Share of Teva Pharmaceutical Industries (TEVA 0.42%), an Israel-based developer and manufacturer of brand-name and generic drugs, catapulted higher by 28% during the month of December, according to S&P Global Market Intelligence. The reason for the move appears mostly tied to a mid-month restructuring announcement.
Teva struggled mightily in 2017. It wound up having to replace its CEO; its leading brand-name multiple sclerosis drug Copaxone began facing generic competition; and it's been buried under nearly $35 billion in debt. As a result, Teva slashed its previously delectable dividend by 75% during the summer, and it's reduced its fiscal 2017 profit forecast on a handful of occasions. Thus, a restructuring was certainly in order.
On Thursday, Dec. 14, Teva shed light on what that restructuring will look like. First, the company announced that it'd be shedding around 14,000 jobs over the next two years, representing more than a quarter of its workforce. It did note that most of those layoffs would occur this year. Second, but building on the first point, the company plans to close or sell a number of research and development facilities and office locations around the world. Third, the company announced it would fully discontinue its dividend and suspended annual bonuses in 2017, since its financial goals weren't met. Finally, Teva will focus on its world-leading generic unit by looking to raise prices when possible in order to grow sales and perhaps even discontinue products that aren't proving profitable.
Though the announced restructuring plan will cost the company at least $700 million, mainly as a result of severance costs and the closure of plants and facilities, the end goal will be to reduce its annual costs by $3 billion by the end of 2019. Mind you, slashing its dividend by 75% this past summer also shaved off $1 billion in annual costs. Thus, in about two-and-a-half years, Teva may have trimmed its annual expenses by $4 billion.
Of course, the big questions that remain are: (1) whether these lower costs will allow it to make meaningful headway on its debt, and (2) if the company can reignite its growth engine once more. As a biased shareholder of Teva, I do believe both are possible, albeit the road ahead is long and arduous.
Having already struck a handful of deals to divest its women's health operations, and with numerous other levers yet to be pulled via noncore divestments, plant and office closures, and headcount reduction, Teva should be able to make better-than-expected strides in expenditure cuts by 2019. With $34.7 billion in debt currently, and the company still likely to produce at least $2 billion or more in annual operating cash flow, I would personally not be surprised to see debt levels down to around $25 billion by the end of 2019. This should be enough to give the company more breathing room.
The second question (when will Teva's growth engine reignite) is a bit trickier to answer. Generic drug prices are liable to remain weak throughout 2018, so it's only going to have select instances where it'll be able to pass along higher prices to its customers. However, Teva has volume in its favor over the long run. The global population is aging, and more physicians are turning to generics than ever before.
If CEO Kare Schultz sticks with his game plan, I do believe Teva has bright days ahead.