At the beginning of every year, the pharma industry comes together at the annual Healthcare Conference held by JP Morgan in San Francisco, with each company reporting to analysts and investors on what it's up to. For the third time, Kåre Schultz appeared at the conference as president and CEO of Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA). In hi sopening remarks, Schultz mentioned that when he attended the conference as Teva CEO for the first time two years ago, the company had debt totaling $34 billion, it was dealing with the fresh loss of exclusivity on multiple sclerosis treatment Copaxone, and was facing increased competition in in generics in the US. "So for that reason two years ago, I announced that we were changing our strategy. And one of the key elements was the big restructuring where we were going to reduce the cost base significantly. At the same time, we were going to manage our debt and of course, we're going to secure future growth, but that would come after the first restructuring period," Schultz said.
In his presentation, Schultz gave a detailed account of the streamlining program that Eva began in 2017, mentioning among other things that thirteen production sites had been shut down or sold and that ten more were in the process of shut-down or sale, and that the goal of annual cost savings of $3 billion had been achieved.
"In this connection, of course, we also have to say goodbye to a lot of good people, more than 12,000 people have left the company now. Some more will be leaving in connection with the last ten manufacturing sites that we are winding down," Schultz said, and continued, "Now for restructuring like this to work, you of course need to maintain your operational capabilities. Because if you don't maintain that, then you're selling out the future and you won't have the growth and sales going forward that you need. Now, I'm happy to say that we've been able to do this major restructuring while maintaining, you could say full operational capacity on all our different product lines."
Schultz pointed out that Teva had grown through more than twenty acquisitions in twenty years, resulting in too many offices and too many R&D locations, many of which had now been closed. "We will continue optimizing the manufacturing footprint. Again, in connection with the full year earnings in February, we will give you a more precise picture of what the plans will be for the coming years in order to optimize the gross margin and the manufacturing setup."
On Teva's debt, Schultz reminded his listeners that it had ballooned because of the acquisition of Actavis in 2016 for nearly $40 billion, and that over the past two years the company had recycled debt, and had reduced its debt over the period through assets sales and through its cash flow, the goal being to continue to reduce it. At the end of the third quarter of 2019, the debt totaled $26.9 billion.
Nevertheless, Schultz said he was not happy with the debt position. "I don't think companies in the pharmaceutical space should have a high leverage," he said. "I think that you should probably be down to around 2-times net debt to EBITDA. We are right now about 5-times. There's however been one very good development and that is because we've been stabilizing revenues. We've been stabilizing earnings the last four quarters. You'll see that in the third quarter for the first time, the net debt to EBITDA ratio has started to decline. And this will, of course, continue over the next many years as we use all our operational cash flow, free cash flow to pay down debt, and continue to do that…Then three years from now, there's debt stack of around $4 billion, so we'll need to do another refinancing of around $2 billion. Hopefully, by then the credit rating has improved and we can borrow at even cheaper than what we managed to do this fourth quarter where we still had a very good reception in the credit market. It was heavily oversubscribed and we had no problem with the refinancing that we had to do. And of course, it will help that the net debt-to-EBITDA ratio will continue to decline.
"But of course it's not enough for us to keep the situation under control. If you want to think about it conceptually then the last two years we've spent getting things under control in the sense that we got the cost base under control. We did the crude optimization of manufacturing. We're going to optimize more, but it's more sophisticated now. It's not just shutting down things. It's optimizing what we do.
"But all that doesn't help anything if you're not getting back growth on your revenues of course. And there's been two dramatic drags on growth. One is Copaxone, that used to be a $4 billion plus product. Now it's down to around billion plus product. And it's still declining, but a lot less of course, in absolute terms. And then there was the problem I mentioned before that US generics basically imploded and the value of US generics came down to basically half of what it used to be.
"Now there's an irony in this, because the irony is that we and the whole business, whether it's specialty pharmaceuticals or generics, are of course being accused in all media of too high pricing and taking advantage of patients with too high prices. Now the hard facts of the generic industry in the US is that it's actually the opposite that's taking place. The annual saving from generics and biosimilars in the U.S. is around $300 billion. Teva alone supplies products with an annual saving of around $43 billion. So the idea that generics are not sort of helping make pharmaceuticals and medicines affordable is basically flawed and not correct."
Schultz highlighted Teva's entry into biosimilars, with the launch in November of Truxima, equivalent of Rituximab for treatment of blood cancers and inflammatory conditions, which he said was successful. "There is a strong future the way I see it for both traditional generics and biosimilars in the US and the pricing has now stabilized," he said, adding that in Europe "the situation has been more calm." He said that there was now low single-digit growth in European generics "so we have a very stable, solid business and we are still churning out you know hundreds of launches every a year."
A new market for Teva will be China, where the company has never been a significant player. "I'm not a strong believer in joint ventures in these kind of markets," Schultz said, "So we've decided to do it organically and we've had the luck that the Chinese government had realized that certain products have never been launched in China. So the government has made a list, it's publicly available, of pharmaceuticals that they would like to have in the Chinese market, where nobody ever wanted to spend the money doing the Phase III trials in the whole very, very long regulatory process in China.
"It turns out that because we do so many products, we do some of these products as well. So we've just launched Treanda in China. We have Austedo that has been filed. And the benefit here is we can do that without doing any trials in China, because the Chinese authorities have realized they would like to have these products in the marketplace to the benefit of patients.
"So that means that we're slowly building up. These are not big numbers today but these are 100% controlled numbers from our side. We don't have a partner that's controlling things. And we will be growing very big in terms of percentages but from a small base, but it will be profitable the whole way. And in five, ten years China hopefully will be a significant part of our business."
Schultz presented a fairly simple formula whereby Teva can grow as long as the decline in Copaxone sales is less than the growth in new specialty products, assuming that the overall generic business is growing low single-digit.
"The way to do that it is of course to grow the two new products we have in our portfolio," Schultz said, mentioning Austedo, used in treating Huntington's disease, and Ajovy, for migraines. "Right now we see very strong growth for the second year in a row for Austedo," he said, while on Ajovy he said that "Right now we are slightly below 20% share of the market due to the lack of competitiveness on our device. But within the next coming months, we expect to level that playing field and be very competitive also in the migraine space." The lack of competitiveness is due to be eliminated once FDA approval is received for an auto-injector for the product.
Schultz summed up by saying, "So what I think I have proven to you is that we've done the restructuring. We've done exactly what we promised to do. We promised to reduce the spend base with $3 billion, everything included was $16.3 billion in '17. It has to be less than $13.3 billion in '19. And I can promise you that's the case. We've also handled the debt nicely, taking it down more than $8 billion over two years and we'll continue to do so. And that means, of course, our ratios on the debt side will continue to improve over the coming years. And we also now have a situation where the drag versus the growth is looking positive. So we're expecting to see low revenue growth in 2020. And then, of course, higher once we get into the future simply because of the fact that the drag from Copaxone disappears more or less, while we still see Austedo and Ajovy growing and while we see the combination of US generics and biosimilars also having a very stable to positive outlook."
Teva has a market cap of some $10 billion after a 36% decline in its share price in 2019 and a further 8% decline since the beginning of 2020.
Published by Globes, Israel business news - en.globes.co.il - on January 14, 2020
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