Why I Think Pfizer Is a Better Buy Than Merck & Co.

Image source: Flickr user stockmonkeys.com

Pfizer (PFE 2.40%) and Merck & Co. (MRK 0.44%) are two of the biggest drugmakers on the planet, and both of these companies reward investors with a healthy dividend yield. But I believe it's Pfizer, not Merck, that ought to be in an investor's portfolio. Here's why.

Better product portfolio

The PD-1 targeting cancer drug Keytruda is arguably Merck's best drug, and ongoing clinical trials suggest it has the makings of a blockbuster. But Pfizer has nearly a dozen drugs on the market right now that have posted double-digit sales growth in the past year. That's got me thinking Pfizer's product portfolio is better.

Keytruda sales surged from $83 million in Q1 2015 to $249 million last quarter, but Merck's overall revenue fell 1% year over year in Q1 despite that tailwind.

Meanwhile, Pfizer's breast-cancer drug, Ibrance, saw its sales soar more than 1,000% in the past year to $429 million in the first quarter, and that helped Pfizer deliver top-line sales growth of 20%. Pfizer's results were also supported by 24% year-over-year growth for the lung cancer drug Xalkori, 39% growth for the smoking-cessation drug Chantix, and a more than doubling in sales of rheumatoid arthritis drug Xeljanz. Pfizer also reported that alliance revenue jumped 80% in the past year to $354 million last quarter thanks to rising prescription volume for Eliquis, an anticoagulant that it co-markets with Bristol-Myers Squibb.  

Image source: Pfizer,

Better pipeline

Both Pfizer and Merck pour billions of dollars into research and development, but a lot of Merck's late-stage pipeline potential rests with expanding demand for Keytruda. That may not be a bad bet, but Keytruda already faces stiff competition from Bristol-Myers Squibb's competing PD-1 drug, Opdivo, and more competition may be coming. Last quarter, Opdivo's sales were a pace-setting $704 million, and there's no guarantee that Keytruda can catch up.

Outside of Keytruda, the biggest needle-moving drugs in Merck's pipeline are anacetrapib, a CETP inhibitor that may lower cholesterol, and verubecestat, a treatment for Alzheimer's disease. Undeniably, these drugs target big-market opportunities, but I'm not convinced these trials will succeed. Historically, 99% of Alzheimer's drugs that have made it into clinical trials have ended up in laboratory dustbins rather than on pharmacy shelves. Also, the bar may be set similarly high for anacetrapib, given that competitors, including Pfizer, have previously attempted and failed to develop a CETP inhibitor.

Pfizer's late-stage pipeline may have fewer question marks. It has over a half-dozen biosimilars in development that could soon begin carving away billions of dollars in sales from widely used biologics, such as Merck's Remicade. Pfizer secured an EU go-ahead for its Remicade biosimilar, Inflectra, last year, and Merck reports that Remicade's sales fell 30% year over year in Q1. Inflectra got an FDA green light last month, and Pfizer's developing a slate of other biosimilars that could ultimately position it as the leader in a market it estimates could be worth $20 billion annually in 2020.

In addition to biosimilars, Pfizer's developing a PD-1 drug that could challenge Merck's Keytruda someday. Pfizer recently began enrolling patients in a phase 3 kidney-cancer trial of its PD-1 therapy, and other PD-1 studies are also under way, including one in lung cancer. Since Bristol-Myers Squibb and Merck have already shown that PD-1 drugs can pass muster, there's a good chance Pfizer's drug pans out, too.

Similarly, Pfizer's completed enrolling patients in a phase 3 study of its cholesterol buster, bococizumab. Unlike anacetrapib, Pfizer's drug is a PCSK9 inhibitor. Since the FDA approved two PCSK9 inhibitors last summer, the odds may favor the odds that this drug will get the regulatory OK, too. Importantly, if Pfizer's bococizumab trial shows that it can reduce the risk of cardiovascular events, including heart attack, then Pfizer could end up with the best-in-class drug in a multibillion-dollar market.

Tying it together

Both Pfizer and Merck deserve consideration, but Pfizer's potential for growth makes it my favorite of the two. Pfizer's revenue is expected to grow 7.2% this year and 3.4% next year, while Merck's sales are expected to remain mostly unchanged over the next two years. Similarly, Pfizer's earnings per share is forecast to climb 6.5% in 2017, while Merck's are forecast to grow by only 1%. Given that Pfizer's shares are trading at 12.8 times next year's EPS and Merck's forward P/E ratio is 14.5, Pfizer may be worth buying, especially since its dividend yield of 3.57% is slightly better than Merck's.