These big pharma stocks have something for everyone. Income investors love the dividends Eli Lilly and Co. (NYSE:LLY) and Merck & Co., Inc. (NYSE:MRK) pay each quarter, while dreams of successful new drug launches attract growth-minded investors.
Lilly's stock price has risen in line with the broader market this year, but Merck tanked in October. Let's take a closer look at the threats and opportunities facing both to see which of these big pharma stocks is the better pick right now.
The Case for Eli Lilly and Co.
This company practically invented diabetes care when it launched the world's first insulin product in 1923. A lot has changed over the years, but developing innovative therapies is still a recipe for success. In the third quarter, sales of its next-generation drug for type 2 diabetics, Trulicity jumped 117% to an annualized run rate of about $2.1 billion.
With an estimated 30.3 million diabetics in the U.S. alone, it might seem like potential sales for treatments these people will require throughout their lives is unlimited. Unfortunately for Lilly and its peers, U.S.-based pharmacy benefits managers are getting better at forcing drugmakers to compete on price for access to the millions of diabetic patients they represent.
One older product line in trouble is Lilly's Humalog, a fast-acting insulin injection that earned its first approval in 1996 and contributed 12.5% of total revenue in the first nine months of the year. In the third quarter of 2017, the company reported an uptick in U.S. Humalog sales due to changes in the way secretive rebates and discounts are valued, but total annual sales of the drug peaked at around $2.8 billion in 2015.
Although the company's aging product lines are under pressure, successful new product launches are on fire. New pharmaceutical product sales, which includes Trulicity, came in at $704.1 million for the full year in 2015. In the third quarter of 2017, the same group of new products contributed a whopping $1.2 billion to Lilly's top line.
A recent approval for Verzenio means we can reasonably expect new product sales to continue their surge. In trials leading to approval of the cancer therapy formerly known as abemaciclib, breast cancer patients who had relapsed following standard treatment survived without showing signs of disease progression 76% longer than those given a placebo. Verzenio will run straight into competition with Pfizer's Ibrance, but an easier dosage schedule is expected to push annual sales of Lilly's new cancer therapy up to around $1.8 billion by 2022.
Outside of oncology, an application for a migraine-preventing candidate, named galcanezumab, is awaiting a Food and Drug Administration review, and lasmiditan for the acute treatment of vicious headache pain isn't far behind. Millions of Americans that suffer frequent migraines are clamoring for an effective solution, giving these drugs blockbuster potential of their own.
The Case for Merck & Co., Inc.
Lung cancer isn't the most commonly diagnosed malignancy, but it is the deadliest. Becoming a standard treatment for newly diagnosed patients, which tend to stay on therapy a long time, could be worth several billion dollars in sales each year. Merck's stock price tanked in October after the company rescinded a first-line application for its blockbuster cancer drug, Keytruda.
Although management had good reasons for doing so, delaying a potential launch of this anti-PD1 drug into Europe's large population of newly diagnosed lung cancer patients gives a handful of competing therapies in the same class a chance to catch up.
Like Lilly, Merck's best-selling drug right now is an aging diabetes care product in decline. Januvia franchise sales peaked at $6.1 billion in 2016, which was 15% of total revenue for the entire year. During the first nine months of 2017, Januvia franchise sales were 5% lower than during the previous year period, and it's not the only important product with sinking sales. Generic competition for the Zetia brand hammered sales of the cholesterol medication down to $320 million, a whopping 55% lower than the same period last year.
Several years ago Merck invested heavily into developing next-generation hepatitis C treatments but recently scuttled the program in the face of stiff competition. Recently launched Zepatier added $468 million to the top line in the third quarter, but sales of the antiviral treatment appear to have peaked in the second quarter this year $517 million.
Running the numbers
At its recently knocked-down price, Merck shares offer a nice 3.5% yield that's far more tempting than the 2.5% yield Eli Lilly stock would provide at recent prices. Merck began raising its payout in 2012 after a years-long freeze, and Lilly did the same beginning in 2015.
While you might be tempted to jump for Merck's bigger yield at the moment, Lilly's better positioned to provide more dividend income in the years ahead. Merck had to use an unsustainable 119% of free cash flow to make dividend payments over the past year, while Lilly used an acceptable 58% to do the same.
Over the next five years, the average Wall Street analyst following Merck expects the company's bottom line to grow at a modest 4.9% annual rate over the next five years. That's a lot slower than Lilly, which is expected to grow profits at an impressive 11.9% annual rate during the same time frame.
Lilly's forward price-to-earnings ratio of about 19.9 at recent prices is above the average stock in the S&P 500 Merck is much cheaper at just 13.8 times this year's earnings expectations, but not cheap enough to overlook a lack of growth drivers beyond Keytruda and an underfunded dividend. It's probably best to wait for Eli Lilly's stock price to fall a bit before diving in, but it's the better buy right now.