The world’s largest maker of generic drugs has pledged to cut costs by as much as $2 billion in the next five years as part of a new strategy to increase long-term profitability. Part of those savings will probably need to come from Israel, according to Ronny Gal, an analyst at Sanford C. Bernstein & Co.
“I don’t see how they can meet their sizeable cost cut goals without cutting costs in Israel significantly,” Gal said at an annual conference organized by Tel Aviv-based health-care hedge fund Sphera Funds Management Ltd. “Cutting costs here in Israel is going to be a true test for them.”
Laying off workers or closing down factories in its home market may be politically challenging for Petach Tikva, Israel- based Teva as it faces pressure over tax payments from Labor leader Shelly Yacimovich, who has called on the Finance Ministry to investigate the issue. Israeli newspapers including Globes and TheMarker criticized Teva’s tax contributions last month after an annual statement showed the company paid about $5 million, or less than 1 percent of annual income, in taxes for 2012.
Teva, Israel’s largest company by market value, said its total contribution to the state is greater than that and its operations in Israel generate tax revenue of more than 3 billion shekels ($806 million).
It will now have to balance a desire to protect its public image with an obligation to keep investors happy as intensifying competition eats into sales of best-selling multiple sclerosis treatment Copaxone and weighs on profit.
The political backlash against Teva echoes that felt by U.S. retailers Amazon.com Inc. (AMZN) and Starbucks Corp. (SBUX) after they were singled out by U.K. lawmakers last year for not paying enough corporate taxes in Britain.
“We think it’s outrageous,” Elli Gershenkroin, economic adviser to Yacimovich, said in an interview. “Even if it’s legal, it’s an unbearable situation that has to be stopped and measures have to be taken to correct the situation.”
The private sector’s contribution to the state has been under the microscope since Finance Minister Yuval Steinitz announced plans to cut 14 billion shekels from its proposed 2013 spending. The budget deficit reached 4.2 percent of gross domestic product last year, more than twice the government’s target, as the nation’s economic growth slowed to an annualized 2.5 percent in the fourth quarter, the slowest in more than three years.
While debate continues over the size of Teva’s tax bill, the scope of the company’s operations in Israel may not be sacrosanct, said Jonathan Kreizman, an analyst at Clal Finance Batucha Brokerage Ltd. “The new management has definitely shown they are trying to make the company more global,” he said. “I don’t think the type of presence the company has here can completely be taken for granted.”
Teva’s Israeli operations have been buttressed by the Encouragement of Capital Investments Law, which provides the company and others such as Intel Corp. (INTC) with tax breaks for investing in certain areas and promoting development.
Two of Teva’s eight largest manufacturing facilities are based in Israel, with the Kfar Saba and Jerusalem operations employing more than 1,700 workers between them. Teva also has a pharmaceutical ingredient facility in Ramat Hovav and other sites across the country. At the end of 2012 about 16 percent of Teva’s 45,948 employees were based in Israel.
Teva is required under its contract with workers to negotiate with labor unions before cutting jobs, Dafna Cohen- Nouriel, spokeswoman for the Histadrut labor union federation, said by phone.
On its strategy day on Dec. 11, Teva outlined its cost- saving plans without identifying locations where plants or jobs may be at risk. The company said most of the savings would come from streamlining operations after a string of multibillion dollar deals, including the 2010 $4.9 billion acquisition of Ratiopharm GmbH, based in Ulm, Germany, led to inefficiencies. Still, the company said it will seek as much as $120 million in savings by moving some operations from high- to low-cost locations.
“We are looking across our business globally for the savings that we have outlined,” Hadar Vismunski, a spokeswoman for Teva, said in e-mailed comments. “With regard to our manufacturing network, we are reviewing and evaluating all the sites in our network for their cost-competitiveness.”
Vismunski did not specify whether Israel would be categorized as a high- or low-cost location. “We are committed to our Israeli operations and to significant investment in Israel,” she said.
Teva hired Carlo De Notaristefani, a former Bristol-Myers Squibb Co. (BMY) executive, as global operations head last year to help deliver savings. De Notaristefani’s job has been to see how to make Teva’s 74 manufacturing plants, eight of which are in Israel, more cost-effective.
When Goldman Sachs analyst Jami Rubin asked Teva Chief Executive Officer Jeremy Levin on a second-quarter earnings conference call what the new hire would do about the factories, Levin reminded her of De Notaristefani’s track record at Bristol-Myers: he cut the number of plants by more than 50 percent to 12 from 28.
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