Teva's CEO Shows He Means Business With Planned 25% Job Cuts

(Bloomberg) -- Teva Pharmaceutical Industries Ltd.’s new Chief Executive Officer Kare Schultz proved that when it comes to saving the struggling drugmaker, he’s ready to pull out all the stops.

Just six weeks into the job, he announced plans to slash 25 percent of the Israeli company’s 56,000-strong workforce, suspend dividends and forgo employee bonuses. The plans, which envision cutting costs by $3 billion in two years, surpassed even the most aggressive forecasts from analysts and sent shares surging the most on record in Tel Aviv.

"You can expect a simpler, leaner and more agile organization organized in a much more straightforward way," Schultz said on a conference call as he outlined how the world’s biggest generic drugmaker will reduce a debt burden that’s twice its market value. “In two years from now, it’s going to look good. If we do well, then in five years it’s going to look great.”

Schultz -- a turnaround specialist who navigated Lundbeck A/S through a difficult period of patents expiring on its biggest drugs -- showed he won’t be sidetracked even by the mounting backlash in Israel. Workers there threatened nationwide strikes and Prime Minister Benjamin Netanyahu urged Schultz to limit the damage to the local workforce. Schultz on Thursday sent a letter to Netanyahu apologizing for the company’s predicament and pledging to keep its headquarters in Israel.

Stock Rally

The company’s shares jumped as much as 19 percent in Tel Aviv, trimming losses for the year to 52 percent, in a sign investors are optimistic the turnaround plan will help reduce Teva’s $35 billion debt burden. The company’s stock in New York also rallied.

Schultz said his top priority is to bring its leverage below 4 times Ebitda, or earnings before interest, taxes, depreciation and amortization, by the end of 2020. The ratio was 4.7 last quarter. The proposals include paying down $4 billion of bank loans within a “relatively short” period, he said.

"The cuts are larger and more rapid than what had been anticipated," Vamil Divan, a New York-based analyst at Credit Suisse Group AG, wrote in a note to clients. Given Schultz’s track record, "investors will also be willing to give him the benefit of the doubt that he will be able to successfully execute on this.”

The job cuts will affect about 14,000 employees worldwide, including 1,700 positions in Israel over the next two years. Teva will also shut a number of research facilities and exit some unprofitable products, while raising prices on other medicines.

‘Vigorous Measures’

“Without taking vigorous measures, Teva may become a target for financial institutions or activist entities with an interest, and the risk is real,” Mark Sabag, Teva’s head of human resources, said in a letter to workers in Israel.

From the get-go, Schultz -- who signed on for the job after receiving an offer of $40 million in cash and stock -- showed he means business. Within days of joining on Nov. 1, he oversaw a management shakeup and announced plans to reorganize its generic and branded drug businesses into a single, streamlined entity.

Teva has been struggling since it paid almost $41 billion last year to acquire Allergan Plc’s generics unit because the deal failed to yield the sales boost Teva’s previous CEO Erez Vigodman promised it would. Compounding the problem is the loss of its monopoly on Copaxone, the multiple sclerosis injection that at one point generated half of Teva’s profits.

The company, whose expenses will total $16.1 billion this year, said most of the cost reduction will take place in 2018. Teva will also record a restructuring charge of at least $700 million.

Hiring Schultz was a departure from more than a century of tradition for Teva, which had until now only hired Jewish men for the top job. At Lundbeck, Schultz cut about 17 percent of the workforce and oversaw a $480 million restructuring and brought a number of new medicines to the market.

“We are taking immediate and decisive actions to reduce our cost base across our global business and become a more efficient and profitable company,” Schultz said.

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