Wondering how Teva found room to cut $3B? Look at its past mistakes, CEO says

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Teva embarked on a cost-cutting drive last month that will claim 14,000 jobs.

SAN FRANCISCO—Since new CEO Kåre Schultz rolled out Teva’s $3 billion cost-cutting plan a few weeks back, “some have asked me, ‘how on earth is this possible?’” he said Monday at the J.P. Morgan Healthcare Conference.

One word: structure.

The company has had its generics, specialty meds and global staff functions—including human resources and communications—siloed, he said. And besides creating a situation where “very few people have had a good grip on the operating profit and the P&L,” that structure also resulted in a larger workforce than Schultz thinks was necessary.

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Merging the three units into one “takes out two-thirds of management in some cases and simplifies the whole operation,” he said.

RELATED: Teva finally nabs a CEO, and it's Lundbeck helmsman—and Novo ex—Kåre Schultz

The fact that Teva has grown through acquisitions hasn’t helped, either. “Unless you’re very motivated to squeeze out costs and create synergies, you don’t necessarily consolidate everything,” Schultz noted, adding that it can be “very suboptimal from a cost-efficiency point of view as opposed to if you grow organically.”

Take manufacturing, for example: Teva probably needs just 2 to 4 API sites and between 8 and 12 functional manufacturing sites, he said. But today, the company has 80 sites.

RELATED: Teva's stunning list of cuts targets 14K jobs, $3B in costs and plants around the globe

All of that’s about to change, though, as Teva pushes forward with a cost-cutting plan that’s set to claim 14,000 jobs. While the plan has sparked nationwide labor protests in the company’s home country of Israel, Schultz reassured investors that it was “very firm” and would “definitely happen, so you don’t need to worry about that part of it.”

And there are other changes on the way, too—such as an increased focus on operating profit.

“Teva used to focus on maximizing revenue in the generics business believing that if you just maximize revenue, everything will fall into place and you’ll get great profitability and so on,” Schultz said.

But “that doesn’t really work from my point of view,” he said. “You always need to maximize operating profit.”