Teva 2017: Acquisitions out, cost-cutting in

Teva  photo: PR

Since August, the number of employees at Teva has dropped by 5,000, including 1,700 since the beginning of this year.

Up until several quarters ago, Teva Pharmaceutical Industries Ltd.'s (NYSE: TEVA; TASE: TEVA) conference calls with analysts focused on questions about acquisitions and expansion. The current spotlight, however, is on cost-cutting and selling assets.

In a conference call with Teva's management following the publication of the company's quarterly results on Thursday, the general tone was optimistic. Teva's first quarter revenue was slightly below the analysts' forecasts, but the company exceeded the profit forecasts. At the same time, the company confirmed its forecasts for the year, which certainly did it no harm in the capital market, following disappointment with the company in this aspect in the preceding quarters.

Teva's revenue totaled $5.6 billion in the first quarter, 17% more than in the first quarter of 2017, which did not yet include Actavis's activity (the acquisition was completed in the summer of 2016). Copaxone sales were down 3.6% to $970 million in the quarter. Profit for shareholders amounted to $580 million, almost unchanged from the corresponding quarter last year, while non-GAAP profit was a much higher $1.08 billion ($1.06 per share). The gap between accounting profit and non-GAAP profit was due, among other things, to $320 million in depreciation of acquired intangible assets, $130 million in restructuring expenses, etc.

Finding a permanent CEO

Managed by acting CEO Dr. Yitzhak Peterburg, Teva is still searching for a permanent CEO. At the same time, CFO Eyal Desheh is expected to resign at the end of June, and his temporary replacement, Michael McClellan, comes from within the company (Desheh took advantage of the opportunity to say goodbye in the conference call to the analysts, with whom he has been in contact for 37 consecutive quarters). Former CEO Erez Vigodman was ousted in February, and the first quarter of the year was partly under his management and partly under Peterburg's management.

Commenting in the conference call on the question of the CEO, Teva chairman Sol Barer promised that finding a CEO would be the top priority. "We're looking for someone with a profound and extensive understanding of pharmaceutics and experience in complex global companies, with corporate responsibility and proven strategic and operating capabilities," he said.

The fact that Vigodman is the second straight CEO at Teva to be fired is probably not making the task of finding a new CEO any easier for the company. Barer was asked at the conference call whether Teva would forego its requirement that the new CEO live in Israel. He did not answer the question directly, but his answer may indicate that Teva is likely to be flexible in the matter. "As I said, we're looking all over the world for the best candidate for Teva. We're committed, as soon as we find such a candidate, to bring him to Teva, and we'll do what is necessary to make that happen - I want to be very clear on this point," he said.

Sale of assets and personnel cutbacks

The large debt in Teva's books, which includes $1.9 billion in short-term debt and $32.7 billion in long-term loans and bonds, is one of the things bothering the market. Last year, Teva took advantage of the low interest rate environment to take a large debt on fairly easy terms in order to pay for the $40 billion Actavis acquisition, but the focus now is on the sale of assets that can help finance the debt.

Teva reduced the debt by $1.2 billion in the first quarter, and the company expects the benefit from synergy resulting from the Actavis acquisition to reach $1.5 billion in 2017, $200 million than the originally projected amount.

"We have begun the sale of assets that are not core assets, including our global activity in women's health and our oncology and pain business in Europe in order to help pay the debt," Peterburg said.

Teva has hired Morgan Stanley as an advisor for the sale of its women's health business and the Bank of America as an advisor for the sale of its oncology and pain business in Europe. In the conference call, Peterburg explained, "We believe that the proceeds from the sale and the sale of other assets will be substantially larger than the $1.1 billion target we set."

Teva Global Specialty Medicines president and CEO Dr. Rob Koremans said that the company's business in these categories had generated $516 million and $360 million, respectively, in revenue in 2016, and had high profit margins, "so they should be attractive for selling."

Teva is cutting costs, among other things by reducing staff. Desheh said that since the Actavis deal was completed in August, the number of employees at Teva has dropped by 5,000, including 1,700 since the beginning of this year (Teva had nearly 57,000 employees at the end of 2016).

Risk in Venezuela

Teva's annual forecast was confirmed $23.8-24.5 billion in revenue and a net profit of $4.90-5.30 per share, despite generic pricing pressure in the US and what is described as "growing instability in Venezuela."

The sharp depreciation in the Venezuelan bolivar reduced revenue by $200 million, in comparison with the corresponding quarter last year, and is liable to affect the rest of the year. Teva previously estimated that Venezuela would contribute $0.11 to its profit per share over the coming three quarters.

Little contribution by Actavis to Teva's results

Teva's first quarter financial statements enable investors in the company shares to compare its current results to those reported before the high acquisition of Actavis Generics, the generic drug division of Allergan. Teva completed the acquisition of Actavis in August 2016, for which it paid $33.4 billion in cash and issued shares worth $5.4 billion on the transaction date to Allergan, the seller.

While Teva's first quarter net profit grew 2% to $580 million, its profit as calculated by management (i.e. excluding accounting items described as one-time), dropped 8% to $1.1 billion.

Since Teva acquired generic activity, it is logical to compare its results from generic business before and after the acquisition of Actavis. Teva posted $2.46 billion in revenue from generic drug sales in the first quarter of 2016, with a gross profit of 45.7% of revenue. A year later, Teva's revenue from generic business amounted to $3.06 billion, while its gross profit margin was 44.8%.

This means that for a huge payment of almost $38.8 billion (more than Teva's entire current market cap), Teva added in the first stage only $600 million to its generic sales, reflecting 24.4% growth.

Furthermore, profit from generic activity grew even less in the first quarter of 2017 – 20% - to $779 million, due to erosion in its profit margin to 25.5% of revenue, compared with 26.4% in the corresponding quarter in 2016.

It is quite clear that the amount that Teva paid for Actavis also included the existing opportunities in Actavis's backlog of products still in development and the saving in joint costs. For example, Teva notes that the synergy from combining the two activities has saved $1.5 billion a year in costs. On the other hand, the current figures are still far from supporting the price that Teva paid for Actavis, including the mushrooming of its debt to $34.6 billion, as of the end of March 2017.

Teva facing a new reality

When the deal was completed, then-CEO Vigodman said, "By acquiring Actavis, we are building a new Teva, with a reliable base, an improved financial profile, and more diversified sources of revenue and profit. These are backed by product development engines for both generic and ethical drugs. This infrastructure will generate over 10% growth in sales and profits, and substantial cash flow."

Sigurdur (Siggi) Olaffson, president and CEO of Teva's Global Generic Medicines Group at the time, said, "Teva now has several of the best assets, capabilities, and professional in the industry. We are clearly responsible for translating these strengths into significant results for the patients, customers, and community that we serve, and for the shareholders."

Less than a year later, Vigodman, Olafsson, and Desheh are no longer at Teva, and the current management is faced with finding the solutions for the new reality.

Published by Globes [online], Israel Business News - www.globes-online.com - on May 16, 2017

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

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Teva  photo: PR
Teva photo: PR
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