Should Teva join the split-up club? With CEO gone and options open, analysts press for answers

Teva
Teva is looking for the best candidate "literally in the world," chairman Sol Barer told investors Monday.

Teva faces plenty of questions right now, but analysts zeroed in on one Monday on the company's earnings call: Is the floundering drugmaker, which just sent its CEO packing last week, considering a split-up?

The investment community—including frequent breakup advocate Jami Rubin of Goldman Sachs—jumped at the chance to quiz Celgene founder and newly appointed Teva chairman Sol Barer, who led the call along with interim CEO Yitzhak Peterburg. Would Teva divide itself in two, with generics going one way and specialty pharma the other?

Barer seemed to be anti-split, but he said the yet-to-be-hired CEO would call that shot. “My personal vision is that we have a company that serves with existing drugs and we have a company that develops new ones,” Barer said, pointing out that these days, the “line between specialty and generics isn’t what it once was."

“It’s a bit of a continuum,” he said.

Barer wouldn’t disclose his own “prejudices” about which side of the company possesses stronger assets, pointing out that, theoretically speaking, “you can make arguments in either case." The announcement of a strategic review, which came last week alongside news of skipper Erez Vigodman’s departure, stoked the split-discussion flames, and Peterburg assured analysts that “we will leave no stone unturned.”

“We are here to fix what is not working,” Peterburg said on the call.

But of course, which path Teva winds up taking in regards to a generics-specialty divide will depend largely on its incoming CEO, Barer said, and his highest priority “is to find the best candidate for Teva literally in the world.”

The drugmaker wants “someone with deep and broad pharmaceutical experience that can lead Teva and take this to the next level as a company,” Barer said, adding that “I am personally involved, I am personally leading this, and I am committed to bringing the absolute best person from anywhere”—even if it means tossing out corporate governance rules that currently require Teva’s helmsman to live in Israel. He didn't say, however, whether Teva would pump up its CEO pay package, which is far lower than its rivals'.

Navigating a potential split won’t be anywhere near the only issue Teva’s next CEO has to deal with, though. For one, a court recently upturned four patents on long-acting multiple sclerosis star Copaxone to put billions of dollars of revenue at risk.

The company is currently in the middle of appealing that decision, but if the FDA approves competitors that then stage at-risk launches, Teva could see $1 billion to $1.3 billion wiped off its top line and 75 cents to 95 cents in lost EPS, Peterburg said. Overall, though, the company kept its 2017 guidance—which it already walked back by $1 billion-plus in January—intact.

The company is “very committed” to its guidance range—which includes revenues of $23.8 billion to $24.5 billion and non-GAAP EPS of $4.90 to $5.30—and “the management team and I will do what it takes to protect it, including additional cost reduction if necessary,” Peterburg said.

The reaffirmation likely reassured shareholders, some of whom got worried when they didn’t hear the range reiterated with last week’s CEO change announcement. “This lack of reiteration caused great concern among some investors,” Wells Fargo analyst David Maris pointed out in a note to clients.

And Teva’s fourth-quarter results “should allow some sigh of relief” among them, too, Barclays analyst Doug Tsao wrote in his own investor note. Total revenues of $6.49 billion beat a $6.28 billion consensus estimate, and EPS of $1.38 topped forecasts by 3 cents.

Some analysts, though, were less upbeat, predicting that staying put on the guidance front may have been a mistake. “We think this was a missed opportunity to lower guidance and position the stock for beats and raises throughout the year,” Goldman Sachs’ Rubin wrote. She and her colleagues “still think there remains a risk that guidance will be cut when a new CEO joins the company.”