Schultz is reviving Levin's planned cuts from 2013

Jeremy Levin

Teva's board of directors forced Jeremy Levin to resign after he planned to cut the workforce by 10% when Teva's debt was just $12.5 billion.

A public storm arose in October 2013 when Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) announced a major program of cutbacks. Then managed by CEO Jeremy Levin, the company planned 5,000 layoffs worldwide, amounting to 10% of its workforce at the time, including 700 in Israel. Teva attributed the plan to the need to overcome global challenges, including price pressure and the risk of losing revenue from special products, especially Copaxone, Teva's most significant original drug, then at its peak in terms of revenue and profit.

The plan, however, was never implemented. Levin was forced to resign less than three weeks later, following sharp differences of opinion between management, which he headed, and the board of directors, then headed by chairperson Phillip Frost. The cost of the streamlining plan presented by Levin before he was ousted was estimated at $1.1 billion. It also included the sale of the company's non-core assets. Had the program been carried out as planned, it would have helped Teva save $2 billion annually by the end of 2017.

We are now at the end of 2017, and Teva under new CEO Kare Schultz is again putting a program of streamlining and cuts into effect. In contrast to the previous program, Teva has not yet officially announced its plans, and has not provided detailed numbers and data. It is believed that Teva will fire up to 20% of all employees at the company, including 1,000 in Israel. Last summer, Teva announced its intention to lay off 350 employees in Israel in Kfar Saba and Ramat Hovav, thereby sparking a public controversy that reached the Knesset floor (as did Levin's plan in 2013). The number of layoffs was eventually reduced to 230.

Copaxone disaster

The current program of cutbacks is getting underway in a completely different situation than the one that prevailed in 2013. First and foremost, Teva today faces a $34.7 billion debt, compared with "only" $12.5 billion four years ago, after having made the biggest acquisition in its history during the interim – the acquisition of Actavis for nearly $40 billion, which in retrospect has become a burden for Teva.

Another difference between 2013 and 2017 concerns Teva's share price. In 2013, Teva's share was treading water at $40 a share, reflecting a company market cap of $33 billion. Teva's recent afflictions have led to another nosedive in its share price. The company's current share price is only $13.70, reflecting a $13.9 billion market cap. It is clear that at Teva's current share price, any financing round that the company conducts will require further dilution of its shareholders. Teva's urgent need for cutting costs also results from the fact that there is a continual decline in the cash flow that it is generating, which is making it difficult for the company to reduce its debt and leverage, as required by the lending banks (and if it wants to preserve an investment rating from S&P and Moody's for its debt. Fitch has already downgraded Teva to "junk bond" status).

According to Teva's revised guidance, it will finish 2017 with a cash flow of $3.15-3.3 billion, compared with its previous guidance of $4.4-4.6 billion. Cash flow in the fourth quarter is projected to total $850 million-$1 billion. Following the loss of exclusivity for Copaxone, Teva is encountering generic competition for the 40-milligram dosage Copaxone used by most patients for the first time this year. This development was expected, but somehow, it appears that the timing surprised Teva when Mylan announced approval for its generic version in early October, and Teva had to lower its guidance several weeks later.

Copaxone was also mentioned in 2013 when the streamlining plan was announced. The fact that the drug's contribution to Teva's profits was projected to fall (and indeed did decline even before Mylan launched its generic version) was one of the reasons why cutbacks were necessary. Teva's Copaxone sales reached a $4.3 billion peak in 2013. In other words, this plan was designed to take place when Teva was in a much more comfortable position than the current plan, which the company is undertaking from lack of choice and under great difficulties. Copaxone sales totaled $3 billion in the first three quarters of 2017, and profit from the drug was $2.4 billion. Mylan's into the market at the beginning of the fourth quarter, however, sparked an intense price war, which is of course leaving its mark on Teva's results.

Imagination on the board of directors

Despite the differences between 2013 and 2017, there are also certain similarities - some of the directors. The composition of the board has changed, and most of the directors were replaced during the subsequent period - among other things as a result of the struggle for a change in the board led by minority shareholder Benny Landa. Four of the directors who served on the board when it pushed Levin out, however, are still there. These are Yitzhak Peterburg, Amir Elstein, Galia Maor, and Dan Suesskind, who left the board, but returned to two months ago. Peterburg, who has been a director since 2012, became chairman after Frost left in 2015, and also served as acting CEO until Kare Schultz's recent appointment as CEO. Elstein, who is from Teva's founding family, has been a board member since 2009 (his second term as a Teva director). Maor, former CEO of Bank Leumi (TASE: LUMI), has been serving since 2012.

No stock exchange trading took place in the US last Thursday because of Thanksgiving. On Friday, Teva's share began trading with a 6% jump, but the rise cooled off, and the share wound up only 1.6% ahead. Citibank estimated at the end of last week that laying of 20% of Teva's labor force would save the company $1.5-2 billion a year.

Published by Globes [online], Israel Business News - www.globes-online.com - on November 27, 2017

© Copyright of Globes Publisher Itonut (1983) Ltd. 2017

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