Here's Why I Won't Touch Teva Pharmaceutical With a 10‑Foot Pole

Teva Pharmaceutical Industries (TEVA +0.24%) is an interesting investment story. For the right investor, it could be an attractive buy. For me, however, it isn’t. Here’s the opportunity that Teva has ahead of it, and why that opportunity just doesn’t interest me.

What does Teva Pharmaceutical do?

Historically, Teva produced generic drugs, which can be a lucrative business model. Essentially, some other pharmaceutical company puts in the time, effort, and expense of developing a medication. That company is granted a limited period during which it can sell the new drug exclusively; during the period of patent protection, it can produce massive revenue and profits. However, when that patent protection ends, companies like Teva can step in and make the drug themselves.

Image source: Getty Images.

The generic drugs that Teva makes normally sell for materially less than the name-brand versions. While that leads to a steep decline in revenue for each company that originally created a now-generic compound, Teva Pharmaceutical gets a new revenue stream. And Teva is very good at what it does.

The generics business is getting harder

The problem is that other companies have caught on to the generics opportunity. So competition in the space has increased over the years, leading to fewer profits for companies that make generics.

Teva has responded by focusing on more complex-to-make generic drugs, where it has an edge over less experienced companies. That’s reasonable, but it requires more investment and involves more risk. Sometimes, generic drugs don’t actually work as hoped, especially when you’re dealing with hard-to-make drugs.

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NYSE: TEVA

Teva Pharmaceutical Industries

Today’s Change

(0.24%) $0.08

Current Price

$33.85

Key Data Points

Market Cap

$39B

Day’s Range

$33.05 - $33.85

52wk Range

$12.46 - $37.34

Volume

189K

Avg Vol

9.5M

Gross Margin

51.82%

So, Teva’s business model is riskier than it used to be. That’s a modest problem for me. Tipping me over the edge is the fact that Teva isn’t just focusing on hard-to-make generic drugs – it’s also developing its own, original drugs. To be fair, there’s an opportunity for success, and Teva is well-versed in drug development. However, there’s also massive competition from companies with much more experience.

Even some of the most successful drugmakers have products that don’t work out. Pfizer, for example, had to abandon its internally generated GLP-1 weight loss drug not too long ago. Following that setback, Pfizer quickly acquired a company with a promising GLP-1 drug and inked a distribution agreement with yet another company. I’m not convinced that Teva has the wherewithal to pivot like that if its internal drug pipeline is weaker than expected.

I’m a fairly conservative investor at this point in my life. I see why some investors would like Teva’s current business approach. For me, however, the model change brings with it more risk than I’d like to shoulder in a very competitive sector. Maybe, after there’s a longer track record for the new approach, I’d be willing to revisit the stock.