The new CEO of Teva Pharmaceutical Industries Ltd., Kare Schultz, is expected to announce this week a roadmap detailing how he plans 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.
Rather than setting out a grand plan forward for company growth, analysts expect Schultz, just weeks into his new job, to hunker down and outline a treatment that will ensure bare survival, as the patient needs to repay debt of some $10 billion over the next 12 months.
A Teva spokeswoman in Tel Aviv declined to comment.
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 Actavis acquisition, a failure to turn the company around and other missteps eventually led to the resignation of Vigodman in February. On November 1, Schultz took the helm.
Last month, Schultz made his first changes at the Jerusalem-based firm, once a source of national pride and a fixture of local investment plans. He announced a new organization and leadership structure aimed at giving the company “more commercial focus” and creating greater value for investors, who have seen the share price spiraling to its lowest levels in 17 years.
The company also said Teva is already working on a detailed restructuring plan that will be shared in mid-December.
The new organization and leadership structure, which took effect immediately, aims to streamline operations across regions and functions, “leveraging scale, enhancing agility, extracting efficiencies and providing increased proximity to the markets,” Teva said in a statement.
The November organizational reshuffle also saw the departure of the former CSO and head of global R&D, Dr. Michael Hayden, and the merger of all R&D activities under one global group for better efficiency.
Schultz appointed Dr. Hafrun Fridriksdottir, who previously served as president of Teva’s global generics R&D, as executive vice president of global R&D, indicating that the company’s focus will continue to be on generic drugs and not, as some had hoped, on developing more lucrative and sexy branded medications like Copaxone. That is because branded drugs require major investments of money and time and Schultz has taken the helm of a company that has basically run out of both.
So what will the December plan say?
Many details of the yet-to-be-announced plan have been cleverly leaked over the past few weeks, both in the local and foreign press, indicating that Schultz’s strategy will be to cut costs to generate short-term revenue for the firm, whose debt of some $34.7 billion is more than double its market value. The market value of Teva was $16.3 billion on Friday, with its share having lost some 54 percent in the past 12 months.
Bloomberg reported at the end of last week that Schultz aims to reduce expenses by $1.5 billion to $2 billion over the next two years through plans to cut as many as 10,000 jobs and curb research and development spending, citing people familiar with the matter. Last month, Israel’s financial website Calcalist said the pharma giant is planning to cut up to 1,700 jobs in a streamlining plan in the coming months.
“Given Teva’s high debt level, we believe that the strategy over the near to medium term will be to maximize cash flow based on the company’s current portfolio of assets (both in the branded and generic portfolios),” wrote Liav Abraham, an analyst for Citi, in a note Friday. “Teva’s strategy going forward is likely to be encapsulated in two words: cash flow.”
Abraham forecast that Schultz’s mid-December restructuring announcement will include a clear cost-cutting plan that will detail the magnitude of the cuts as well as how much of them will be realized in 2018, 2019 and beyond. Schultz is also expected to set out the firm’s financial expectations for 2018 and its intentions regarding its credit rating, which at the moment is just one notch above a junk rating. A junk rating would make it harder and more expensive for the company to raise funds to recycle its debt.
“We assume that the intent will be to maintain investment grade rating with the agencies,” Abraham said, speculating that Teva may announce some sort of “hybrid raise” of funds to help it with its debt payments.
Citi estimated that to maintain its investment grade status, Teva will have to show a “clear pathway to debt paydown” of over $10 billion over the next 12 months.
Some $2 billion of this will derive from the proceeds from the recent sale of company assets: the company said in September it had entered into agreements to sell its specialty global women’s health business and its contraceptive product Paragard. The rest will have to come from cost-cutting measures and the raising of funds, Abraham said, though she excluded the possibility of the firm raising money through the sale of shares.
If the press reports are accurate and Teva is planning layoffs and cuts in R&D spending, “it means Teva is forgoing growth in new products in order to focus only on products that add to the near term bottom line and cut costs,” Saar Golan, an equity trader at the Bank of Jerusalem Brokerage, wrote in a morning note to investors on Monday. “Rapid growth fueled by debt was the main reason Teva got itself into the current trouble.”
Teva’s shares surged 7.1 percent in New York on Friday after Bloomberg reported details of Schultz’s upcoming plan, leading to rises in the company’s Tel Aviv traded shares on Sunday as well.
“Many of the details of what we expect to see have been leaked to the press already and indicate that the new CEO will layout a roadmap, a work plan that will detail for investors how he plans to get the company to repay its debt, which is his first and most important task at the moment,” said Yaniv Pagot, an economist and head of strategy for the Ayalon Group, an Israeli institutional investor.
“What we will be witnessing later this month will be sort of an unveiling of the whole sculpture,” Pagot said, referring to the promised mid-December plan. “We have seen the leg and the arm” of Schultz’s sculpture for Teva, but “now Schultz will reveal to us his whole work of art – the whole ensemble of his plan.”