Manufacturing at the heart of Teva's $2B cost-cutting drive

Teva Pharmaceutical Industries ($TEVA) wants to cut annual costs by $2 billion through changes to its manufacturing network and sourcing strategy. The savings push will see Teva focus on bigger, more efficient plants--while shifting production to lower-cost locations--as Teva's CEO works to remake the generics giant into a broader-based company.

New CEO Jeremy Levin is behind the push to keep Teva profitable after multiple sclerosis drug Copaxone--which generates half of the company's earnings--goes off patent in 2015. And Levin has tasked sourcing and manufacturing with finding the largest chunk of the savings. Faced with the need to cut the cost of goods more than $1 billion, Teva's president of global operations--who followed Levin from Bristol-Myers Squibb ($BMY)--is looking East for inspiration.

"Over time, you will see an evolution of the network from West to East. So the center of gravity of our product supply will be moving. We will be supplying more and more of our products from the most cost-effective locations in our network," Carlo De Notaristefani said at Teva's investor day.

Teva is yet to place a dollar figure on potential savings from that approach, but was forthcoming with financial details of its other plans. Moving from small facilities to larger, more efficient plants will generate savings of up to $175 million, Reuters reports. As part of the shift, Levin said Teva will "reduce excess capacity," but was light on details of which sites--if any--face the ax. And to extract maximum value from its remaining production hubs, Teva is accelerating rollout of Lean Six Sigma concepts at its largest plants.

A good example of what the company has in mind can probably be seen in the $110 million sterile injectables plant it recently opened in Hungary. With 6 production lines, the 15,000-square-meter facility has the capacity to churn out 160 million to 200 million units of injectable meds annually. Teva plans to distribute chemotherapies and other products from the facility to more than 70 countries, particularly the U.S. and markets in Europe and the Far East. 

But the biggest savings will come from overhauling procurement. Teva talked up the benefits of having its own ingredient plants--which insulate it from turbulence at vendors--but still sources a lot of raw materials and other goods from external suppliers. By centralizing purchasing, Teva thinks it can cut out overlaps while striking better, long-term deals with vendors. Savings of up to $700 million are expected.

If successful, the cost-cutting drive will mitigate a possible loss of sales from Copaxone. Teva is optimistic that it can still keep a slice of the market though, and--in a reversal of its usual role--talked down the likelihood of successful generic competitors. Copaxone is a complicated molecule that is "very, very difficult" to manufacture and replicate, Levin said. Small differences in production can have unintended consequences--such as down regulation of protective genes--and as such Teva thinks clinical trials of generic Copaxone are needed. On this occasion, higher barriers to generic entry would be a big boon for Teva.

- check out Reuters' article
- here's the WSJ piece
- read more in the investor day transcript (reg. req.)