Better Buy: Pfizer Inc. vs. Johnson & Johnson

Find out how America's largest pharma stacks up to the world's largest healthcare company.

Cory Renauer
Cory Renauer
Jun 8, 2017 at 9:12AM
Health Care

It's a battle of the behemoths. In one corner sits Pfizer Inc. (NYSE:PFE), America's largest pharmaceutical company. In the opposite corner, we have Johnson & Johnson (NYSE:JNJ), the world's largest healthcare company.

Both would make fine additions to any portfolio, but which stock is the better pick right now? To find out, we'll look at a few important features to consider when shopping for dividend-paying big pharma stocks and see which one comes out ahead.

Two multicolored fists clashing.

Image source: Getty Images.

On the rise 

Both companies sport successful new cancer therapies. Pfizer's Ibrance didn't earn Food and Drug Administration approval until 2015, but first-quarter sales of the breast cancer therapy put it on pace to reach $2.7 billion this year. If all goes as expected, it could add $5 billion to the company's top line each year at its peak.

At Johnson & Johnson, revenue from a star leukemia therapy continues to surge. First-quarter sales of Imbruvica rose 57% over the prior-year period to an annualized run rate of $1.6 billion. More recently launched Darzalex jumped 152% in the first quarter to a $1 billion run rate. Granted, that's relatively small potatoes for the healthcare giant, but some industry watchers are predicting over $9 billion in annual sales for the multiple myeloma therapy at its peak.

Outside the oncology sphere, both companies have successfully launched new oral anticoagulants that are quickly replacing the use of old-school warfarin. In the first quarter, Pfizer's share of Eliquis revenue popped 51% to a $2.3 billion run rate. Although J&J's blood thinner of the same class finished the first quarter on pace to generate $2.1 billion in sales this year, Xarelto revenue actually slid 9% lower than the same period last year. I'd be surprised if it doesn't continue its upward march, though a majority of patients in need of drugs like Xarelto and Eliquis haven't made the switch from warfarin yet.

Looking ahead, recently launched Bavencio from Pfizer could follow in the footsteps of similar new cancer therapies that smashed through the $1 billion in annual sales blockbuster threshold in their first year post-approval. Further out, talazoparib could prove it was worth a large chunk of the $14 billion the company spent acquiring Medivation last year.

When it comes to late clinical-stage pipelines, though, J&J outshines all its big pharma peers. The company expects to launch, or at least submit applications for more than 10 new blockbuster drugs over the next four years. It also plans to keep its present lineup growing by filing more than 50 label extensions for drugs currently in commercial stages.

An array of prescription drugs. and

Image source: Getty Images.

Sinking ships

What goes up must come down, and both companies are facing exclusivity losses for key products. At about 9.4% of total revenue, Remicade is J&J's single largest revenue stream, but perhaps not for much longer. Biosimilar sales abroad, and more recently at home, are altering the drug's trajectory. Year-to-year sales slipped 6% lower compared to last year, and it looks like the $6.97 billion it added to the top line last year will be a high-water mark.

Pfizer's largest revenue stream has been sliding as well, but for a less frightening reason. It looks like the company's pneumonia-preventing Prevnar vaccine is a victim of a highly successful commercial launch. Now that most of America's senior citizens have been vaccinated, demand has slackened, and sales fell about 8% in the first quarter.

Prevnar revenue comprised 10.9% of Pfizer's top line during the first three months of the year, so any slackening in demand is a big deal. That said, Prevnar demand should reach an equilibrium, while incoming Remicade copycats will most likely race each other to the bottom.

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Give me dividends

Both stocks are popular with income investors, but for slightly different reasons. At recent prices, Pfizer's 4% yield overshadows the 2.6% you would receive from Johnson & Johnson at recent prices, but there's more to consider.

Although Pfizer has boosted payments at a steady clip for about eight years, the latest $0.32 quarterly payment is the same amount Pfizer shareholders received in early 2009. Johnson & Johnson hasn't gone a year without raising its payout since the early '60s, and its shareholders have seen their payments outpace Pfizer's on longer timelines.

As a percentage of free cash flow, both companies used a little more than half to make their last four payments. This suggests both companies have plenty of room to continue increasing their dividends, at least in the near term.

JNJ Dividend Chart

JNJ Dividend data by YCharts.

If history repeats itself, J&J would be the better choice for long-term portfolios. Past performance doesn't guarantee future results but branded consumer goods and, to some extent, medical devices are far more predictable sources of profit than branded-drug sales. These two operating segments might not get much attention, but they still account for a majority of the conglomerate's total revenue.

There's a good chance that Pfizer shareholders might see more dividend income and capital appreciation over the next several years. Over a much longer time frame, however, I think Johnson & Johnson will lead to higher returns, and that makes it the better buy right now.