Without a doubt the most frustrating and disappointing company that I’ve invested in over the last several years has been Teva Pharmaceuticals (TEVA) based out of Israel. The company has had a litany of manufacturing disruptions and “one-time” charges that have led to unsatisfactory profitability. The company has posted extremely low returns on invested capital and equity, which is atypical for a pharmaceutical company with a blockbuster drug such as Copaxone, and the most scale in the generic drug industry. Today it has been announced that recently hired CEO Jeremy Levin is stepping down from the company over disagreements with the board of directors about strategy. While such a short tenure is worrisome, I didn’t get the feeling that Levin was heading in the right direction, so I believe that if the board makes the right hire, this could turn out to being a positive development.
Teva has an interesting API business and significant manufacturing and distribution capabilities. I believe that the new management team should mimic Valeant Pharmaceuticals strategy of acquiring proven products and incorporating them into the company’s distribution system, which is truly global. Then Teva must focus relentlessly on eliminating excess costs from the system. the other potential strategy for Teva would be to split apart its businesses into branded drugs, generic and potentially a third business focused on API’s. This would allow each management team to direct capital to the highest returning opportunities without conflicts of interests throughout the company. I added to our long Teva position today on the sell-off because the stock is extremely undervalued, but I’m disappointed in both the Board and the outgoing CEO. The company trades at a single digit p/e and price to cash flow multiple, which makes sense given the future expiration of Copaxone, so that market is basically saying the company will not grow after losing a substantial portion if its current earnings potential. If attractive acquisitions aren’t available, the company should be buying back stock aggressively, while reducing costs, which would bolster margins and returns on invested capital.