Having a handful of reliable, low volatile stocks to anchor your portfolio is a great way to pad your wealth from short-term shocks while supporting its long-term growth. The pharmaceutical industry, including biopharma, has long been home to some of the most stable, yet growing, companies. In the face of increasing demand for newer and more complex medical treatments, these companies have nearly perfected the art of developing and selling drugs. And it's no surprise that investors have preferred such companies for their portfolios.
But there are plenty of clunkers, especially in the biopharmaceutical space, that can potentially burn your hard-earned wealth instead of preserving it. Specifically, shares of the two drug manufacturers I'll discuss below have lost 75% of their total value over the last five years, and there isn't much hope for improvement anytime soon.
In short, these companies are unlikely to deliver the slow but stable growth over time that prudent investors look for. Here's why you should avoid them.
Image source: Getty Images.
1. Teva Pharmaceuticals
Israeli Teva Pharmaceuticals (TEVA 0.29%) makes generic drugs, biosimilar drugs, and generic inhalers. It's currently very narrowly profitable, with a profit margin of 2.6% for 2021, though its track record for profitability is quite spotty in recent history. For a typical investor in a generic drugmaker, that's a problem, as it undermines the stock's chances of compounding in value consistently over time.
And there's a slew of other compelling reasons why you should stay away from its shares.
Over the last five years, its annual revenue fell by 27.3%, and in 2021 it brought in $15.8 billion. And, per management's 2022 guidance, things won't significantly change this year. If there was a grand plan to target new markets or commercialize more lucrative generics, it has yet to start paying off.
Furthermore, in an attempt to improve its gross margin, the company is closing, consolidating, and selling off some of its offices, manufacturing sites, and research laboratories. Therefore, it could be missing out on serving demand, or potentially curbing its ability to invest in research and development (R&D) to spur growth down the line. For a stock intended to be a long-term compounder, that's yet another massive red flag.
Then there's $23.5 billion in debt. Last year, it paid off a whopping $7.8 billion, most of which was long-term debt, but it also took out an additional $4.9 billion in loans.
That left the company with a scant $236 million in free cash flow (FCF). For those keeping track, Teva's operating expenses in 2021 totalled $4.4 billion. So while it's continuing to deleverage like it has been over the last five years, there's a long way to go before the cost of servicing the debt load is more manageable.
Many other biopharma stocks simply don't have that problem. In sum, there's no reason to buy shares of Teva when there are better alternatives out there.
2. Endo International
Like Teva, Endo International (ENDP) manufactures generic medicines, though it also makes branded generics, medical aesthetics, and sterile injectable drugs. It isn't profitable, and its sales have shrunk by 13.7% since 2018. If you're not already looking for the door, you probably should be.
Last year, it posted a net loss of $613.2 million despite annual revenue of $2.9 billion. What's more, 2022 is shaping up to be brutal. Management expects revenue in every single one of its major segments to decline in the first quarter at a minimum, with the expected top-line contraction in the range of 10% to 19%. And there's reason to believe that the company's overall financial health is deteriorating.
In 2021, it took out an additional $3.2 billion in debt, making its total debt balloon to $8.3 billion, while spending $3.3 billion on repaying existing liabilities. For a company with a market cap of only $542 million or so, that's quite a large amount to be on the hook for. And with growth unlikely to return in spades, it just might be yet another problem for people who invest today.
To cap it off, management has explicitly stated strategic priorities are to add more medicines to the portfolio, "reinvent how we work," and to "be a force for good." As positive as the latter two messages are, investors are likely to wonder where their interests fall. Likewise, with no mention of margin improvement in sight, it's reasonable to expect Endo to remain unprofitable for the foreseeable future.
And without much in the way to offer for growth in the near term, investors would do well to avoid this stock for the time being.
