Teva's CEO News Is Encouraging
Teva (TEVA) and Lundbeck’s announcement that Kare Schultz, previously CEO at Lundbeck and COO at Novo Nordisk, will take over as Teva’s new CEO is encouraging news for Teva but troubling for Lundbeck. We do not expect changes to our moat ratings or fair value estimates for either company. Details on the official timing of the management transition are still forthcoming.
We find the departure of Schultz concerning for Lundbeck, as the company’s turnaround success can largely be attributed to Schultz’s aggressive tactics after taking over as CEO in mid-2015. Shortly after his appointment, Schultz announced a bold plan for margin expansion, signifying a stronger alignment with shareholders' interests and a clear plan for Lundbeck’s return to profitability following patent losses on key drugs. Now that the threat of the firm’s patent cliff is nearly behind it and cost reduction strategies have largely played out, we don’t expect significant changes to Lundbeck’s upward growth trajectory with Schultz’s departure. However, coupled with the simultaneously announced departure of Chief Commercial Officer Staffan Schuberg and lack of executive replacement plan from Lundbeck’s board, we are less confident in the company’s ability to execute on additional margin expansion tactics. We think the recent sell-off feeds into our thesis that the market is over-rewarding Lundbeck for its turnaround story.
Schultz inherits difficult challenges at Teva, including a potential generic Copaxone launch, high financial leverage, and competitive pressures in the generics industry. In the near term, we don’t imagine Schultz’s leadership will lead to dramatic changes since the firm has already announced layoffs, closed manufacturing sites, and plans to sell certain assets. Longer term, however, Schultz’s familiarity in branded drug markets could cause the firm to take on more product development risk, with purchases of earlier-stage products and more dramatic asset sales.
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