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2 Popular Healthcare Stocks I'd Avoid at All Costs

By Alex Carchidi – Dec 3, 2021 at 8:37AM

Key Points

  • Generic drug manufacturers need to have steadily growing free cash flow to deliver returns for investors.
  • Small biotechs that struggle with commercializing drugs aren't likely to grow consistently.
  • Waiting to invest once a company's performance improves is always an option.

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There's an entire galaxy full of better places to invest your money.

When it comes to healthcare companies, sometimes it pays to steer clear of crowd favorites. Even if there might be compelling, much-discussed catalysts for growth in the near future, there are often a few finer points that get left out of the discourse, and those can make a big difference to investors.

Today, I'll be weighing in on two healthcare stocks that I plan to avoid for the foreseeable future. It's entirely possible that they'll go on to outperform the market, but even if they do, there are a handful of flaws and risks that investors should consider before piling in.

An investor ponders a laptop computer while she holds several papers and sits at a desk.

Image source: Getty Images.

1. Teva Pharmaceuticals

The generic drugmaker Teva Pharmaceuticals (TEVA 0.69%) is a risky stock that's easy to mistake for a stalwart. Given its line of business, it's reasonable to expect that there will always be a market for some of Teva's products, as people will always need access to inexpensive medicines. But that doesn't mean there will be growth.

In fact, over the last three years, the company's quarterly revenue has shrunk by 2.3%. And in the last five years, its quarterly net income has fallen by 54.7%. Since it doesn't pay a dividend like other generic drug manufacturers, there hasn't been much of a silver lining to offset the stock's punishing decline of more than 77% since late 2016.

But what are the chances of Teva making a turnaround? In its pipeline are a few late-stage biosimilars, like its generic version of the arthritis drug Humira, that could reverse its fortunes over the next few years. The catch is that because it's a generic drugmaker, it's guaranteed to have plenty of competitors chasing the same markets.

Aside from facing competition with its planned launches of new generics, the company will need to keep spending oodles of cash to reduce its massive debt load, totaling $24.2 billion. In the third quarter alone, it repaid $1.5 billion in long-term debt, and its free cash flow (FCF) was only $383 million. And Teva still has $3.5 billion in current debt that it'll need to pay off within a year. That's sure to be a major headwind when investing in spinning up new manufacturing lines to produce and market additional generics.

So, between its weak revenue growth, indebtedness, lack of a dividend, and poor share performance in recent history, there doesn't appear to be any reason to invest in Teva.

TEVA Chart

TEVA data by YCharts

2. Bluebird Bio

Bluebird Bio (BLUE -0.89%) is a gene therapy company that's been embroiled in difficulties over the last few years, and signs say things may be taking a turn for the worse.

The company recently completed a spinoff of its oncology-drug development division, which became 2seventy bio. Though most of the C-suite has departed -- which is a red flag in and of itself -- Bluebird retains its gene therapy division, which will be the company's focus moving forward. 2seventy also took with it the ownership of Bluebird's only commercialized oncology drug, a gene therapy for multiple myeloma (a form of cancer that attacks plasma cells).

That's a problem, as the company also plans to exit the E.U., where a pair of its other drugs are authorized. In short, it couldn't sell its therapies at the price it wanted in the E.U. Now, Bluebird may face rapidly dwindling recurring revenue from drug sales, as well as uncertain prospects for the near future.

If the Food and Drug Administration approves its pending application to commercialize its beti-cel gene therapy for beta-thalassemia, which could occur as early as next year, the company will have income once again. Another therapy close to commercialization, eli-cel for cerebral adrenoleukodystrophy (CALD), is currently on a mandated clinical hold after a patient experienced a severe adverse reaction during the medicine's trials. If that hold is resolved after talks with regulators, and things proceed smoothly, the company could file for approval by the end of the year.

But none of the above is guaranteed. And as the company's stumbles in the E.U. show, simply getting approval isn't enough to ensure a good outcome for shareholders, either.

In my view, the research and development risks, clinical trial risks, and regulatory risks inherent to biotech stocks make for more than enough downside exposure. When there's evidence that a company's commercialization strategy is also a liability, such as with Bluebird's short-lived dalliance in the E.U., that's an additional risk beyond the standard set. That means that there needs to be the potential for an even larger upside to make an investment worthwhile. With Bluebird Bio, I just don't see it.

Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool recommends 2seventy bio, Inc. and Bluebird Bio. The Motley Fool has a disclosure policy.

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