There's no such thing as a perfectly safe stock. Many investors have had the unpleasant experience of buying shares of a company they thought was safe, only to see their money evaporate down the line when their investment wasn't as "safe" as their initial impressions.
In that vein, one of the hallmarks of safety is reliable and highly recurring revenue and earnings, complete with a durable and defensible profit margin that's consistent over time.
Manufacturers of generic pharmaceuticals seem to fit that bill. After all, there's a tremendous and persistent demand for low-cost medicines, and many people take drugs to treat their chronic conditions for decades on end.
But as we'll see in just a moment, generic drugmakers aren't monoliths, and some are actually quite unsafe to invest in despite their veneer of stability. Let's start by piercing that veneer by analyzing one of the largest (and least safe) generic-drug manufacturers.
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1. Teva
Teva Pharmaceutical Industries (TEVA 0.66%) is an Israeli business that makes more than 3,600 different generic medications, and it's responsible for making the constituents for 1 in 12 prescriptions in the U.S. That includes generic offerings for workhorse psychiatric therapies like Wellbutrin and Adderall, as well as more complicated biosimilars that treat conditions like chronic lymphocytic leukemia (CLL).
With so many medicines and a healthy share of the U.S. market, it's reasonable to expect Teva's performance as an investment to be quite good, but it isn't.
Over the last 10 years, its shares have lost 79% of their value. In that period, its average profit margin was negative, and there's no clear trend toward that changing.
Likewise, its annual revenue has fallen 27% since 2013, reaching $14.9 billion. And Wall Street analysts are expecting on average that it'll only grow its top line by around 1.1% this year, even as it could soon commercialize four new medicines that are currently in regulatory review.
So what's the cause behind Teva's dysfunction? Management provided a clue in its fourth-quarter earnings update when it noted its ongoing work to improve efficiency in its supply chain and its manufacturing operations. But that's all the more reason to avoid buying this stock.
If a massive-scale generic-medication maker like Teva can't run a tight operation with its supply chain and its manufacturing, it isn't succeeding at executing with its core business model. The whole point of the enterprise is using economies of scale in manufacturing to drive down costs.
And that's why it's a hard pass: It certainly isn't a safe stock if it can't get its business model to work correctly despite years of trying.
2. Viatris
Unlike Teva, Viatris (VTRS -0.64%) is a relative newcomer to the generic manufacturing scene. It only became independent from Pfizer in late 2020.
In fact, it's still going through its post-spinoff stabilization, with management angling for $1 billion in cost reductions before the end of this year. But so far it's profitable, with a margin of 12.7%, and it also pays a dividend, which currently has a forward yield of 4.8%.
That means it has enough financial leeway to disburse some of its excess capital to shareholders, even as it's just starting to find its footing as an independent company -- a good sign that it's a somewhat safer stock than Teva, which had to discontinue its dividend at the end of 2017.
Plus, Viatris has quite a few medicines that are on the cusp of getting approved for manufacture, not to mention ownership of big generic brands of Lipitor and Viagra that helped it to bring in $16.2 billion in sales for 2022. In its complex-injectable segment alone, it has 10 programs awaiting regulatory approval, seven of which would be the first generics approved for sale in their categories.
In terms of its strategy, Viatris plans to spend the next few years continuing to reduce its debt load of $19.5 billion while remaining profitable, cruising for bolt-on acquisitions, and continuing to return capital to shareholders with dividends as well as stock buybacks. And since the end of 2020, when it became an independent entity, it's made progress on all those goals every quarter.
Following through on its ambitions doesn't mean that Viatris is going to beat the market anytime soon, since it's still quite limited by its low-growth business model. But especially if you're interested in picking up some relatively secure dividend income, it might be worth considering a purchase. It'll probably do a lot better than Teva in the near term, at any rate.
