Teva’s collapse
This could be an opportunity to redirect Israel’s biotech industry
The Teva collapse resulted in a “lost year” for Israeli equities compared to other Developed Market indexes. More than any other company, Teva’s implosion accounts for the poor performance of all Israeli stock market indexes. Prior to its collapse, Teva comprised 29% of the Tel Aviv 125 Index, now down below 8%. The further planned voluntary delisting of Mylan scheduled for February 2018 follows another life sciences delisting, of Mellanox in 2013, creating another big hole in the local capital market and a loss for Israel’s role in this important industry.
Clearly, some new approach to financing medical solutions is overdue for Israel, instead of relying solely upon tax subsidies to large companies and the current limitations of our public and private equity markets. What can we learn and how can we prevent this from happening again?
Already in 2014, Teva discussed separating its generic from its specialty drug business, but instead (despite unsuccessful pressure from activist investors) it doubled down on the generic side of the business through its catastrophic acquisition of Activis, Allergan’s generics business, for $40.5 billion. Over the past two years, Teva lost $57b. of value, leaving it with a remaining market value of $19b. It owes about $35b. and faces a cliff of debt payments of $9.1b. by 2019 and $17.5b. by 2021. It faces these challenges with a cash flow that is projected to shrink to $3.2b. in 2018 due to heightened generic drug competition and the loss of patent protection for its sole proprietary drug, Copaxone.
In an important article last week, Prof. Eyal Winter argued that Teva’s failure “must not make the company that invented Copaxone into a company whose primary business is producing aspirin.” Well, it might be too late to solve that problem for Teva, but not for the Israeli scientific and technology ecosystem that can build life science solutions to global health problems.
Under the Law to Encourage Capital Investments, Teva secured over $5.7b. in tax benefits, generating free cash flow and subsidies without any conditions or accountability to Israeli taxpayers. This enabled Teva to move much of its growth abroad and pay out dividends to shareholders and salaries to the executives who managed it into decline.
Teva just shut down its R&D facility operating from Israel and slashed its overall research and development budget. Without a creative strategy, this could threaten Israel’s future competitive strength in the biotechnology sector. Teva no longer has the firepower to fund its drug development pipeline and needs to radically restructure its debt. It cannot provide long-term, fixed rate financing to drug development. With guarantees, public and private investment and credit-enhanced, researchbased obligations, Israel can. THERE ARE plenty of examples in the world of pursuing new directions focused on biotechnology and accelerating medical solutions. In 2015, London’s mayor proposed a $15.7b. biopharma development fund. In 2016, UBS launched a $470 million oncology fund. Bio-Bridge raised a $135m. fund to make smaller investments for early-stage therapies that haven’t made it to human trials. The State of California funded public bonds for $3b. to fund the California Institute for Regenerative Medicine and accelerate therapies through public-private partnerships.
The government should use current negotiations it is holding with Teva over tax assessments as a lever to help restructure some of Teva’s huge debt and transform that into a public-private partnership with the government and scientific research institutes in Israel. This could enable Israel to regain some value of the tax subsidy it lost subsidizing Teva’s disastrous buying spree. In doing so, it could reboot a value-added translational medical ecosystem in Israel to solve global chronic and infectious diseases and enable new firms to emerge from the economic and business policy failures associated with Teva.
A debt swap of specialty drug patents could also reduce Teva’s current debt burden. Teva could swap out current debt for the value of the remaining specialty drug patents whose development it can no longer support enabling Teva to right-size its reduced generic drug footprint.
Those drug patents would become part of a longterm public-private drug development partnership focused on specialty drugs, via a new Research Based Obligation (RBO) Bond that would finance the translational medical industry and other intellectual property emerging from technology transfer organizations through Israel’s globally known medical centers, incubators, and the Israel Innovation Authority. This would provide new players with sufficient runway to discover cures, vaccines, and treatment modalities including but beyond pills, where Israel’s knowledge capital can be competitive.
Last year, Teva received approval for three innovative drugs (Fluticasone Salmeterol MDPI, Vantrella and Fluticason Propionate MDPI). Another drug is in Phase III clinical trails for migraine headaches. Other drugs in development at various stages include ones for movement disorders and Huntington’s disease. Analyst reports from Citigroup, JP Morgan and Morgan Stanley reported potential sales volumes of $3-5b. annually from these drugs. Combined with patents from other technology transfer organizations in Israel, the country could yet achieve great value for the intellectual property it is so heavily invested in by fueling long-term commercialization.
In some of our institute’s financial innovations labs, colleagues from MIT, UC-Berkeley, NYU and elsewhere have shown how such financial engineering can increase success in fighting cancer, diabetes, neuropsychiatric disorders, blood disease and infectious diseases such as malaria, tuberculosis and neglected tropical diseases as well.
As Prof. Andrew Lo and his colleagues demonstrated in the case of cancer, the historical probability of success for developing a single anti-cancer treatment is about 5%, but the probability of success shoots up to 99.59% in a portfolio of 150 cancer drugs whose successes are statistically uncorrelated. This means that the probability of two or more ending up approved by the US Food and Drug Administration increases. In short, the probability of success goes up when you create a portfolio of patents where the benefits of holding a group of complementary assets exist through long-term debt financing.
The risk is further mitigated with guarantees from the government and disease-specific foundations seeking cures through outcomes philanthropy to drive real impact in accelerating health.
Israeli biotechnology and medical device companies are still some of the highest performers in Israeli equities. Companies like Protaliz Bio therapeutics, Mazor Robotics and Aevi Genomics continue to post double-digit gains as reported by Blue Star Indexes. More companies can emerge from the process of disruptive growth in the life sciences industries as science and technology improvements mature. But, we must construct the investment vehicles for drug development and delivery.
The author is senior director at the Jerusalem Institute’s Milken Innovation Center and visiting professor at the Hebrew University of Jerusalem Graduate School of Business Administration.