Teva’s stock surge comes to a halt, falling 14% amid weak 2025 outlook
Teva’s stock surge comes to a halt, falling 14% amid weak 2025 outlook
Despite a strong 80% gain in 2024, Teva’s stock dropped after the company revealed disappointing profitability and cash flow forecasts.
The impressive rise in Teva's stock, which brought it to a value of NIS 100 billion (approximately $28B), was interrupted on Wednesday after the release of its 2024 Q4 financial reports, which included a disappointing forecast for 2025. Teva completed two consecutive years of single-digit growth under the management of Richard Francis, who took office at the end of 2022. Its stock jumped by 80% during 2024, which led investors to develop expectations that turned out to be almost exaggerated.
After the publication of the forecast, which indicated much weaker-than-expected profitability and a decrease in free cash flow from operations for the second year in a row, Teva's stock dropped by 14% on Wall Street.
In a conversation that Teva's management held with analysts after the publication of the reports, many questions were raised about the lower-than-expected forecast for profitability and cash flow indicators. The message conveyed by management in response is that the new growth strategy presented by Francis about a year and a half ago comes with a price – and that price is profitability. Teva's goal under his leadership is to shift the focus to the innovative leg, namely the development of originator drugs, and reduce the generic leg, with the exception of biosimilar drugs, which are a more complex type of generic.
The development of original drugs has costs that are orders of magnitude higher than those for generic imitation drugs. On the other hand, if the development is successful, the profitability from it is infinitely higher and lasts for a longer period of time. Therefore, even though Francis calls 2024 a turning point, it seems that this year will also be part of the pharmaceutical company's recovery process from the crisis it has faced over the past decade, since it embarked on the adventure of acquiring Actavis for $40 billion. This move threatened to sink the Israeli flagship, which took on more than $30 billion in debt to finance the acquisition, and has since devoted the last few years mainly to attempts to recover from this pitfall.
As of the end of 2024, Teva was left with a net debt of $14.5 billion (NIS 52.1 billion) and is approaching its target of a debt-to-EBITDA ratio of less than 3. In 2024, Teva repaid $1.6 billion of its debt.
"The transition to growth is a journey, and we can say that we have completed the first part of it," Francis said in a conference call with investors. He added, "We are optimistic looking ahead, also because there are strong future drugs in development, including in the biosimilar drugs segment, and at the same time we have reached a high level of efficiency in Teva's operations."
Teva has stated its intention to continue increasing research and development expenses, as well as marketing and sales expenses, in order to accelerate the development processes of new drugs and also to invest more in their rapid introduction to the market. An example of this can be seen in the drug Uzedy for the treatment of schizophrenia, which was launched under Francis' management. The drug showed a significant jump in revenue last year, and Teva has even updated its numbers more than once. According to the original plan, it was expected to generate revenue of $80 million in 2024 but ended the year with revenue of $117 million. The company now expects annual revenue of $160 million for the new drug. In addition, Francis is pushing to accelerate the final stages of clinical trials for two future and important drugs that Teva is expected to launch in 2026-2027: an innovative inhaler for the treatment of asthma (SABA) and Olanzapine, another drug for the treatment of schizophrenia, which is expected to be Teva's next major innovative launch in 2026.
"Gross profit margins will not change compared to 2024, but we will continue to invest in the pharmaceutical portfolio to encourage growth, and therefore operating expenses will increase compared to 2024," says Eli Kalif, Teva's chief financial officer. According to him, "Additional payments for legal settlements are expected this year as well." Kalif added that the intention is to continue the payments that Teva is obligated to make as part of the compromises it reached in recent years in the giant lawsuit over its share of marketing painkillers in the U.S. and in the drug price-fixing affair. According to Kalif, in 2025 the payments will be slightly higher than the half-billion-dollar figure Teva paid last year. A higher amount will be paid again in 2026, and only in 2027 is a decrease in these payments expected.
Teva ended 2024 on a positive note, with fourth-quarter results that beat expectations, with both revenue of $4.2 billion and earnings per share of 71 cents. Although these results ostensibly reflect a decline compared to the same quarter last year, it is important to note that the last quarter of 2023 included a one-time payment of half a billion dollars (NIS 1.8 billion) that Teva received from Sanofi after the two companies signed a joint development agreement for Duvakitug, the promising drug for intestinal diseases, which about a month ago showed excellent results in the second phase of clinical trials.
The fourth quarter led the pharmaceutical company to $16.5 billion in revenue for the year, an annual growth of 6% in local currency terms. The main growth engine was the original drug Austedo, for the treatment of involuntary movements due to nerve diseases. Austedo grew by 36% and beat the forecast with annual revenue of $1.6 billion, compared to expectations of $1.5 billion. Free cash flow was $2.1 billion, at the high end of the forecast, although slightly lower than in 2023, due to payments for legal settlements. Net income reached $2.49 per share, although according to full accounting rules, Teva is still losing money, mainly due to a long series of legal expenses and goodwill write-offs carried over from its difficult decade.
But the main story in Teva's report is not about what was, but about what will be. Revenue is expected to reach $16.8-17.4 billion in 2025, reflecting a single-digit growth rate again, and net income is expected to total $2.35-2.69 per share. In other words, it may even be less than in 2024. Cash flow, one of the important parameters for the company, which is still repaying its enormous debt, is also expected to be lower than last year, at $1.6-1.9 billion – reflecting a further decline following the decline recorded in this line in 2024 (also affected by the Sanofi payment).
Teva notes that the revenue forecast does not include the next payment that is expected to be received from Sanofi, with the start of the third phase of the clinical trial for Duvakitug. The companies plan to start the trial during 2025, so the reasonable assumption is that the money will indeed be received, recorded in the revenue line, and contribute to the profit line. On the other hand, in the annual forecast, Teva included a full year of operation of TAPI, the raw materials division, which generates annual revenues of approximately $550 million and is expected to be sold during the year. Teva has been working for more than a year on the sale of the division, in accordance with Francis' strategy, who identified it as a potential spin-off, but at this stage, no buyer has been found who will pay the price of approximately $1 billion that Teva is asking.
On the good news side, also looking ahead, we can mention again Austedo, which is expected to generate revenue of $1.9-2 billion this year, on the way to the $2.5 billion target set by Francis in 2027. Ajovy, the third original drug, will grow by 18% this year, similar to last year, and is expected to reach revenue of $600 million. Copaxone, Teva's former star, will continue to erode and is expected to decline to $300 million in 2025, compared to half a billion dollars last year.
