"One of the key elements in the restructuring is of course to reduce the overall cost of running the company… we have a plan to reduce the total cost base of everything that you have in your cost by $3 billion in 2019… we are very well underway to do that," Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) president and CEO Kare Schultz said at the annual JP Morgan health conference. At last year's conference, Schultz was a new CEO launching a dramatic cost-cutting program at his company; now he was able to report the progress achieved to investors and give specifics about Teva's targets for the coming years.
Schultz stated, "But at the same time as we are reducing cost, there's of course been a lot of skepticism about then what about the revenue. And I think we've proven that we can do that both on the products that we are in the launch phase of, but also in terms of getting new approvals, be it for new innovative drugs or new and biopharmaceuticals or new generics." Schultz mentioned Ajovy, Teva's new drug for treatment of migraine headaches, saying that, while he had previously predicted that it would attain a 20-30% market share, it already had a 30% market share of new prescriptions in the US (there are two competing products in the same category). He said that this seemed to him like a fair market share that Teva would be able to maintain, adding that the drug's price was lower than the company's expectations two year ago, but that its sales volume was larger.
Commenting about the generics market, in which prices have fallen substantially in recent years, Schultz repeated his assessment last quarter that things were leveling off. " And a year ago I think it's fair to say we were in a classical negative death spiral of pricing on generics just everybody going lower and lower. And I think I said also a year ago that this has to stop and at least in Teva we are stopping it because we're no longer supplying products below manufacturing cost products that do not contribute to our profitability. And we started the process of going and talking to all our key customers… Of course we had to give up some of the volume that didn't hurt us because we were not making money on it… But I think the most important thing and this is I think the most significant maybe today that I'm sharing with you is that the whole pricing dynamic in US generics changed… we no longer have this spiral price declines… That does not mean that we get back to where we were… but it just means that this constant reduction of the marketplace has stopped." In response to a question from the audience, Schultz said that of the 10% of its generic products that were unprofitable, Teva had abandoned marketing two thirds of them, while the other third were now profitable again.
The enormous cutback program was instituted in order to deal with the huge debt that Teva had to service. Schultz said in this context, "Now, the big sort of elephant in the room a year ago, I mean maybe you could see still an elephant in the room, but at least it's more tamed now, that's the debt… We're now down to around $27 billion, and we will continue in the coming years to bring it down." Schultz and Teva CFO Michael McClellan said that Teva would make no major acquisitions until it reduces its debt and brings its leverage under control. On the other hand, Schultz added that the company would not sell any more substantial activity. "We decided early 2018 to go out and do some refinancing. It was a good time to do it," Schultz explained, adding that Teva had raised debt and refinanced some debt, which was useful because Teva now had only bonds at fixed interest rates.
Teva will focus on revenue from new branded products
Schultz stated a number of strategic principles for Teva. He said that the most important thing was making Teva into a single company, remarking, "Teva was built on many, many acquisitions over many, many years... In many geographies, we had many, many geographical locations." According to Schultz, Teva will continue closing down and consolidating its sites. Other elements of the company's strategy are organic growth and leading the generics market ("… we carefully analyze each and every generic project… we look for the most profitable projects."). Yet another element is the biologics sector, which is becoming a platform in Teva's core research and development, together with progress in technology for inhalers. The final element is continued focused investments. "So we haven't stopped investing in the business," he said, adding that Teva was investing hundreds of millions of dollars in the biopharmaceutical sector.
Schultz mentioned the generics sector as a long-term growth engine in which the main markets were growing: biosimilars (generic versions of biological drugs) and biologics, which Teva was building inhouse capabilities and had 20 products in development. Schultz presented targets for the next 3-5 years, including a 27% non-GAAP operating profit margin (compared with 24.4% in the third quarter), a free cash flow to net profit attributable to shareholders ratio of over 80%, and a ratio of debt to EBITDA of less than 3.
In 2019, Teva will focus on generating revenue from the new braded products that it has launched, and later on stabilizing its generics business and new investments in generics, such as the generic version of EpiPen, given the loss of exclusivity for key products (Copaxone and ProAir). Another focus this year is management of expenses in order to meet the $3 billion target for saving on expenses and continued reduction of the company's debt. Teva's share price is currently up in New York in response to what Schultz said at the conference, pushing the company's market cap up to $19.6 billion.
Published by Globes, Israel business news - en.globes.co.il - on January 8, 2019
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