Teva Pharmaceutical Industries Ltd. disclosed its long-awaited plan to restructure operations and reduce its crushing debt, revealing that it will eliminate more than 25 percent of its work force and seek to slash $3 billion in net costs from its bottom line by year-end 2019. In a conference call with analysts after outlining the company’s plans in an email to employees, Kåre Schultz, recently named president and CEO, said “the only thing that we’re really protecting is the product flow,” leaving the company’s entire R&D operation and manufacturing capabilities vulnerable to cuts during its internal review.
Schultz acknowledged the company was facing four major challenges, leading with its debt, which totaled approximately $34.7 billion at the end of the third quarter. The others, well known inside the company and out, include generic competition to Copaxone (glatiramer acetate), already under siege by other manufacturers; price erosion in the generics market; and a slowdown in Teva’s first-to-file (FTF) efforts and U.S. generics launches. (See BioWorld, Oct. 5, 2017.)
Teva plans to reduce expenses – expected to top $16 billion this year – by eliminating some 14,000 jobs around the world, closing office and R&D sites and streamlining manufacturing. Half of the reductions are expected to be achieved by the end of next year, with the remainder by the end of 2019.
Teva said most of the job losses will occur next year, and most employees who are affected will be notified within 90 days. The company said it will comply with local requirements and begin shortly to consult with relevant employee representatives.
Teva expects to record a restructuring charge of at least $700 million, mainly related to severance costs. Schultz said additional charges are possible following decisions on facility sales or closures.
The company will move from separate global commercial groups for generics and specialty pharma into a single integrated organization. Imposition of a “unified and simplified organizational structure” is expected to reduce layers of management, create synergy and simplify business structures and processes across global operations, according to Schultz. Teva will seek to optimize its generics portfolio globally, but mostly in the U.S., through price adjustments and/or product discontinuation. The overhaul of its generics portfolio will enable the company to accelerate restructuring of its manufacturing and supply network, including closures or divestments of “a significant number” of facilities in the U.S., Europe, Israel and other markets.
Teva spokeswoman Kaelan Hollon told BioWorld that “Teva is conducting a thorough review of all R&D programs across the entire company, in generics and specialty, to prioritize core projects and terminate others immediately, while maintaining a substantial pipeline. The measures taken as part of the restructuring are aimed to achieve higher profitability and productivity, and this includes substantial actions within the manufacturing network. All decisions will be business-driven and based on network rationalization.”
Hollon said the company had no additional comment on its plans, including the impact to partnerships, pipeline prioritization by asset stage or indication, and out-licensing as a fundraising strategy.
Teva immediately suspended dividends on ordinary and American depositary shares and said dividends on mandatory convertible preferred shares will be evaluated on a quarterly basis, as customary. Retained employees and management will share the pain, as those eligible for bonuses, except sales reps, will not receive a bonus in 2017.
Teva said it will provide full guidance for 2018 in February with its 2017 year-end financing results and share an updated long-term strategic outlook later in 2018.
‘More favorable pricing in generics is likely unrealistic’
The company plans to execute its structural changes without distracting attention from the commercial launches of Austedo (deutetrabenazine), approved earlier this year to treat Huntington’s chorea, and fremanezumab (TEV-48125), partnered with Otsuka Pharmaceutical Co. Ltd. to prevent migraine. In October, the company submitted a BLA to the FDA for the anti-CGRP candidate, based on data from the phase III HALO program in episodic and chronic migraine.
Investors applauded the size of the overhaul, sending Teva’s shares (NYSE:TEVA) 18 percent higher Thursday before closing at $17.30 for a gain of $1.59, or 10.1 percent. While encouraged by the moves, analysts nevertheless cautioned that the Jerusalem-based company still could find itself resigned, in the words of Cowen and Co.’s Ken Cacciatore, “to simply tread water at the current operating cash generation.”
Teva’s downsizing decision, although unfortunate in human terms, “is exactly what was necessary to preserve the cash flows to meet its current debt obligations,” Cacciatore wrote. “However, these cost reductions will come at some cost to the revenue profile, which management would not quantify. And a confident stance by management about being able to work with its customers to accept more favorable pricing in generics is likely unrealistic.”
In the end, assuming the potential Copaxone degradation and other potential revenue impacts, a $1.5 billion reduction in operating cost in 2018 “will simply keep Teva at its current cash generation position (at best),” he added.
Added Jefferies Group LLC analyst David Steinberg in a flash note, “A key component of the new CEO’s strategy is optimizing TEVA’s generic portfolio for profitability, with plans to increase prices on certain products and exit markets where profitability cannot be achieved,” consistent with Schultz’s commentary that he believes in “’margins over volume.’” Schultz also stressed the need to execute on FTF generic opportunities and launches, and on Austedo’s commercialization and that of fremanezumab, expected in mid-2018, Steinberg pointed out.
Whether Austedo could become a blockbuster drug, as previous Teva officials suggested, is debatable. Cortellis Competitive Intelligence pegs the five-year consensus forecast at $485 million. The five-year sales forecast for fremanezumab – which faces CGRP competitors from Eli Lilly and Co. (galcanezumab), Amgen Inc. and partner Novartis AG (erenumab, AMG-334), and Alder Biopharmaceuticals Inc. (eptinezumab) – is $511 million. (See BioWorld Today, May 15, 2017.)
“Teva’s restructuring and early details from new CEO Kåre Schultz on the future direction of the business contained two core items we were hoping to see: harsh cuts across the board and strong suggestions of further divestitures,” Piper Jaffray’s David Amsellem wrote in a company note. “Despite these encouraging developments, there are the realities of an increasingly commoditized generics business and the erosion of Copaxone (namely uncertainty over the timing and extent of additional competition).”
If Teva’s stated strategy of seeking higher prices for selected products were to fall flat, Amsellem added, the company might simply continue to streamline the cost structure to get to its long-term leverage target.
“That said, at what point would that approach sacrifice Teva’s ability to bring a steady stream of new generic products to market?” he asked, noting that the company already has experienced “a dearth of new launches.”
Considering the speed of Copaxone’s revenue erosion and the specter of additional generic entrants down the road, Amsellem concluded, “we cannot conclude with a high degree confidence that Teva can achieve its target of net debt/EBITDA of less than 4x by the end of 2020.”