Teva Lands A CEO: Can Schultz Replicate Lundbeck Success?

Teva Pharmaceutical Industries Ltd.'s new CEO Kåre Schultz has established a solid track record in the short time he's been overseeing the rationalization of Danish neurology drug specialist Lundbeck Inc. Whether he can replicate the same success at a very different kind of company – the world's biggest generic drug company – is now the question.

Lundbeck's share price has more than tripled during his time as CEO of the company, with sales rising by a healthy 16% in those two years (as of the end of 2016) and profits, margins and cash flow restored to vitality. His golden touch at Lundbeck, experience in the central nervous system (CNS) and history dealing with a patent cliff stand in his favor.

Teva has been struggling for some years to establish a coherent strategy for future growth, especially as the US generic drug sector has come under intense pressure. One diversified opportunity is the company's CNS franchise, including the branded multiple sclerosis drug Copaxone (glatiramer acetate) and the late-stage migraine prevention treatment fremanezumab, though that business is facing competition from both generics and innovative new drugs.

Investors welcomed the appointment of a CEO after a lengthy search, with Teva's share price showing some recovery, up 16.6% on the Tel Aviv stock exchange Sept. 11. Nonetheless, the stock still is trading down substantially from where it was trading in July prior to releasing disappointing second-quarter financials on Aug. 3. The Israeli company has been searching for a CEO for seven months, with former chair Yitzhak Peterburg standing in on an interim basis since Erez Vigodman fell on his sword in February 2017 after failing to turnaround the company in three years at the helm. Schultz could benefit from being an industry insider, a change from Vigodman who previously worked in the generic crop chemical sector.

"While Schultz does face numerous challenges (i.e. generic and branded segments are facing headwinds), we think having an experienced pharmaceutical executive join the company is the single most important item," wrote BTIG analysts in a same-day note.

"Schultz's long track record in the pharmaceutical industry combined with his success in turning around Lundbeck seem to make him a strong candidate to lead Teva's recovery," Credit Suisse analysts said.

Credit Suisse's Vamil Divan highlighted in particular the incoming CEO's ability to launch new products successfully while "aggressively managing expenses" – something that could stand him in good stead as Teva prepares for the launches of fremanezumab and rolls out Austedo (deutetrabenazine) for a recently-approved tardive dyskinesia indication. (Also see "Teva Set For Immediate US Launch Of Austedo In Tardive Dyskinesia" - Scrip, 31 Aug, 2017.)

However, Teva has other challenges in less familiar territory for Schultz, who prior to joining Lundbeck had a long career in senior leadership at diabetes and hemophilia drug maker Novo Nordisk AS, where he was once tipped for the CEO position. (Also see "Ex-Novo Nordisk protégé Schultz becomes Lundbeck CEO" - Scrip, 6 May, 2015.) Pricing pressure in the US generics market is a particularly large problem for Teva as the biggest player – more than half of its revenues coming from generic medicines sold in the US – and will present a different type of challenge for Schultz, who is more accustomed to positioning a business to weather generic erosion of formerly patent-protected products.

Teva has riled investors by failing to meet guidance on several occasions, and the company lowered its guidance for the year following a disappointing second quarter; management also said Teva would cut its dividend by 75%. (Also see "Teva SOS: Troubled Drug Maker Seeks Audacious Captain To Take The Wheel" - Scrip, 3 Aug, 2017.)

Schultz's inexperience in generics left Divan wondering "how his appointment may impact Teva's long-term strategy in that business given the structural challenges the generics industry is currently facing."

Still, Schultz has risen to other challenges in his career, which included experience working in the pharmaceutical and health care sector for McKinsey and Anderson Consulting, implementing a metrics focused approach to operations at Novo Nordisk, modernizing that firm's large-scale biologics production and leading its expansion into Chinese and US markets.

Teva has faced some criticism from investors for paying too much to acquire the large generics portfolio from Allergan PLC last year given the challenges in the US, but consolidation is one of the ways Teva sought to overcome the challenges.

Interim CEO Peterburg emphasized that the firm is on course to generate at least $2bn from the sale of non-core assets. The company already has begun "optimizing our operations and geographic footprint" and focusing resources on assets (both generic and specialty drugs) that offer the best returns on investment.

Schultz's arrival could accelerate that rationalization and may well herald more job losses, although Teva already has announced 7,000 job cuts since acquiring the Allergan generics. Within three months of his arrival at the smaller Lundbeck, Schultz announced a restructuring with 1,000 job cuts. (Also see "Lundbeck Restructures Around 5 Key Products; 1,000 Jobs To Go" - Scrip, 19 Aug, 2015.)

In May, Teva revealed plans to divest its women's health portfolio and its oncology and pain businesses in Europe as it scrambled to meet a $5bn debt reduction target by the end of 2017. It remains to be seen how much progress will be made with this before Schultz joins; for the time being he remains at Lundbeck and no firm start date has been announced. Teva also will need to secure a permanent CFO – a role that's been filled by interim CFO Michael McClellan since July, following the departure of Eyal Desheh.

Lundbeck Under Pressure

For Lundbeck, whose share price fell 13.8% Sept. 11 after Schultz's departure was announced, Teva's news is not the only blow. The company also announced that Chief Commercial Officer Staffan Schüberg resigned. It described the double resignation as a coincidence, and noted that Schüberg was leaving to become CEO of a privately owned company.

"I could easily see myself working at Lundbeck for many years … I just got an offer that I couldn't refuse"

Lundbeck's chairman Lars Rasmussen said in a statement that Schultz was leaving the firm when it was "strong and healthy, and with a clear strategic direction." He added: "The board is very pleased with the strategic path and the outlook for the company and sees no reason to change the strategic path the company has entered."

For his part, Schultz said he had been "extremely happy" as CEO of Lundbeck, which was on track to "deliver the best financial result ever" in 2017. "The outlook is strong with high profitability and solid cash flow generation many years ahead and I could easily see myself working at Lundbeck for many years. I just got an offer that I couldn't refuse, being CEO at one of the biggest pharmaceutical companies in the world," he was quoted as saying in Lundbeck's press release.

However, the two-year surge in Lundbeck's share price have left some fearing that the company may be over-valued. Deutsche Bank analysts wrote in a Jul. 28 note that "following a 30% share price increase year-to-date, the shares are now trading at 30x 2017e earnings … reflecting a very positive scenario for the company's new drugs, equivalent to Rexulti [the depression/anxiety/psychosis drug brexpiprazole] generating $3bn of peak global revenue."

The analysts described this scenario as "a significant leap of faith" given that Deutsche Bank is forecasting peak sales for the product of around $1.9bn. They said "management has progressed the pipeline and weathered patent headwinds well" but warned "we now believe there is a level of exuberance that ignores the fact that Lundbeck is a company with small molecule (easy to copy at patent expiry) products with a limited pipeline."

Both Lundbeck executives will remain in their positions until further notice, and the board will immediately begin the search for their replacements. Schultz eventually will relocate to Israel to be based at Teva's Petah Tikva headquarters.