A Member of Pat McKeough’s Inner Circle recently asked for his advice on a global leader in the pharmaceutical sector which not only operates as the world’s largest generic drug manufacturer but is also aggressively expanding a high-margin proprietary portfolio of innovative medicines, biosimilars, and active pharmaceutical ingredients.
Pat likes the firm’s highly successful transformation from a pure, low-margin generic supplier into a high-margin innovator. Premium therapies are highly insulated from generic price erosion and carry strong profit margin. The company’s debt paydown is also a plus. However, Pat notes generic side of the business remains a high-volume, low-margin business, where erosion from competing copycat drugs can hurt sales.
Teva Pharmaceutical Industries ADR (Symbol TEVA on New York; www.tevapharm.com) is a pharmaceutical company that produces generic and branded drugs. The company operates worldwide in 57 markets with about 34,000 employees. The headquarters is in Israel, with a significant presence in the U.S., Europe, and other markets.
Generic drugs make up around 55% of Teva’s sales, while the balance comes mostly from branded drugs and active pharmaceutical ingredients.
In recent years, Teva has focused more on the development and marketing of higher-profit-margin branded drugs. Successful developments include Ajovy (migraine treatment), Austedo (tardive dyskinesia and chorea associated with Huntington’s Disease), and Uzedy (schizophrenia treatment).
Teva has three main segments: United States, Europe and International Markets.
The biggest region, United States, contributes about 45% of revenues. Branded drugs, particularly Austedo and Ajovy, were strong contributors to sales in this region.
The European segment includes the European Union, the U.K. and certain other European countries. This region contributes 39% of the company’s sales.
The International Markets segment includes more than 35 countries not included in the North America and Europe segments (including Canada) and contributes around 15% of overall sales.
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Teva’s revenues peaked in 2017 and declined steadily until 2023. This was due to a combination of factors, including intense generic drug price erosion in the U.S. market, the loss of exclusivity for its blockbuster drug Copaxone, and the weight of a massive debt load from the $40 billion acquisition of Allergan’s generics business in 2016.
A highly experienced healthcare leader, Richard Francis, was appointed as CEO in early 2023. Apart from lowering the company’s debt, his focus has been on growth areas for Teva. That includes the development of branded drugs and biosimilar drugs, while keeping generics as a strong source of revenue.
In the three months ended March 31, 2026, Teva’s revenue rose 2.3%, to $3.98 billion from $3.89 billion a year earlier. Revenue rose due to portfolio growth, even with lower revenues from lenalidomide capsules due to increased generic competition in the U.S.
Excluding one-time items, earnings were $621 million, or $0.53 a share, in the latest quarter. That was up 3.2% from $602 million, or $0.52. Earnings rose due to strong growth in key innovative products and strong operational execution.
The company’s long-term debt is $14.0 billion or a somewhat high 37% of its market cap. The debt jumped sharply in 2016 when Teva acquired Allergan’s generics business, but the company has managed to reduce the debt by over $18 billion since that time. The company also holds cash of $3.7 billion.
Teva’s outlook is sound. The drug maker aims to keep transitioning to branded drugs from generics—although the generic side of the business remains stable, aided by the launch of a first-ever generic GLP-1 weight loss drug.
Meanwhile, the company’s late-stage pipeline is sound. New drugs could offer $10 billion in long-term sales potential. They include olanzapine, a schizophrenia therapy that’s pending FDA approval; DARI asthma inhaler; duvakitug (anti-TL1A, developed with Sanofi for inflammatory bowel disease); and emrusolmin for multiple system atrophy. In generics, Teva also got FDA approval on a biosimilar to Prolia (osteoporosis) and is awaiting the okay on a biosimilar to Xolair (allergy/inflammation).
After a significant slump in the share price between 2015 and 2023, the shares have recovered some of the lost ground and are up by 184% since the start of 2024.
Despite its rising stock price, the company’s shares still trade at a low 14.2 times the forecast 2026 earnings of $2.22 a share.
Recommendation in Pat’s Inner Circle: Teva Pharmaceutical Industries is okay to hold.
