Kare Schultz, the new chief executive of Teva Pharmaceutical Industries, just passed his first test.
The auguries ahead of Schultz’s meeting with Prime Minister Benjamin Netanyahu and Finance Minister Moshe Kahlon weren’t good. The prime minister’s associates tried to teach the Danish newcomer a crash course in provincialism, the basis on which the Israeli government operates.
Teva plans to fire 1,700 Israelis, part of a move to lay off 14,000 people to contend with its debt mountain. The Israelis hectored him to close down manufacturing in Ireland and India and keep the loss-making plant in Jerusalem operational, but Schultz would have none of it.
Stories abound about Teva employees whose world has come crashing down; thousands of workers have been demonstrating. If Teva had an Israeli CEO, he’d probably haggle out some deal with Netanyahu, chiefly to save the prime minister’s face and relieve the public pressure on Teva’s management.
But Schultz isn’t Israeli and didn’t bow to the power or the pressure. He refused to cancel the layoffs and the plan to close the Jerusalem plant.
Simply, he has no choice, because unlike Netanyahu and the Israeli government, there are genuine pressures on Teva – in the form of banks and shareholders.
Teva owes $34.7 billion, and in 2018 and 2019 it’s scheduled to pay back $9.1 billion. By 2021 it’s due to pay back $17.5 billion. That’s a gargantuan sum, considering that its cash flow is expected to shrink $3.2 billion in 2017 because of declining prices of generic drugs and rising competition to its sole proprietary drug, multiple-sclerosis treatment Copaxone, which lost patent protection.
Teva can be expected to reschedule some debt, but the bondholders and other creditors would be extremely unlikely to agree if the CEO balked at efficiency measures.
If he had accepted the preposterous demand by Netanyahu’s cronies and agreed to subsidize the failing plant just to keep Jerusalem unemployment from skyrocketing, Schultz would have been personally liable. But unlike Netanyahu, Schultz understands his duty to Teva’s American shareholders, who have paid a price for the company’s Israeli identity and the sociopolitical obligations entailed. Also, signaling that the blood of workers in Jerusalem is redder wouldn’t have warmed hearts at Teva’s plants around the world.
In the two days following the company’s announcement of its efficiency plan, its stock climbed 18%. After that the share retreated once again as analysts delved into one of the plan’s stranger aspects: to jack up prices.
Teva said in a conference call that it expects the pace of erosion of generic-drug prices to continue in 2018 (they fell 9% in the third quarter). A bid to raise prices looks hopeless.
Schultz apparently realizes that letting the politicians manipulate him would be a mistake that would be hard to recover from. It would cause a loss of faith in the recovery plan, press even more on the share price and increase the likelihood of a hostile takeover. Yields on the company’s bonds would climb. That could lead the credit rating agencies Standard & Poor’s and Moody’s to downgrade Teva bonds to junk, raising its cost of debt even more.
In the past, the state could support Teva through tax breaks. But again, some of the company’s factories are losing money, as in Jerusalem. Others, like the plant making Copaxone in Kfar Sava after the drug lost patent protection, are likely to see profits collapse.
Schultz couldn’t possibly, and didn’t intend to, forgo closing the Jerusalem plant, which makes tablets. At its height the factory made 5 billion pills a year, but it sold them for $15 per thousand – three times the manufacturing cost in India. Meanwhile, the plant has scaled down production because of the crisis in the U.S. market.
Obviously the plant has no future. Teva thought about merging it with a plant making inhalers using advanced Respiclick technology, but there turned out to be no demand. The only bone Schultz could throw the politicians was to forgo closing the plant in Ramat Hovav after efficiency measures. But that’s all.
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