Teva Pharmaceutical Industries Ltd. (TEVA) had a good Tuesday. The Israeli drugmaker beat third-quarter earnings expectations and raised its full-year outlook, and investors responded by pushing the stock up 3.37% to $42.07, close to its 52-week high of $42.59.

The headline numbers: adjusted earnings of 86 cents per share against an analyst estimate of 73 cents. Revenue came in at $4.395 billion, down 2% year over year but comfortably above Wall Street's $4.291 billion forecast. The revenue dip came mostly from lower sales of generic drugs, particularly lenalidomide capsules.

What really stood out was the margin story. Teva's adjusted gross margin rose 345 basis points to 58.7%, its highest quarterly level in a decade, excluding a development milestone payment received in late 2025. Adjusted operating income reached $1.39 billion, an operating margin of 31.7%. The company generated $241 million in operating cash flow and $495 million in free cash flow, and ended the quarter with $4.085 billion in cash and cash equivalents.

The Branded Drugs Are Doing The Heavy Lifting

Teva's pivot toward innovative branded medicines is showing up in the numbers. Austedo, Ajovy and Uzedy together generated approximately $1.1 billion in revenue, up 33% year over year in local currency. That growth helped offset weakness in the generics business, which is exactly the trade investors have been waiting to see pay off.

Generics, meanwhile, had a rougher quarter. Global generics revenue fell 16% in local currency, mainly because U.S. sales of lenalidomide, a generic version of Revlimid, dropped. New generic launches and biosimilar growth partly offset that decline. Excluding lenalidomide, global generics revenue actually rose 1%, with European sales up 7% while U.S. and emerging-market sales fell 3% and 4%, respectively.

The biosimilars piece is picking up speed. Teva now expects that business to generate more than $800 million in 2026, hitting its original 2027 goal a year early. Management sees generics revenue staying flat or rising slightly in 2026, and expects the global generics business to grow 1% to 2% annually over the long term.

A New Biosimilar Partnership

Teva and Samsung Bioepis also announced an agreement Tuesday to commercialize two FDA-approved immunology biosimilars in the U.S. Teva will gain U.S. commercialization rights to etanercept-ykro, a biosimilar to Enbrel, at closing. Rights to infliximab-abda, a Remicade biosimilar, will transfer in the third quarter of 2027.

Guidance Goes Up Across The Board

Teva raised its 2026 adjusted earnings forecast to $1.92-$2.11 per share from $1.91-$2.11. Analysts expect $1.98 per share. Revenue guidance moved up to $16.7 billion-$17 billion from $16.5 billion-$16.85 billion, versus Wall Street's $16.651 billion estimate.

The product-level forecasts got bumps too. Austedo revenue is now expected at $2.55 billion-$2.65 billion, up from $2.45 billion-$2.6 billion. Ajovy jumped to $930 million-$960 million from $850 million-$870 million. Uzedy rose to $290 million-$310 million from $270 million-$290 million. And following the launch of Weltruza, Teva sees combined peak sales potential of $1.5 billion to $2 billion for Weltruza and Uzedy.

The Medicare Cloud On The Horizon

Here's the part worth paying attention to. On Tuesday's earnings call, CEO Richard Francis acknowledged that Medicare drug price negotiations under the Inflation Reduction Act will affect Austedo in 2027. That's a real headwind, and the market knows it.

But Francis expressed confidence that strong underlying demand would help offset the pricing pressure. He expects Austedo to generate approximately $2.5 billion in revenue in 2027 and exceed $3 billion in peak annual sales. Teva also expects Austedo's fourth-quarter 2026 revenue to decline year over year, due to changes in purchasing patterns and pricing ahead of the IRA's January implementation.

In other words, there's a bit of a air pocket coming in the near term as the pricing regime shifts. The question is whether demand growth outruns the price cuts. Francis thinks it will, and the raised guidance suggests management is willing to put numbers behind that view.

For now, the market seems inclined to believe the story. A stock trading near its 52-week high after a revenue decline tells you investors are focused on the margin expansion and the branded-drug trajectory rather than the top line.