Teva to Focus on Smaller M&A

Teva Pharmaceutical Industries Ltd. is shifting away from the multi-billion dollar acquisitions that have defined its growth for the past decade, indicating acquisitions don’t have to be major to be important,” said Chairman Phillip Frost, who owns about $815 million of Teva shares, in an interview on November 19 in his Miami office. “The idea of the multibillion-dollar type of acquisition is going to be reserved for very special cases going forward, in which the desirability is so compelling and so game-changing that everyone will feel it has to be done.”

Mr. Frost’s comments signal the world’s biggest generic drugmaker may be shying from a strategy that saw it buy Frazer, Pennsylvania-based Cephalon Inc. for $6.2 billion, and Ratiopharm GmbH, based in Ulm, Germany, in a $4.9-billion deal. Petach Tikva, Israel-based Teva has made 25 buy-outs in the past 10 years, including five valued at $3 billion or more, according to data compiled by Bloomberg.

The company’s Israeli shares gained 1.6% to 155.60 shekels, the equivalent of $39.84, in Tel Aviv. The benchmark TA-25 index rose 0.3% to 1,208.66. Teva’s New York shares climbed 1.8% recently, leading gains in the Bloomberg Israel-US Equity Index of the largest Israeli companies traded in New York.

“There is the opportunity for product acquisitions, for small company acquisitions, for technology acquisitions, and to bring in new people who themselves are capable of creating the new products,” explained Mr. Frost.

Teva’s board tapped earlier this year Jeremy Levin, a former Senior Vice President for Strategy at Bristol-Myers Squibb Co., to become the Chief Executive Officer of the world’s largest maker of generic medicines, as it seeks to diversify in branded drugs. The CEO, who joined the company in May, plans to give investors a strategy update, dubbed “Project Spring,” on December 11 in New York.

American depositary receipts of the Petach Tikva, Israel-based company have dropped 2.2% this year, lagging behind the 8.3% rally for the MSCI World Pharmaceutical Index (MXWD0PH), as investors remain skeptical the company can sustain growth for its branded multiple-sclerosis drug Copaxone. Teva’s ADRs trade at 7.3 times estimated earnings, the lowest valuation among the world’s 20 biggest drug companies, which have an average price-earnings ratio of 13.4.

Teva’s stock is undervalued, and investors will realize that as Mr. Levin implements a new strategy, said Mr. Frost, who became a Teva shareholder when he sold his generic-drug maker Ivax Corp. to Teva for $7.6 billion in 2006.

“On the novel product side, Jeremy brings experience to the table that we didn’t really have at Teva before,” he said. Mr. Levin and Michael Hayden, Teva’s new Chief Scientific Officer, “will have their influence permeate the company so that the mindset will over time shift from being a generic company to a more broadly based pharmaceutical business,” said Mr. Frost. “Copaxone sales will hold up.”

The drug, an injection that accounts for about 40% of US sales of MS treatments, faces new competition from Novartis AG oral drug Gilenya. US regulators are reviewing another MS pill, Biogen Idec Inc. BG-12. Generic-drug makers are also appealing a court decision that upheld Copaxone’s US patents through 2015.

“Copaxone will be around for quite a while, I’m sure of it,” stressed Mr. Frost. “At a certain point, it’s possible a generic will affect certain markets, but the product itself will continue to be important in other markets.”

The US court decision may give Teva more time to switch patients to a new, higher-dose version of the drug. Teva has said that a late-stage trial of a longer-acting formulation reduced MS relapses more than a placebo and showed a “favorable” safety profile. Teva is also considering an entrance into emerging markets from Brazil to China, where the company’s presence is relatively smaller, said Mr. Frost.

“There is room for a lot of creativity at this point,” said Mr. Frost. “The creativity will go along with experience.”

To contact the reporter on this story: David Wainer in Tel Aviv at dwainer3@bloomberg.net. To contact the editor responsible for this story: Phil Serafino at pserafino@bloomberg.net.