Life-saving medicines will never go out of style -- just one of the things that make drugmakers excellent potential stocks to buy and hold on to for years. However, not all drugmakers on the market are great stock picks.
Here's one company in this sector that's not worth your hard-earned cash: Teva Pharmaceutical Industries (TEVA -0.70%). This company faces an uphill battle in a difficult segment of the industry to navigate. In addition, it is currently battling company-specific problems that make it even less attractive.
Data by YCharts.
The challenging market for generic drugs
Teva Pharmaceutical is one of the largest manufacturers of generic medicines in the world. It stands as the leader in this market in North America and Europe. On the one hand, selling generic drugs has its perks. Once blockbuster therapies developed and marketed by other pharmaceutical companies lose patent protection, Teva Pharmaceutical can steal some market share from these competitors by offering a cheaper generic version of the drug.
But there's also a significant drawback to consider: Drugmakers that develop and market brand-new medicines benefit from patent protection for some time -- in the U.S., patent protection lasts for 20 years from the date of the patent's issuance. Patents confer competitive edges and allow drugmakers some degree of pricing power.
Teva Pharmaceutical's products do not benefit from patents and often face competition from other generics. When competitors market a generic version of the same drug Teva Pharmaceutical markets, the two products are interchangeable. The company does make up for that, at least somewhat, with an extensive portfolio of products and a wide presence across the globe.
Teva Pharmaceutical offers more than 3,500 products, and beyond the U.S. and Europe, it boasts a presence in more than 35 countries, including Israel, where it is based. However, despite its leadership position in the generic drug market, Teva Pharmaceutical faces serious challenges investors shouldn't overlook.
Image source: Getty Images.
A value trap
The bulls might point out that Teva Pharmaceutical is currently dirt cheap. Investors can scoop up shares for a little less than $9, and its forward price-to-earnings (PE) ratio is 3.33 -- an extremely low metric by almost any standard.
But Teva Pharmaceutical is cheap for a reason. For example, as just one of the issues it is currently facing, Teva Pharmaceutical has come under intense scrutiny due to its alleged role in the U.S. opioid crisis.
Some of the company's products, including oxycodone -- an opioid pain medicine -- can be addictive. That coupled with Teva Pharmaceutical's marketing strategy (despite the company's knowledge of these products' potential addictive side effects) contributed to this public health issue, or so the argument goes. Lawmakers have brought forth a raft of lawsuits against Teva Pharmaceutical and other companies, such as pharma giant Johnson & Johnson.
As Teva Pharmaceutical notes, more than 4,000 complaints have been filed against the company since 2014, both by private individuals and members of government agencies in various states. These legal battles will continue to harm the company's image and expose it to additional financial risk. Perhaps this wouldn't be a deal breaker if it weren't for the fact that Teva Pharmaceutical is already facing debt-related issues, although to be fair, the company has made significant headway here in the past few years.
According to management, the company has reduced its debt by almost $13 billion in the past four years. The company ended the third quarter with a net debt of $21.7 billion, which still looks pretty high. The combination of the company's debt with its litigation problems does not bode well.
To make matters even worse, its financial results haven't been great of late. It recorded revenue of $3.9 billion in the third quarter, a 2% decrease compared to the prior-year quarter.
Teva Pharmaceutical did perform slightly better on the bottom line -- with its adjusted net income per share rising to $0.59, up from the $0.58 it reported during the year-ago period. The company's sales have been impacted by the pandemic, and given the current trajectory of the outbreak, it doesn't look like this headwind will subside going into 2022. That gives Teva Pharmaceutical a risky, uncertain outlook, which only adds to the other issues it is facing.
That's why even at current levels, Teva Pharmaceutical does not look like a great option. For investors looking for reasonably valued pharma stocks, there are much better options to consider.
