Why Teva Pharmaceutical Is Soaring 13.5% Today

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What happened

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After providing investors with the details of its latest cost-savings plan, including a massive workforce reduction, Teva Pharmaceutical (NYSE: TEVA) shares are rallying 13.5% as of 1 p.m. EST Thursday.

So what

It's been a brutal year for the world's biggest generic drugmaker. Shares have suffered significantly due to declining sales and profit due to lower generic drug prices, new competition for its best-selling drug, Copaxone, and higher interest expenses associated with its $40 billion acquisition of Allergan's (NYSE: AGN) generic drug business.

In the third quarter, these headwinds caused non-GAAP (generally accepted accounting principles) profit to tumble 23.7% year over year to $1 per share. Revenue from generic drugs dropped 7.7% to $3 billion and Copaxone sales fell 7% to $987 million, which in turn, caused specialty brand drug revenue to fall 1% to $2 billion.

Unfortunately, the top-line headwinds negatively impacting Teva Pharmaceutical's profit aren't going to ease up anytime soon, especially since Mylan (NASDAQ: MYL) launched a Copaxone competitor in Q4 that could significantly dent Copaxone sales in 2018.

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In response to its revenue challenges, management outlined a plan on Thursday to conserve cash, pay down debt, and keep itself afloat. The plan includes eliminating 25% of its workforce (14,000 jobs) and suspending its dividend payment to investors. The company won't pay any bonuses this year and it plans to ax management and close some of its buildings. Overall, it thinks these moves will save it more than $1.5 billion by the end of 2018 and $3 billion by the end of 2019.

Management also told investors it will update them in February on its long-term strategy and that it doesn't plan on issuing more shares to raise cash.

Now what

These are painful but necessary moves if Teva Pharmaceutical's is going to survive. The dividend cut is disappointing, but not unexpected given that it previously cut its dividend by 75% earlier this year to free up cash.

The troubles facing the company remain big, though, and I'm uncertain these moves make this company a buy. Debt remains above $35 billion and while cash flow is still positive, the size of the negative impact that's associated with Mylan launching its 40 mg formulation of Copaxone won't be clear for a while. Given the risks and lack of a dividend anymore, there are probably better places to invest your money.

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Todd Campbell owns shares of Mylan. His clients may have positions in the companies mentioned.
The Motley Fool recommends Mylan. The Motley Fool has a disclosure policy.