"Teva Ramps Up R&D Spending to Fuel Growth—Analysts Get It"

Teva Pharmaceuticals (NYSE: TEVA Teva Pharmaceutical Industries -4.69%  ) reported its fourth-quarter and full-year 2024 results, posting strong numbers, yet its 2025 guidance fell short of Wall Street expectations—sending shares tumbling 13% in early trading. The company projected earnings per share (EPS) of $2.50 at the midpoint, versus analyst expectations of $2.78, a roughly 10% shortfall that dampened investor enthusiasm.

After doubling in 2024, Teva’s valuation had become a subject of debate. While the stock was once seen as an undervalued turnaround play, trading at a P/E ratio of 5, investors piled in as it climbed to a multiple of 8 in recent months. Now, Teva remains reasonably priced, but within a pharma sector where valuations tend to be compressed—Pfizer (NYSE: PFE Pfizer Inc 1.3%  ) trades at 8.5x forward earnings, Perrigo (NYSE: PRGO Perrigo Co. 0.59%   ) at 8x, and broader industry multiples hover around 10-12x, excluding the booming weight-loss drug segment.

Adding to market uncertainty, the appointment of Robert F. Kennedy Jr. as U.S. Health Secretary has raised concerns given his vocal opposition to vaccines and skepticism toward excessive drug prescribing. However, Teva CFO Eli Kalif remains unfazed, stating that the company’s regulatory relationships remain strong and that demand for pharmaceuticals and vaccines will remain high.

“The U.S. Department of Health and Human Services is run by professionals, and we’ve successfully worked with various administrations over the years. Nothing has changed at this stage,” Kalif reassured. “There’s no specific regulatory risk I can point to right now.”

Why 2025 Guidance Fell Short

Teva’s lower-than-expected 2025 profit forecast is largely a result of increased R&D spending, which the company argues is essential for future growth.

“R&D expenses will exceed 6% of revenue in 2025, as we accelerate multiple programs,” Kalif explained. “These investments don’t contribute to immediate revenue, so there's a disconnect in short-term earnings. But the impact will be significant in the long run. We’re optimistic about 2025 and beyond.”

The company reaffirmed its commitment to long-term growth, pointing to its seven consecutive quarters of revenue increases and a recent credit rating upgrade as indicators of its financial health.

“Teva has transformed into a growth company, and to sustain that growth, we need to ramp up R&D,” Kalif added. “Currently, 55% of our R&D budget is allocated to branded drugs, while 45% is focused on generics. Over the next few years, the generics portion will drop to just one-third of total R&D—a clear strategic shift.”

The issue? Teva hadn't clearly communicated its plans to boost R&D spending in previous quarters. This lack of transparency caught the market off guard, leading to a sharp selloff when guidance missed expectations.

“Analysts know Teva well—we maintain regular communication,” Kalif said. “They understand our investment in R&D. We are focused on building trust with investors by showing them exactly where we’re headed. The returns from these investments take 2-3 years to materialize, but if we hadn’t accelerated certain programs in 2023, like Olanzapine, we wouldn’t have hit our 2024 targets or be on track for 2026.”

R&D and Debt Strategy Remain Key Priorities

Despite the earnings miss, Teva continues to prioritize growth while maintaining cost discipline. 

“We’re keeping our operating expenses steady at 27%-28% of revenue, which is only sustainable because we’re growing,” Kalif emphasized. “If growth stalls, that’s a problem—but we’re not in that situation. Teva is in a growth phase.”

With legal battles behind it, Teva is now focused on further deleveraging. While some have speculated about the possibility of an acquisition, Kalif dismissed the idea outright: “We’re not looking at a sale—we’re focused on growth and reducing debt.”

Teva will also refinance a portion of its debt in mid-2025 as part of its capital management strategy. “We have debt maturities in 2026, and we want to be proactive in preparing for that,” Kalif explained. “We’ll likely raise new debt in the first half of 2025, depending on market conditions.”

Generic Drug Market: Competition Remains Intense

As Teva pivots toward higher-margin branded drugs and biosimilars, questions remain about the competitive landscape for its generics business.

“Competition in generics is constant,” Kalif noted. “But when we talk about competition, we need to clarify: Are we discussing market share? Pricing pressure? Sales volume? Generic drug pricing will always face erosion—that’s the nature of the industry.

“Our ability to maintain and grow sales depends on launching new products consistently. That’s why we’re heavily focused on R&D. We expect strong biosimilar and generics launches in 2025 and beyond, which will support overall revenue growth.”

Teva’s drop reflects short-term disappointment, but the underlying fundamentals remain intact. The company’s long-term transformation is still on track, with rising sales, a stronger balance sheet, and strategic investments in higher-margin businesses. Analysts still see significant upside—with UBS maintaining a $30 price target (39% upside) and Bank of America rating Teva among its top pharma picks. With debt reduction progressing and R&D investments set to drive future earnings, Teva’s recent dip could present a buying opportunity for long-term investors—assuming the company can deliver on its 2026 targets.