Teva Opts for 5,000 Job Cuts as Big Acquisitions FlopDavid Wainer
Teva Pharmaceutical Industries Ltd. became the world’s largest generic-drug maker and highest-rated pharmaceutical stock earlier in the decade by spending more than $30 billion to acquire competitors.
Now, with Teva’s stock down 37 percent from its peak as a patent protecting best-selling medicine Copaxone nears expiration, the company is no longer buying. To grapple with an expected drop in sales of the $4 billion multiple sclerosis injection, Teva is doing something it’s never done before: downsizing. The Petach Tikva, Israel-based company plans to cut 5,000 jobs to save $2 billion in annual costs by 2017.
The move reflects Chief Executive Officer Jeremy Levin’s pledge to make the company leaner and more focused rather than grow through multibillion-dollar acquisitions. Levin, who took over last year, also has less room to maneuver after his predecessor, Shlomo Yanai, spent more than $10 billion in two deals, saddling Teva with the highest debt load relative to profit among the 10 largest drugmakers in Europe, the Middle East and Africa.
“Levin’s hands are tied now and there’s not very much room for mistakes,” said Jonathan Kreizman, an analyst at Clal Finance Batucha Brokerage Ltd. “Teva dug itself into a hole with two major acquisitions that didn’t pay off. His strategy is to prepare the company for the long-haul by cutting costs while building the pipeline deal by deal. It will take time.”
Teva’s American depositary receipts have advanced 10.3 percent this year, including dividends, giving the company a market value of $34 billion. The Bloomberg Europe Pharmaceutical Index has risen 20 percent in the period.
The M&A strategy ranked Teva among the top 10 most acquisitive pharmaceutical companies in the past decade, according to data compiled by Bloomberg. Levin, who helped oversee a “string of pearls” policy of partnerships and smaller acquisitions in his former role at Bristol-Myers Squibb Co., is hoping he can execute a similar strategy at Teva.
His aversion to blockbuster deals garnered criticism from Jami Rubin, a Goldman Sachs Group Inc. analyst who in July recommended selling Teva shares partly because of Levin’s reluctance to buy big. Levin’s targeted approach comes as mergers and acquisitions are on the rise in the pharmaceutical industry, with about $24 billion spent in the third quarter compared with $14.8 billion in the same period last year, data compiled by Bloomberg show.
Levin’s strategy marks a departure from Yanai’s tenure. To propel growth and wean Teva off its dependence on Copaxone, Yanai, a former Israeli army major general, sought to strengthen Teva’s generic sales in Europe by buying Ratiopharm GmbH, based in Ulm, Germany, for about $5 billion in 2010.
That acquisition came just before a credit crisis wreaked economic havoc in the region, spurring government efforts to rein in health-care spending that hurt Ratiopharm sales. Then, seeking to expand in branded drugs, Yanai spent $6.2 billion in 2011 to buy Frazer, Pennsylvania-based Cephalon Inc. Some of Cephalon’s projects have since been eliminated, including Obatoclax for small-cell lung cancer.
Under Levin, Teva has spent less than $1 billion on deals. Instead, it has sought alliances or acquisitions of small companies such as the $26 million purchase of Huntington’s Disease medicine Huntexil and the $165 million agreement to buy inhaler developer MicroDose Therapeutx. It’s also betting on repurposing or reformulating existing drugs in a business Chief Scientific Officer Michael Hayden says will be a multibillion-dollar opportunity by 2018.
“Clearly, Levin has come in and has begun the process of rationalizing the pipeline and cutting programs,” said Jason Kolbert, an analyst at Maxim Group in New York. “Previously, Teva was acquiring everything under the sun and these acquisitions are clearly going through a scrutiny process.”
While Teva builds up its pipeline, Levin will need to plug a hole in the company’s income statement as Copaxone, which analysts say generates about 50 percent of profit, faces generic competition as early as next year. To offset the potential decline in profits, Levin has embarked on the company’s largest cost-cut program to date, a move welcomed by some investors.
“Teva has engaged in a number of complex acquisitions in the past that added layers of inefficiency into the organization,” said John Park, co-portfolio manager of Jackson Park Capital LLC’s Oakseed Opportunity Fund, of which Teva shares make up about 5 percent of assets. “There is room to boost profitability through cost cuts.”
Teva’s level of debt is lower than that of generic competitors such as Mylan Inc. and Actavis Plc and is on par with some branded medicine rivals such as Amgen Inc. and GlaxoSmithKline Plc, Teva said in an e-mailed statement. Teva manages its debt “carefully and responsibly, which is reflected in its A- credit rating,” the company said. Teva has “crafted and announced a detailed strategy designed to meet the challenges it stands to face in the coming years,” according to the statement.
The cost-savings announcement on Oct. 10, together with estimates that its respiratory business will double to $2 billion in the next five years, helped Teva’s ADRs rise 6.4 percent this month.
Still, some investors say the cuts won’t be enough to boost profitability as Copaxone faces competition from newer oral medicines such as Biogen Idec Inc.’s Tecfidera, which entered the market this year, at the same time as generic drugmakers including Cambridge, Massachusetts-based Momenta Pharmaceuticals Inc. seek to sell cheaper copies of Copaxone.
“I can’t recall a company whose shares performed well in the long term by cutting costs without at the same time delivering new products,” said Ori Hershkovitz, a partner at Sphera Funds Management Ltd. in Tel Aviv. “If there’s a delay to Copaxone going generic, that would represent an upside to Teva’s profits, but the minute generics come in, the skies will fall.”
One investor questioned the timing of the cost-cut announcement, less than three weeks before Teva’s third-quarter earnings report on Oct. 31.
“Why didn’t the company wait until its earnings report to make such a dramatic announcement?” said Gil Levy, CEO at Infinity Portfolio Management Ltd. “This announcement is intended to soften a bit the disappointment from the expected drop in Copaxone sales due to a competitor’s entrance.”