sentiment towards Teva has changed because we have shown that we are a growth company. The trend will continue and the investor community will begin to look at us differently, this will also lead to a different pricing in the coming years," continued Francis, detailing the nostalgia of the Israelis who believed for years that Teva shares could only go up, a trust that was broken somewhere in 2015. In the same year, the company reached a record value of almost $80 billion and since then it has mostly experienced falls all the way to its current value of about $15 billion.
The meeting with Francis took place on Tuesday at the company's relatively new offices in Kiryat Atidim, to which the company's headquarters moved in the midst of the pandemic. There is something deceptive about the British CEO, who replaced the Danish Kare Schultz. On the one hand, he has European manners, speaks quietly and from the lapel of his jacket protrudes the obligatory white handkerchief. However, a little above the handkerchief he wears the yellow ribbon pin (in solidarity with the Israeli hostages held by Hamas).
On the way to the room where the meeting takes place, it is hard to ignore the many photos of Eli Hurvitz that adorn the walls of the high-tech-looking offices, which are completely different from the kibbutz atmosphere that characterized the company's historic headquarters in Petah Tikva. In a completely unexpected way, it is also difficult to ignore a certain external resemblance between Francis and Hurvitz in the older photos, when he was younger. By the way, the 55-year-old Francis is the youngest CEO of Teva since it was Hurvitz himself who took over the pharmaceutical factory from Petah Tikva, turned it into the generic pharmaceutical company that at its peak was the largest in the world and made Teva a stock owned by almost all Israelis.
Now Francis, in turn, has to reinvent Teva, after it was almost euthanized following the upheaval it went through after the huge failed $40 billion acquisition of the generics division of the American pharmaceutical company Allergan. Francis' predecessor in the position fought for five years in an attempt to reduce the huge debt of $34 billion that the company took on to finance the purchase and in legal battles that descended on the company like a flock of black swans. Schultz did much of the dirty work and left Francis with a healthier company with fewer issues, but without a future of growth or any news for investors.
Francis, who comes to Teva after more than a decade of direct competition with it as a senior executive and later also as CEO of Sandoz, one of its bitter rivals in the generics sector, did not rush to make dramatic changes in the first months of his tenure, but mainly studied and observed. In the last half of the year, he began to make changes that signal a new direction for Teva.
How much does Francis try to put Teva's past behind it? Yesterday's meeting was probably the first event in Teva’s history where the word "Copaxone" was not mentioned even once. The innovative medicine for the treatment of multiple sclerosis that turned Teva into a huge company on a global scale and generated revenues and profits of tens of billions of dollars. The expiration of the patent on the drug is what put Teva into a spin in the first place and led to a series of managerial mistakes in an attempt to find a new growth avenue and profit engine for the company.
Another drastic change that Francis is leading, partly out of necessity, is building business plans that are based solely on organic sources. "We will not purchase anything," said Francis, "we trust only ourselves and not anyone else from the outside. We are of course doing business development, but we do not have to purchase anything," he refined the strategy which is of course derived from the $16 billion debt on Teva's balance sheet combined with a historically low share price. During Teva's previous growth period, its strategy was based on acquisitions at a high rate and integrating them into the company's existing set-up. In retrospect, it turned out that the company was not as good at integration as it thought, but Copaxone allowed it to maintain an inflated expense structure, a luxury that Francis does not have.
Francis' organic plan, already underway, tries to leverage what he found in Teva. It is based more than ever on the development of innovative drugs and at the same time reducing generics to only drugs that have real added value and the ability to reach the market first. The development is financed by profits from Teva's current blockbuster, the Austedo drug that passed the sales mark of one billion dollars last year and is expected to generate revenues of $1.5 billion this year. Alongside it is also Ajovy for the treatment of migraine and Uzedy, which was launched at the end of 2023 for the treatment of schizophrenia. "We have no plan to split the generic arm out, because it participates in financing the development costs for the innovative drugs," Francis clarified.
Contrary to this, Francis is moving forward with the plan to sell Teva's active pharmaceutical ingredients (TAPI), a plan that he already set in motion almost immediately upon taking office. "TAPI has greater growth potential separately from Teva as the second largest company in the $85 billion market," explained Francis, "TAPI currently has an annual turnover of about a billion dollars and they need to grow at least at the rate of growth of the market which is 6% per year, but can also grow much more. Such assets do not come to the market often."
Judging by the latest transactions in this market, the sale of the activity may yield about a billion dollars for Teva. About two years ago, the pharmaceutical giant Sanofi made a similar move when it issued its active pharmaceutical ingredients division at a value of $1.2 billion. All these actions should ensure, in Francis' opinion, continued growth, even if not particularly fast. "In 2023, we grew for the first time in years, and when you see what led to the growth, you realize that you can continue to grow for another ten years," he says.
