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Teva's new boss has bitter medicine to administer
February 7, 2017 / 11:01 AM / 10 months ago

Teva's new boss has bitter medicine to administer

LONDON (Reuters Breakingviews) - U.S. President Donald Trump has criticised drugmakers for getting away with murder. Israeli group Teva, which has lost its second chief executive in four years, looks guiltier of self-harm.

Erez Vigodman, President and CEO of Teva Pharmaceutical, participates in a panel discussion at the 2015 Fortune Global Forum in San Francisco, California November 3, 2015. REUTERS/Elijah Nouvelage - RTX1ULU1

The loss of its CEO comes at a bad time for the world’s largest generic drugmaker. Its core business of making copycat drugs is under attack in the United States, where inflated drug prices are under growing scrutiny. In January, the group lowered sales and earnings forecasts made just a year earlier in a sign of how quickly the landscape is changing.

But Teva’s problems stretch well beyond political risk. While the company makes more than half of its money out of generics, its biggest revenue earner is its own treatment for multiple sclerosis, called Copaxone. Yet a court in January threw out a key patent that covers the drug and firms including Novartis are preparing to launch their own versions of the medicine.  Two such copycat drugs could cut Copaxone revenues by a quarter and overall earnings by nearly 17 percent, based on Teva’s assumptions and Thomson Reuters Eikon data.

There’s a playbook for getting out of trouble: bring in new management, cut costs, buy assets. None of these is easy. Deep cost cuts have already been made and Teva’s acquisitions history is patchy. Buying generics firm Actavis in 2015 now looks ill-timed and costly; a deal with Regeneron to develop treatment for back-pain is held up by safety concerns; and an acquisition of Mexican firm Rimsa resulted in a fraud spat. More deals would be risky and expensive when Teva’s debt is over three times EBITDA and its stock is depressed. One mooted idea, a breakup, would be a costly distraction right now.

This puts a lot of pressure on Teva’s next chief to set a new course. And the talent poll may be limited because the company’s rules require the chief executive to live in Israel. One easy win may involve cutting the dividend. A dividend yield of more than 4 percent looks too high for a company with quite so many challenges. Teva’ depressed valuation of just 7 times forward earnings, half the pharma sector average, shows this may not be the only bitter medicine that lies ahead.

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