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Major pharmaceutical companies have it rough in the current global political environment. It's bad enough that they face legions of costs to develop and test their products to bring them to market. Add to those the less-talked-about, but still very real, costs of all the ones that don't make it through testing, and it's often a wonder any of them manage to profit at all.

Perhaps most worrisome of all, though, is the ever-increasing thirst for control on the part of governments worldwide. Sure, the FDA seems ultra-conservative when it comes to approving new drugs since Merck's (NYSE: MRK) Vioxx and Pfizer's (NYSE: PFE) Bextra got pulled. That's only part of the problem, though -- the part that seems to ebb and flow as the political winds shift.

But the real problem is the increasing pressure that governments worldwide place on pharmaceutical companies for a "free ride": demanding the benefits of pharmaceutical R&D without bearing the costs. 

When carrots go away
High prices for drugs serve two key purposes. First, they help recover the already-spent costs of drug discovery and study. Second, they enable future research. Without the high prices, there'd really be no incentive to perform the research that's so critical to new discoveries.

Unfortunately, however, that's not how populist politicians worldwide view things. In their view, the high production margins give governments the leverage to demand significantly lower prices in exchange for access to their markets. Pharmaceutical companies have little choice but to accept those prices. After all, it's better to sell for $0.20 a pill that cost $0.10 to produce than not to sell the pill at all.

Sounds good, right? The real risk from government-mandated low prices, though, is that without the opportunity to recover their large expenditures, there's no incentive for companies to develop the next blockbuster. That bodes very poorly for the future of drug companies heavily into R&D.

If you can't stop the insanity
Given that background, why would anyone want to invest anywhere near the pharmaceutical industry? The answer is simple -- people still need medication. What's at risk from the free riders are future treatments and cures, not existing medicines. As a result, the companies that will do best in this ugly political climate are the ones like Teva Pharmaceutical (Nasdaq: TEVA) that focus largely on generics.

Teva's lower-cost model is ideal for allowing it to remain competitive in this insane climate. Based on its valuation -- a premium to so many research-heavy major drugmakers -- the market seems to agree:

Company

PE Ratio

Novartis (NYSE: NVS)

9.8

AstraZeneca (NYSE: AZN)

10.9

Wyeth (NYSE: WYE)

12.6

Schering-Plough (NYSE: SGP)

16.0

Merck

18.7

Pfizer

19.7

Teva

20.7

Data from Yahoo! Finance, after market close Feb. 1, 2008.

Ordinarily, I'd shy away from a company like Teva, with its premium valuation. In this particular case, though, I have to acknowledge the reality that Teva simply has far better potential in the current political climate that so penalizes new drug research and development.

But don't take just my word for it. Teva stands out as a top-rated, five-star stock at Motley Fool CAPS, the Fool's own free investor-intelligence database. If you agree with the big thumbs-up, then join us for free at CAPS, and add your outperform rating alongside mine. If enough of us speak with one mind on its stock, CAPS will keep Teva among the top stocks around. Then come back in a few days and we'll tell you who you've picked as the best international stock.

Further Foolishness that's far from generic:

At the time of publication, Fool contributor Chuck Saletta owned shares of Merck. Pfizer is a pick of the Inside Value newsletter. The Fool has a disclosure policy.