Restructuring plan announcement
On December 14, 2017, Teva (TEVA) stock gained more than 10% on the back of the announcement of a comprehensive restructuring plan and additional measures to improve the company’s operational and financial performance. The plan aims to implement a leaner and simpler organizational structure, reduce the cost base of the business, improve profitability, boost cash flows, and increase productivity.
The restructuring plan follows the organizational structure changes and leadership changes the company announced on November 27, 2017. The new management is focused on an efficient turnaround of the company.
On December 14, 2017, the Generic Drugs ETF (GNRX) rose by approximately 1.0%. GNRX holds ~0.02% of its total portfolio in TEVA.
Challenges facing the company
Teva Pharmaceuticals has a debt of $32 billion, which needs to be serviced in an organized manner to strengthen the company’s financials and bring down leverage. The company’s leading multiple sclerosis drug, Copaxone, now faces competition from the generic version, which was recently launched by Mylan (MYL). Copaxone contributes approximately 25% to the company’s total annual sales. In fiscal 3Q17, Teva’s Copaxone sales amounted to $1 billion. Moreover, the US generics market has become highly competitive during the recent period with faster FDA (US Food and Drug Administration) approvals for generic drugs from the major pharma players including Pfizer (PFE) and Gilead Sciences (GILD). The healthcare consolidation has also put increasing pricing pressures on generic drugs. In the wake of these challenges, Teva has put in place a comprehensive restructuring plan.
Teva’s restructuring plan to address these issues
Teva Pharmaceuticals has planned to cut its costs by $3 billion over the next two years. In fiscal 2016, Teva’s total costs amounted to $16 billion. The cost cuts will be implemented through massive employee layoffs and R&D (research and development) site closures over the next two years. The company estimates a recurring cost reduction of $3 billion going forward.
The company has suspended dividend payments on an immediate basis. Moreover, the company has plans to divest a number of its non-core business lines and optimize R&D spending.