By Denise Roland in London and Rory Jones in Tel Aviv
Investor concerns about Teva Pharmaceutical Industries Ltd.,
which is grappling with a leadership vacuum and industry headwinds,
mounted on Thursday when the world's biggest seller of generic
drugs offered a bleak financial update that sent shares
reeling.
The drugmaker, which is Israel's largest company by market
capitalization, posted disappointing second-quarter results, cut
its full-year outlook and slashed its dividend, blaming the rapid
deterioration of its all-important U.S. generic-drug business.
Teva is confronting multiple problems without a permanent chief
executive after the abrupt February departure of former boss Erez
Vigodman. Like other generic drugmakers, Teva faces a tough pricing
environment and increasing competition that is squeezing its
already-tight margins. It is also saddled with about $35 billion in
debt and a sprawling supply chain accumulated through
acquisitions.
Adding to the company's woes, Teva's biggest shareholder said it
was dumping its shares. Allergan PLC, which acquired a 9.9% stake
in the company when it sold its generics business to Teva for $40.5
billion in 2016, announced on its own conference call Thursday that
it "will not be a long-term shareholder in Teva," adding that it
plans to sell its stock over the next few months.
Shares of Teva were down 23% at $23.91 in New York trading on
Thursday afternoon.
A yearslong deal-making streak has transformed Teva, founded
before the state of Israel to ship drugs by camel across
Ottoman-controlled Palestine, from an obscure player in generic
drugs to the industry's most important. One in every seven
prescriptions in the U.S. is for a Teva drug.
But last year's acquisition of Allergan's generics unit --
Teva's biggest-ever deal -- saddled the company with a huge debt
pile that it is struggling to pay down amid an industrywide
slowdown.
Many investors have said they believe Teva paid too high a price
for that business, given the subsequent deceleration in
generic-drug sales. On Thursday, Teva said it had taken a $6.1
billion write-down on its U.S. generics unit to reflect dimming
prospects.
Another recent deal, the $2.3 billion acquisition of Mexican
generic drugmaker Rimsa, has also created problems. Teva is locked
in a legal battle with the Rimsa's former owners over alleged
breach of contract.
These concerns were already weighing on Teva's shares before
Thursday. The stock had more than 50% since the beginning of 2016
before the latest selloff.
Teva said it now expects adjusted earnings per share of $4.30 to
$4.50 for 2017, versus earlier guidance of $4.90 to $5.30. It cut
its full-year revenue expectations to $22.8 billion-$23.2 billion,
from $23.8 billion-$24.5 billion. The company also warned that it
expected full-year cash flow of $4.4 billion to $4.6 billion,
versus an earlier forecast of $5.7 to $6.1 billion.
Its adjusted EPS for the quarter, at $1.02, and revenue of $5.69
billion both fell short of analyst expectations of $1.06 and $5.72
billion, respectively. The company also slashed its dividend in the
second quarter to 8.5 cents, from 34 cents for the first three
months of the year.
Interim President and CEO Yitzhak Peterburg said he understood
"the frustration and disappointment of our shareholders" and
promised to "aggressively confront our challenges" by cutting
costs, selling off parts of the business and paying down debt.
But Teva is in a tough spot. Mike McClellan, interim chief
financial officer, told analysts on Thursday that the company
risked breaching its debt covenants this year should its potential
divestments generate lower proceeds than hoped.
In June, Teva nominated four new directors in an effort to
address investor concerns that its board lacked international
pharmaceutical experience. But without a permanent CEO, investors
are skeptical of the company's ability to get a turnaround under
way.
"It's a rudderless ship until Teva gets a real CEO," said Benny
Landa, an activist investor in the firm. "The most important thing
is getting leadership on the board and a CEO with global
experience."
Mr. Landa and some other shareholders have advocated for the
company to be split into different divisions, one focused on
generic drugs and the other on specialty medicine. Some investors
argue the two businesses should be run by different management or
separated entirely.
Teva Chairman Sol Barer said in June that the company was
interviewing candidates for the top job, and the choice would
likely be someone with global drug-industry experience, from
outside Israel but willing to live in the country.
AstraZeneca PLC CEO Pascal Soriot was last month linked to the
job, but neither company has commented on what both described as
"market rumors."
Teva has been trying for several years to make progress on an
overhaul. In 2012, it hired Jeremy Levin from Bristol-Myers Squibb
Co. to take the helm, but he was forced out the next year during a
dispute with the board over the company's direction.
His replacement, Mr. Vigodman, an Israeli who was familiar with
the company from his time serving on its board but lacked a
drug-industry background, left the company in February amid
investor criticism over the Allergan generics deal and a deep fall
in Teva's share price.
Mr. Vigodman has declined to comment on the reasons for his
departure. Longtime CFO Eyal Desheh left Teva on June 30.
Underscoring the challenge a new chief faces in making wholesale
changes, Teva last month said it would cut roughly 350 jobs in
Israel at two factories, causing uproar among the firm's unionized
employees.
An Israeli parliamentary committee last week examined the issue
and called on Teva to negotiate with union employees or risk losing
tax breaks.
"The committee will take off its gloves" if Teva doesn't
negotiate, lawmaker Micky Rosenthal told Israeli media.
He said the firm had received 18 billion Israeli shekels, or $5
billion, over the past decade in tax benefits, calling that an
"inconceivable amount."
Write to Denise Roland at Denise.Roland@wsj.com and Rory Jones
at rory.jones@wsj.com
(END) Dow Jones Newswires
August 03, 2017 15:54 ET (19:54 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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