Meanwhile the capital market likes what Francis is doing. Teva's stock jumped 40% since he took office and last January Teva returned to being the largest company on the Tel Aviv Stock Exchange with a value of NIS 53 billion. This value, of course, was not determined in Israel, but on Wall Street, where the hedge funds noticed a stock that was underpriced after the large and loyal investors abandoned it over the past few years as Teva became more and more mired in legal complications in painkillers and price-fixing cases in the generic drug market. All of these led Teva to trade at a dramatically lower profit multiple than all of its competitors, despite the fact that it enjoys an operating profit of approximately $4 billion and a positive cash flow of $2 billion that allows it to service its debt.
The calculations funds do is simple. It is enough to take a look at the American company Neurocrine Biosciences, which is traded on Wall Street with a value of $13 billion, similar to Teva. This value of the company is based entirely on one drug - Ingrezza - which competes directly with Austedo, Teva's largest drug today for the treatment of a neurological disease called tardive dyskinesia. Ingrezza was indeed the first to reach the market and therefore its revenues are higher than Austedo, but not by much - $1.8 billion in 2023 compared to $1.2 billion and this year it is expected to generate revenues of $2 billion compared to $1.5 billion in Austedo, which is growing faster. It is easy to see that the market is not actually pricing all of Teva's other activities, or in other words, $14.5 billion in revenue from a line of generic drugs and an original drug for migraine treatment.
This is of course just one example and it can explain the performance of the Teva share since Francis began to appear more and more at the conferences of the major investment banks who also raised the recommendations for the share. The change of direction was also good for Francis himself, who upon his arrival received a much more modest remuneration package than that of his predecessor who put all his professional prestige on the line and left with more than $50 million after five years in Teva. However, the contract signed with Francis for three years gives him an annual salary of $1.6 million before bonuses, a capital grant of $9 million in restricted shares and a signing bonus of an additional $5 million in restricted shares, which have surged since November 2022, when he signed the contract with Teva.
In the meantime, both Francis and Teva investors have reasons to smile, but we must not forget that Schultz’s first year in office was also accompanied by optimism and a 50% jump in the stock. In the end, despite the announcements of Teva's return to growth, the forecast it provided for 2024 still reflects a slight increase compared to 2023, the high debt still does not allow the freedom of action that a company of Teva's type and size needs and much of the future potential depends on the successes of developments that are currently in the lab.
"When I examined Teva before joining, I looked at its 124-year history and saw that its recent past is not what defines the company. In my previous positions in the pharmaceutical market, I always competed directly with Teva and it was the most challenging and tireless competitor of all. This is what I see in Teva and not the mistakes made, because the past is not what defines us, but what allows us to look forward."
"I'm trying to give a voice to Israel"
One of the things that no CEO of a large pharmaceutical company has ever faced is a war taking place tens of kilometers away from the company's global headquarters. Richard Francis, the second non-Israeli CEO in Teva's more than 100-year history, certainly did not take such a scenario into account. His contract does have a clause to finance relocation costs to Israel, but at this stage he prefers to keep his place of residence away from the Israeli cauldron, but he comes here often. His predecessor in the position Kare Schultz, who came from Denmark, moved his residence to Jaffa for five years during which he managed Teva. But Francis comes to Israel on a regular basis and the current visit is also far from his first since the outbreak of the war.
"As a company, we have business continuity plans for every scenario," says Francis, "We have mechanisms that ensure that everything will function. Israel is responsible for at least 8% of our production and everything that is produced here can also be made in our other factories. In terms of sales, the Israeli market is responsible for only 2% of Teva's revenues. However, our headquarters are in Israel as are the largest number of employees. It is impossible to underestimate the amazing ability of the employees in Israel to continue working as usual in this atmosphere when at every moment they are subject to constant concern for their loved ones. When I joined Teva, I was warned that Israelis are very direct people, but I think you need to work on their marketing. It's not just that you are direct, but very dedicated and passionate about what you do, and that's what you've seen in recent months. I don't know if there is another country whose citizens could function as well as the Israeli workers during the war," he stresses.
"I see it as part of my job to make people outside of Israel understand what Israelis are going through and I try to give Israel a voice, to communicate things so that as many as possible understand the facts and the reality in the country." Francis pointed out that over the past few months Teva has not encountered any incidents of boycotts on its products and presented an ambitious project that Teva Israel has undertaken through the establishment of the "Mental Caregivers" fund to promote the treatment of the trauma of Israelis following October 7. Within the framework of the fund, Teva, in cooperation with other parties, will train, among other things, trauma care teams nationwide and strengthen the resilience centers in the south, in order to deal with the shortage of therapists and the long waiting times for mental health care in the public health system.
