Teva Layoffs: Major Changes Occurring at the Company
Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) is cutting its workforce by more than 25%, which would amount to 14,000 job cuts.
The job cuts are expected to take place all around the world since Teva is a company with a global presence. Employees will be notified by the middle of February of their employment status with the company.
One area that will see significant job cuts is the research and development (R&D) segment of the business. This makes perfect sense since the R&D division commands a lot of capital invested without the assurance of there being an investment return.
Teva is the largest generic pharmaceutical company in the world with its headquarters located in Israel. The company is divided into two business segment, one being generic medicines and the other specialty medicines.
Numbers Do Not Lie
Looking at Teva’s financials, the downsizing and job cuts should not come as a surprise. The market cap of the company is around $18.0 billion, which is roughly half of its debt load of $35.0 billion. The debt is a major concern for the senior management team and a big reason for seeing a large percentage of the workforce being laid off. The debt is controlling the decisions made by the company’s management team. Job cuts are one way to reduce the operating cost of the business, which should help preserve capital within the company.
A major reason for such a large amount of debt on the balance sheet is because of the $40.5-billion acquisition of Allergan plc‘s (NYSE:AGN) generic drug division. The majority of the deal was done in cash. At the time, the move seemed great. Today, it is a different story because this could be the reason for major job cuts at Teva.
The company is selling off assets in order to reduce the debt on its balance sheet and restructure the business. Now, all this is a reactive move rather than a proactive move by the company.
It is quite normal in the pharmaceutical sector to have a large amount of debt on the balance sheet. One reason is that there are very high margins generated in the pharmaceutical business. However, the problem in this situation is that the debt became too large and the revenue was not enough to cover the liabilities from the debt burden.
Shareholders Are Affected by This Business Decision
Normally when shareholders hear of job cuts, the news is taken positively. Evidence of this is the 15% jump seen in the TEVA stock price on the day that the job cuts were announced. The reason why this move is a positive is that it means there are fewer business costs associated with running the company. Also, it means there are fewer liabilities on the balance sheet when it comes to cash leaving the company to pay for salaries and real estate rent.
However, this announcement came with bad news for shareholders who held the investment in their portfolios. The quarterly dividend paid to shareholders was eliminated completely. This reflects very negatively because it means that the company is struggling with its current cash position and the cash flow is not sustainable to reward shareholders.
Even though the stock price has gone higher, it may be more of a short-term positive. Over the long term, it could result in downward pressure on the stock price. The reason for this is that the dividend from TEVA stock is no longer in place. Income investors that held the stock for income purposes are not being satisfied anymore. This then could lead investors to find a stock that would fulfill their income needs. Also, large investment firms that have mandates to own income stocks could be forced to sell TEVA stock.
There will be another group of investors that will look at the company deeply because the company is going through the phase of being a turnaround story. Many investors may not have the patience to see what happens as there is a change in business strategy and business restructuring.
In addition, the company that investors were taking a stake in is no longer the same company it once was. Therefore, investors will reassess and determine if the investment is still appropriate to own.
Final Thoughts About Teva Layoffs
Once all the jobs cuts are complete within the company, there is no telling how the company will look from the outside looking in. One thing is for sure; the overall size of the company will be smaller. This is an example of a company that had very ambitious goals of becoming larger but, at the end of the day, the debt load held all the power.
Once the job cuts are complete, there is always the possibility of more job cuts occurring if the management team is seeing a great benefit from the balance-sheet perspective.
“Teva Is Laying Off 14,000 Workers, Suspending Its Dividend,” Forbes, December 14, 2017.
“Teva to Acquire Allergan Generics for $40.5 Billion Creating a Transformative Generics and Specialty Company Well Positioned to Win in Global Healthcare,” Teva Pharmaceutical Industries Ltd, July 25, 2015.
“Teva Pharmaceutical Industries Ltd. ADR,” MarketWatch, last accessed December 15, 2017.