New Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) CEO Kare Schultz held his first call today to dive into the fresh restructuring strategy to fire up a true comeback for the Israeli pharma giant. Investors were encouraged, sending shares surging nearly 17% in pre-market trading.
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Schultz said, “Two weeks ago we announced a new organizational structure and executive management team. Today we are launching a comprehensive restructuring plan, crucial to restoring our financial security and stabilizing our business. We are taking immediate and decisive actions to reduce our cost base across our global business and become a more efficient and profitable company.”
“We will execute this plan in a timely and prudent manner, remaining focused on revenue and cash flow generation, in order to make sure Teva is ready to meet all of its financial commitments. Teva will optimize its cost base while ensuring that we protect our revenues and preserve our core capabilities in generics and in select specialty assets, in order to secure long-term growth. In 2018, we expect to secure the successful launches of Austedo and fremanezumab.”
The two year restructuring plan announced today is intended to reduce Teva’s total cost base by $3 billion by the end of 2019, out of an estimated cost base for 2017 of $16.1 billion. More than half of the reduction is expected to be achieved by the end of 2018. The company expects to record a restructuring charge as a result of the implementation of the plan in 2018 of at least $700 million, mainly related to severance costs, with additional charges possible following decisions on closures or divestments of manufacturing plants, R&D facilities, headquarters and other office locations.
The restructuring plan will focus on:
- The immediate deployment of the new unified and simplified organizational structure, announced on November 27. It will deliver cost savings and increase internal efficiencies by reducing layers of management, and simplifying business structures and processes across the company’s global operations. The new structure will support our continued commitment to compliance and business integrity
- Substantial optimization of the generics portfolio globally, and most specifically in the United States, through price adjustments and/or product discontinuation. This will enable the company to accelerate the restructuring of its manufacturing and supply network, including the closures or divestments of a significant number of manufacturing plants in the United States, Europe, Israel and Growth Markets
- Closures or divestments of a significant number of R&D facilities, headquarters and other office locations across all geographies, delivering efficiencies and substantial cost savings
- Teva will work to significantly improve profitability in all existing markets by optimizing their cost base
- A thorough review of all R&D programs across the entire company, in generics and specialty, to prioritize core projects and terminate others immediately, while maintaining a substantial pipeline
These steps are expected to result in the reduction of 14,000 positions globally – excluding the impact of any future divestments – over 25% of Teva’s total workforce – over the next two years.
The majority of the reductions are expected to occur in 2018, with most of the affected employees being notified within the next 90 days. Restructuring efforts will be done in accordance with applicable local requirements. Consultations with the relevant employee representatives will begin in the near term.
In addition to the restructuring plan, Teva is announcing the following measures to address the company’s financial situation:
- The company will immediately suspend dividends on ordinary shares and ADSs, while dividends on mandatory convertible preferred shares will be evaluated on a quarterly basis per current practice
- Teva’s annual bonus for 2017 will not be paid due to the fact that the company’s financial results are significantly below our original guidance for the year.
- The company will continue to review the potential for additional divestment of non-core assets
Teva will provide full guidance for 2018 in February with the annual results and will share a longer-term strategic direction for the company later in 2018.
Schultz concluded, “These are decisions I don’t take lightly but they are necessary to secure Teva’s future. We will implement these changes with fairness and the utmost respect for our colleagues worldwide. Today’s announcement is about positioning Teva for a sustainable future which we will achieve with our talented people. We will ensure that we continue to provide high quality medicines to the many patients we serve every day, while adhering to the highest standards of GMP compliance.”
On the ratings front, Teva stock has been the subject of a number of recent research reports. In a report issued on December 12, Guggenheim analyst Rohit Vanjani initiated coverage with a Hold rating on TEVA and a price target of $16, which represents a slight upside potential from current levels. Similary, on November 29, Mizuho’s Irina Rivkind Koffler reiterated a Hold rating on the stock and has a price target of $16.
According to TipRanks.com, which ranks over 7,500 financial analysts and bloggers to gauge the performance of their past recommendations, Rohit Vanjani and Irina Rivkind Koffler have a yearly average return of 12.6% and 15% respectively. Vanjani has a success rate of 54% and is ranked #565 out of 4720 analysts, while Koffler has a success rate of 51% and is ranked #248.
Sentiment on the street is mostly neutral on TEVA stock. Out of 18 analysts who cover the stock, 12 suggest a Hold rating, 4 suggest a Sell and 2 recommend to Buy the stock. The 12-month average price target assigned to the stock is $14.50, which implies a downside of 8% from current levels.