A massive restructuring plan announced on December 14, sent Teva Pharmaceuticals (NYSE: TEVA) stock up and bulls cheering. Its current reality, holding the stock down, must be addressed. The cost-cutting plan will address Teva’s near-term headwinds.
Teva has four challenges: significant financial obligations in the next four years, generic competition for Copaxone, headwinds in the U.S. market for generics, and fewer Gx product launches in the U.S. Teva must cut its staff costs and sell non-core assets to deal with the new reality.
Teva’s plan cuts $3 billion from its $16-billion total cost base. It will do so by cutting over 25% of its work force. This is a devastating blow to employee confidence but the smaller slimmed-down version of the company will bring costs in line with the lower revenue ahead.
Dividend cancelled
Teva decided to cut its dividend completely, a blow to income investors but necessary. Without cash flow growth, Teva cannot sustain a dividend payout as the business shrinks. Operationally, it is consolidating its generic and specialty units into one unit through three regions: North America, Europe and growth markets. R&D will get centralized. Marketing will oversee R&D.
Takeaway
Teva’s cut to operations is harsh but expected. Markets may expect that this time, Teva stock bottomed.
