Will Teva cut jobs but boost spending on R&D?

Leaders of Teva Pharmaceutical Industries will discuss their plans for 2013 Friday morning, according to a company news release that was distributed after the markets closed on Thursday.

A prominent financial analyst, Ronny Gal of Bernstein Research, told clients a day before that the company might cuts jobs, close or sell factories in some areas but increase spending on research and development of new, branded drugs.

Teva is the world leader in generic pharmaceutical drug sales, but the competition has been fierce and nearly 80 percent of the U.S. drug market is filled with generics, so the room for growth in that area is limited. Teva has tried to help its portfolio of higher-profit branded drugs, including the $6.8 billion purchase of Frazer-based Cephalon in 2011.

The company previously scheduled an investor day for Dec. 11.

One thought is that the company wants to discuss some things Friday and then use the Dec. 11 meeting to try to create a more positive discussion going into 2013.

Teva is based in Israel, but has its Americas headquarters in the Philadelphia suburb of North Wales, and other facilities in the area.

Besides adding Cephalon facilities, the company bought the brownfield site in the Bustleton section of Northeast Philadelphia that used to be owned by the Budd, Co.

Teva planned to put three buildings on the site and use them for distribution, warehousing and computer data. In late September of 2011, local politicians joined then-Americas leader Bill Marth in putting shovels in the ground to mark the occasion.

But things changed and those new buildings are very much in doubt.

With the stock price lagging, the company changed chief executive officers on Jan. 1. Jeremy Levin was named to replace Shlomo Yanai and took control in May. The company recently said Marth would immediately become an advisor to Levin before retiring.

Levin has been examining the company since taking over and in June said he was considering whether Teva had too many factories. At a Sanford C. Bernstein investor conference, Gal asked Levin if the company would be building more facilities.

"My question to the organization was, ‘We’ve got 74 facilities. How many do we need? Where should they be located? What are the core facilities that you need?’ " Levin said then.

On Wednesday, Gal sent a note to clients, warning them that to appreciate Teva and its stock, they a needed a long-term outlook. Short-term results could be flat.

Gal predicted there could be cost cuts in some areas, but more spending in research and development. Local workers could be impacted.

Gal suggested there might be a 2 to 3 percent cut in sales and administrative areas (SG&A), which he said were now 24 percent of revenue, "substantially above other generics and more in line with some of the branded peers...The argument that its SG&A should be this high is reasonably weak."

In August, Carlo de Notaristefani joined Teva as president and chief executive officer of global operations. Like Levin, De Notaristefani previously worked at Bristol-Myers Squibb.

"Although we know that Teva was always cost-conscious, it was built through a series of acquisitions resulting in over 40 facilities," Gal wrote. "The new head of operations, De Notaristefani, was brought in partly for his skills in lowering manufacturing costs. From a strategic perspective, it makes sense for Teva to slowly wind down its manufacturing operations in North America and certain parts of Europe and Israel and shift capacity to low-cost geographies."

As for research and development (R&D), Gal wrote, Teva might spend more, contrary to the recent path taken by other big pharma companies. Copaxone, a drug for multiple sclerosis, is Teva's top brand-name drug, but it will soon face generic competition.

"Teva has historically spent only 6% of revenue on internal R&D and now will reasonably need to bring this figure up over time," Gal wrote. "In our model, we assume R&D will expand to 8% of revenue by 2015 ($1.6 billion)."

Teva filed a third-quarter financial report with the Securities and Exchange Commission on Nov. 1. A link to that filing is here.