3 Things You Need to Know if You Buy Teva Pharmaceutical Stock Today

Most companies have a simple story to tell, and generic drug maker Teva Pharmaceutical (NYSE: TEVA) is no different. However, under the simple story is almost always a more complex tale that you need to understand, as well. Here are three of the most important facts to know about Teva before you buy this stock in this large and important drugmaker.

1. Generics: The simple story

The big and well-known story surrounding Teva is that the pharmaceutical company focuses on producing generic drugs. Discovering new drugs is a time-consuming, technically complex, and expensive task. Getting new drugs approved by regulators is another massive project. Because the process is so intense, drugmakers are granted a time-limited monopoly on the drugs they discover and bring to market.

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When patent protection on drugs ends, however, companies face generic competition, as competitors such as Teva make copies of the drug. Although the original drugmaker faces a painful patent cliff as its revenue declines, Teva receives a valuable new income stream with very little cost associated with its creation.

That's great, and Teva has an attractive business. But it isn't the only generic-focused drug company in the world. In fact, even in its home market of Israel, the company estimates that it only has a 35% market share. It doesn't provide data on broader market share, but it is reasonable to conclude that Teva's generics business operates in a highly competitive market. Investors can't be complacent, assuming that Teva's position in the generics sector is assured forever.

2. Teva is producing harder-to-make drugs

Making generic drugs means competing on cost. Although Teva is a large company with the capability of producing generic drugs at a low cost, it has been attempting to differentiate itself by moving up the value chain. Essentially, it is attempting to shift toward generic drugs that are more challenging to manufacture. That allows it to lean into its technological strengths and to protect its margins.

This is good news, but it comes along with higher costs and more risk. A key focus here is on biosimilars. Biosimilars aren't exact copies and thus require additional regulatory hurdles. Teva is seeing success in its biosimilar efforts, and this move aligns with the company's core generics business. However, investors need to understand before they buy the stock that Teva is moving up the value chain as it looks to boost its long-term growth prospects, and that comes with added risks.

3. Teva is stepping out on its own

As attractive as the generic drug market is, it is still highly profitable to discover and develop original drugs. In an effort to boost growth even further, Teva isn't only moving up to harder-to-make generics; it is also starting to manufacture its own branded drugs. This means that it faces all the costs and risks that investors generally associate with branded drugmakers.

Once again, this isn't a bad move. In fact, it seems like a logical progression for the company as it gains scale and its technological capabilities grow. However, it also means that there is more risk, since the failure of a novel drug could mean huge capital investments were ultimately worthless. It also means that the company's revenue and earnings outlook are now subject to the volatility inherent in developing branded drugs. Essentially, the patent cliffs that Teva has long taken advantage of are now a risk that investors need to consider when thinking about investing in Teva.

Teva isn't as simple as it once was

For many years, the story surrounding this healthcare stock was relatively straightforward. Teva made generic drugs. That fact hasn't changed, but there is more going on under the covers than there was not too long ago. As you examine this stock, consider the increasingly competitive generic market, the company's shift toward more complex-to-produce generics, and its transition to developing its own branded drugs. Although Teva remains a well-run business, investors may need to be more attentive to it than before, as management looks to accelerate growth.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.