Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) CEO Kare Schultz made a presentation yesterday at the annual JP Morgan Healthcare Conference, one of the most prominent conferences for the industry, in which he sketched his plans for the company beyond the layoffs recently announced. Schultz stressed the need to improve operating profitability, saying that in the past Teva focused on maximizing revenue, on the assumption that this would add up to profit.
Schultz said that the optimization that Teva was carrying out in its product offering was fundamental to the switch of focus from revenue to operating profitability. This did not mean that the company would stop supplying certain products, but rather that it would enter into negotiations with its customers on products that were unsustainable for it, and discuss prices with them. Schultz affirmed that Teva's number one commitment was to patients, and promised that it would ensure that supplies were uninterrupted.
Asked by JP Morgan analyst Chris Schott why Teva had focused on raising revenue, and whether it saw benefit in selling unprofitable products, such as gaining market share, Schultz said that Teva was the largest supplier in its field, but that in the past the contribution of each product had not been thoroughly examined.
Schultz presented the four main challenges facing Teva today. The first of course is its debt ($34.7 billion at the end of the third quarter last year). Another is the generic competition to MS treatment Copaxone. On this Schultz said that Teva knew more about generic competition than most companies, and that it would be able to deal with the challenge, although it was clear that Copaxone's contribution would wane in the coming years.
A third challenge mentioned by Schultz concerned the generic drugs market in the US, with the FDA accelerating approvals for new generic drugs and buyers being more organized, leading to greater competition and faster erosion of prices. The fourth challenge was a lower than expected number of generic launches in the US.
"We believe we can turn Teva around in the short to medium term by significantly reducing our cost base, closely managing our liabilities, and divesting non-core assets," Schultz said in his presentation. It will be recalled that Teva has announced a streamlining program with the aim of reducing annual costs by $3 billion. The cost based is expected to fall by $1.5 billion in 2018, from $16 billion in 2017. The program involves laying off 14,000 employees.
Describing what was different about Teva's cost cutting program now compared with similar efforts in the past, Schultz said that Teva had succeeded wonderfully in the past with the revenue stream from Copaxone and with generics, but that a fragmented structure had led to a situation in which very few people at Teva besides the CEO and the board of directors saw the complete picture. He said that restructuring and consolidation of the generics and specialty drugs divisions would simplify operations and lead to everyone looking at the profitability and cash flow of the company as a whole. He added that a third of the expected cost saving would come from restructuring.
Schultz also said that Teva currently had about 80 sites around the world, and that in the long term the number would drop by half, with 20-25 being cut in the next few years.
On the debt burdening the company, Schultz said he did not like to work in a company in debt, and that Teva had immediately suspended dividend distributions and was committed to using its cash flow to repay debt. He added that there would be no major acquisitions, and that his long-term aim was a debt to EBITDA ratio of 2, lower than required in the financial covenants given to the lender banks that were amended last September, which call for a ratio of 5 by the end of 2017 and 3.5 by the end of 2020. He reiterated that Teva would not raise capital.
He said that in 2018, Teva would simplify its structure, make progress in reducing its debt, and hoped to obtain approval for its ethical product for treating migraine.
Asked how Teva could ensure that its cutbacks would not be too extensive and hurt future growth, Schultz responded that he had carried out streamlining programs in the past, and had never encountered problems that harmed revenue. He added that Teva was closely examining its value chain.
On that, Schultz said that Teva had a very strong value chain, in both generics and innovative products, and that it had two growth engines: new specialty products such as the migraine treatment, and new generic launches. He said the company was now "fine-tuning the machine."
Published by Globes [online], Israel business news - www.globes-online.com - on January 9, 2018
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