With $40 Million Pay, Teva Breaks From Custom for Turnaround
(Bloomberg) -- Teva Pharmaceutical Industries Ltd. is betting $40 million that the man credited with the rapid revival of a Danish drugmaker can do it again -- and it’s breaking from century-old traditions to prove it.
Following a seven-month search for a new chief executive officer, the world’s biggest maker of generic drugs will pay Kaare Schultz of H. Lundbeck A/S that amount in cash and stock just for signing on at a company besieged by $35 billion of debt, slumping profit margins and expiring patents on lucrative medicines like multiple sclerosis treatment Copaxone.
“They were desperate. If you were looking that long for a CEO and nobody is willing to take the job, you pay big,” said Ori Hershkovitz, chief investment officer of Nexthera Capital LP, a New York-based health-care hedge fund with $300 million under management, which holds a short position on Teva’s stock. “It’s huge. Even for U.S. pharma this is big.”
For Teva, the package is a substantial departure from customs that in some cases date back to its founding in 1901. For instance, the top job has traditionally been filled by an Israeli who agreed to accept frugal compensation compared with typical American and European rivals. Schultz, who will relocate to Israel, stands to make many times more than former CEO Erez Vigodman, who didn’t get a sign-on bonus and was offered $4.49 million in compensation for his first year on the job in 2014.
The task before him is considerably more daunting than anything he would have faced at Lundbeck. For starters, he has to decide whether to split Teva’s generics and specialty drug lines into two different businesses and needs to drum up enough cash from asset sales and job cuts to avoid breaching debt covenants in the coming months.
Vigodman stepped down after the $41 billion acquisition of Allergan Plc’s generics unit he engineered last year failed to deliver the sales boost he promised. That revealed cracks in Teva’s strategy of aggressive acquisitions that made it into a pharmaceutical giant but also saddled it with a debt burden that’s almost twice its market value.
Schultz, a Danish pharmaceutical industry veteran, is largely unknown outside the European drugs industry. Speaking in an interview, Teva Chairman Sol Barer said Schultz has “every single” qualification that Teva’s board sought. "At the end of the day, all these salaries are a very small fraction of the shareholder value these guys can bring,” he said.
Shares in Teva, which have slumped 67 percent in the past 12 months, rallied 12 percent on Monday as investors welcomed the appointment. Prior to Lundbeck, Schultz spent more than 20 years climbing the ranks of Novo Nordisk A/S, the world’s biggest maker of insulin, eventually holding the role of chief operating officer as the drugmaker expanded in the U.S. and China. He left after he was passed up for the top job at Novo.
Then at Lundbeck -- where Schultz earned the equivalent of $6.1 million in salary and bonus last year -- he navigated the company through a difficult period that saw patents expiring for its biggest drugs. He cut about 17 percent of the workforce and oversaw a $480 million restructuring and brought a number of new medicines to the market. Lundbeck is now on track to report record sales and earnings this year and its stock price has almost tripled since Schultz’s appointment.
Aside from the signing on perks, Teva will pay Schultz a base salary of $2 million and an annual cash bonus of as much as double that amount depending on performance, the Israeli company said in a filing to the Tel Aviv stock exchange. All told, he could earn up to $12 million a year.
Schultz will also become part of a new generation of chieftains at the vanguard of the global pharmaceutical industry: Vas Narasimhan, a Harvard-trained doctor, will become CEO of Swiss giant Novartis AG on Feb. 1. Emma Walmsley, 48, in April took the helm at London-based GlaxoSmithKline Plc, becoming the only woman to run one of the world’s largest drugmakers. Over in the U.S., David Ricks, 50, became CEO of Indianapolis-based Eli Lilly & Co. on Jan. 1.