Teva investors applaud and staff revolt as Schultz swings the axe
With unions already threatening to bring Israel to a halt, Teva’s new chief executive Kåre Schultz has his work cut out to implement the wide-ranging cost-cutting programme unveiled today.
The rescue plan involves slashing $3bn, or a fifth of the generics giant’s cost base, by the end of 2019. Around 25% of the workforce will be cut, alongside “substantial optimisation” of the generics business globally. Dividend payments have also been suspended although investors have taken this on the chin – the company’s ADRs opened 14% higher in US trade.
The share price climb is of course off a very low base – Teva’s market value had more than halved this year, to $16bn, on concern that the struggling company would find it hard to pay back its huge debt pile. The bounce this morning, to $18 per ADS, signals some hope of a turnaround from investors, many of whom will be remembering the heady days of $60 per ADS, only two years ago.
Teva had already slashed its dividend back in August, and today’s news that shareholder payments will be suspended for the foreseeable future was probably inevitable. Perhaps executives considered it important to be seen spreading the pain – annual bonuses will also be halted – although as Teva stock features so prominently in Israel’s pension funds, Teva’s demise will be felt widely.
On the block
Optimisation of the generics business will focus on the US through “price adjustments and/or product discontinuation”, Mr Schultz wrote in an email to employees. This, he said, will allow for a manufacturing and supply chain “restructuring”, which he acknowledged will result in closing or sale of manufacturing plants in the US, Europe, Israel and growth markets.
The threat to sensitive Israeli jobs has prompted a call for a general strike by its domestic union.
|No of employees at end of 2016||Expected losses|
|Rest of the World (excluding Israel)||15,759||?|
|*Source: Haaretz. All other numbers sourced from Teva.|
It will not be just manufacturing jobs that will go: the plan also calls for closure of research and development, headquarters and other office facilities. Along with closing R&D facilities, Teva is undergoing a pipeline review and will “prioritize core projects and cancel others immediately”, joining Astrazeneca and Glaxosmithkline in the externalization game.
Mr Schultz’s email emphasised that Teva will launch Huntington’s disease drug Austedo and migraine project fremanezumab, so at least those two late-stage assets will not be part of the cull.
If the company’s declining financial outlook in the face of a mountain of debt had not telegraphed it already, the selection of former Lundbeck chief Mr Schultz should have prepared employees and investors alike to what was coming. His ability to right the ship could be limited by employee pushback, potential for conflict as internal organisations merge or are eliminated, and a tough payer environment, especially in the US.
And even if it is all successful, as Bernstein analyst Ronny Gal points out, at the end of the restructuring Teva might be a better company financially, but it could still be stuck on the same strategic questions. Mr Schultz has shown he can cut. But he still needs to demonstrate his plans for growth.