By Bloomberg
August 3, 2017

Teva Pharmaceutical Industries Ltd., which has been without a permanent CEO for six months, revealed the full extent of the challenges facing its next leader by announcing more job cuts, a retreat from 45 markets and a steep cut to its dividend after slashing its earnings goals for the second time this year.

The stock slumped the most in almost two decades and the yield on Teva’s bonds jumped after the Israeli drugmaker also cautioned that it may breach some debt covenants this year if sales don’t rise. The Petach Tikva, Israel-based company said its profit may fall to as low as $4.30 a share for the year.

The barrage of bad news points to the difficulties in attracting a new chief after Teva ousted Erez Vigodman in early February. Once the darling of the generic-drug industry and a poster-child of Israel’s vibrant corporate scene, Teva has fallen on hard times after cycling through three CEOs in the last five years. Its best-selling medicine faces competition from cheaper copycats, while other multibillion-dollar takeovers have quickly soured, leaving Teva with more debt than its market value.

Teva’s woes reverberated to other drugmakers. Within hours of the dividend being cut by 75 percent, Allergan Plc, the drugmaker’s largest shareholder following the sale of its generics division to Teva for $40.5 billion, said it would sell its stake in the next couple of months. The U.S. firm got its 10 percent holding in Teva as part of the payment for the generics unit, and was required to hold the shares for a 12-month period that ended this week. Its first-quarter profit was reduced by a $1.98 billion writedown of the value of the stake.

Interim CEO Yitzhak Peterburg is trying to contain the fallout of last year’s ill-timed acquisition of Allergan’s unit. That gamble failed to pay off as generic drugmakers began seeing their profit margins squeezed due to a drop in prices.

“All of us at Teva understand the frustration and disappointment of our shareholders in light of these results,” Peterburg said on Thursday. “We will continue to take action to aggressively confront our challenges.”

Stock Plunges

Shares of Teva plummeted 22 percent, the most since February 1998, and traded down to $24.45 as of 12:15 p.m in New York, and extending the decline in the past 12 months to about 54 percent. Rival Mylan NV slumped 5.7 percent.

Teva will have cut 7,000 jobs by the end of the year, surpassing the initial estimate of 5,000 positions following last year’s acquisition, Peterburg said.

“Our board and our management team are committed to acting in the best interest of shareholders,” Peterburg said on a conference call with analysts and investors, in response to a question about whether it makes sense to break up the company. “We evaluate all the time the situation, and I think we’re doing the right thing now.”

The Allergan deal made Teva the world’s biggest maker of copycat medicines, but the drugmaker has faced criticism for paying too much in a wrong-way bet on the global generics industry.

Debt Burden

The Israeli company, which had $33.6 billion in market value and $35.1 billion in debt at the end of the second quarter, has said it plans to divest some assets including its global women’s health and European cancer and pain-treatment divisions.

The divestments and other asset sales will help generate at least $2 billion, exceeding the initial target of $1 billion, Peterburg said on the conference call. The sales are likely to be completed by the end of the year, and the company is also continuing to look over other “non-core” operations, he said.

“This review will ensure business is much more focused and efficient in the rapidly changing competitive environment,” the interim chief said. Teva also plans to close 6 plants this year and 9 others in 2018.

Teva is “on track” to pay back $5 billion of debt and meet its covenants this year, which require the company’s net debt to be no greater than 4.25 times its earnings before interest, taxes, depreciation and amortization, interim Chief Financial Officer Michael McClellan said on the call. However, McClellan warned, the company may “face a risk in breaching these covenants” should the dollar continue to depreciate against the euro and the Japanese yen, and Teva fails to raise enough proceeds from the sale of assets.

Peterburg in May had raised his target for cost-reductions this year to $1.5 billion. Today, he increased it once again to $1.6 billion.

Profit Forecast

Earnings per share for the year will probably range from $4.30 a share to $4.50, the Israeli company said in a statement on Thursday. The sales forecast was cut to as low as $22.8 billion, amid an acceleration in erosion of prices and delays in approval for cheap copycat medicines in the U.S., its largest market. In January, Teva had lowered the profit outlook to $4.90 to $5.30 this year, with sales ranging from $23.8 billion to $24.5 billion.

In the second quarter, profit excluding some costs dropped to $1 billion from $1.23 billion a year earlier, before Allergan’s generics business was folded into Teva’s operations. That missed the $1.12 billion average of analysts’ estimates compiled by Bloomberg. Sales climbed 12 percent to $5.7 billion.

The search for the new CEO is ongoing, and six months isn’t excessive, Chairman Sol Barer told analysts.

“This is a process we are not going to rush and we will not compromise on quality and on finding the best individual possible to lead Teva,” he said.

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