Teva Pharmaceutical Industries Ltd. said on Thursday it plans to cut 14,000 positions globally – over 25 percent of its total workforce – over the next two years.
The drug-maker said the number of layoffs in Israel would total some 1,700 employees by the end of 2019, according to a letter sent to Teva’s Israeli employees. The restructuring will see the closure of the Jerusalem manufacturing plant by the end of 2019 and some of the research and development activity in Israel will be cut back. The company will also seek to sell off its global logistics center in Shoham and its plant in Kiryat Shmona.
New CEO Kare Schultz, who took the firm’s helm on November 1, on Thursday unveiled a reorganization plan meant to lead the recovery of the ailing Israeli drug-maker, which has been suffering from price cuts in its generics business and sooner-than-expected competition to its flagship branded drug, Copaxone, for multiple sclerosis.
The 14,000 jobs cut do not include the impact of any future divestments of assets, Teva said.
“Two weeks ago we announced a new organizational structure and executive management team. Today we are launching a comprehensive restructuring plan, crucial to restoring our financial security and stabilizing our business. We are taking immediate and decisive actions to reduce our cost base across our global business and become a more efficient and profitable company,” Schultz said in a filing to the Tel Aviv Stock Exchange.
Teva shares were trading 18 percent higher at 3:53 p.m. in Tel Aviv, as trading resumed after the announcement.
The reorganization plan has already encountered fierce opposition from Israeli politicians, and the powerful Histadrut labor union called for general strike throughout the country next Sunday morning in anticipation of the layoffs, as details of the plan leaked to the press over the past week. They point out the tax incentives the drug maker has received from the government over the years. The company received NIS 22 billion (some $6.2 billion) in breaks since 2006, Avi Nissenkorn, chairman of the union, said on Wednesday.
Teva’s workers union called the day “a black day for the Israeli economy and for Teva.”
The two-year restructuring plan announced Thursday is aimed to reduce Teva’s total cost base by $3 billion by the end of 2019, out of an estimated cost base for 2017 of $16.1 billion. More than half of the reduction is expected to be achieved by the end of 2018, the company said.
The majority of the reductions are expected in 2018, Teva said.
Teva expects to record a restructuring charge as a result of the implementation of the plan in 2018 of at least $700 million, mainly related to severance costs, with additional charges possible following decisions on closures or divestments of manufacturing plants, R&D facilities, headquarters and other office locations.
The company had some 6,800 employees in Israel and some 57,000 workers globally as of the end of November, and is one of the nation’s largest employers.
Teva said that the restructuring plan will focus on the immediate deployment of the new unified and simplified organizational structure announced on November 27.
The plan will cut costs and increase internal efficiency by reducing layers of management and simplifying business structures and processes across the company’s global operations, the statement said.
The restructuring also envisages a shakeup of generics activities globally, and specifically in the United States, through price adjustments and/or product discontinuation, Teva said. The steps will include the closures or sale “of a significant number of manufacturing plants” in the United States, Europe, Israel and other markets, Teva said.
The plan also envisages “closures or divestments of a significant number of R&D facilities, headquarters and other office locations across all geographies” in an effort to achieve “efficiencies and substantial cost savings,” the statement said.
The company will moreover perform a “thorough review of all R&D programs across the entire company, in generics and specialty, to prioritize core projects and terminate others immediately,” Teva said.
In addition to the restructuring plan, Teva also said it would immediately suspend dividend payments on its ordinary shares; it will freeze annual bonuses for 2017 “due to the fact that the company’s financial results are significantly below our original guidance for the year,” and “will continue to review the potential for additional divestment of non-core assets.”
Strategy can wait: Focus is on cash generation, short-term revenue
Teva will provide full guidance for 2018 in February, and will provide further, longer-term strategic direction for the company later in 2018, the company said.
“A longer term strategy will come later in the year, however, in the near term we must remain focused on cash flow generation, short term revenue and serving our debt,” Schultz wrote in a letter to Teva employees. “We must maintain business continuity, and execute the restructuring, all while adhering to the highest standards of ethics and compliance. Finally, it is imperative that we deliver on our plans so that we regain trust and confidence.”
“These are decisions I don’t take lightly but they are necessary to secure Teva’s future,” Schultz said in the TASE statement. “We will implement these changes with fairness and the utmost respect for our colleagues worldwide. Today’s announcement is about positioning Teva for a sustainable future which we will achieve with our talented people.”
In a conference call, Schultz said that the firm does not intend to raise equity and will remain focused on deleveraging its debt, as it has already started doing. He said he expected Teva’s debt to be cut “significantly” by 2020 following the measures.
He added that the company expects to launch Austedo and fremanezumab in 2018, the company’s treatments for complications arising from Huntington’s disease and migraines.
Teva, until recently a source of national pride and a fixture of local investment plans that won the moniker “the people’s stock,” has seen its share plunge some 56 percent over the past 12 months amid a series of missteps that led to sharp increase of its debt.
Rather than setting out a grand plan forward for company growth, Schultz has hunkered down and outlined a treatment meant to ensure company survival, as the firm needs to repay debt of some $10 billion over the next 12 months.
Teva’s debt ballooned after the company acquired drug manufacturer Actavis Generics for some $40 billion under former CEO Erez Vigodman, a move that turned to be an expensive deal for the company in light of the drop in prices of generics drugs due to higher competition. Teva has also failed to find an alternative for its flagship cash-generating branded drug Copaxone 40mg for multiple sclerosis, which is seeing earlier-than-expected competition from copycat versions.
The Calcalist financial website reported on Thursday that Prime Minister Benjamin Netanyahu spoke by phone with Schultz and requested he curb as much as possible the damage to Israeli workers and ensure that Teva’s Israeli identity will be preserved. Schultz promised to do his best on both counts, the financial website reported.
“Clearly, this is a necessary step for survival and shareholders and certainly bondholders will like it, but we need to get through some bumps on the way,” Saar Golan, an equity trader at Bank of Jerusalem, said by email.
“As usual, the less appealing side of capitalism — workers pay the price of management mistakes and bad investments while failed managers float away with golden parachutes,” Golan wrote in a note to investors on Thursday. “Teva is no different.”