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Better Buy: Eli Lilly and Company vs. Johnson & Johnson

By Keith Speights - Feb 13, 2018 at 7:18AM

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Which stock wins in a big pharma battle between Lilly and J&J?

If you had bought $10,000 of Eli Lilly and Company (LLY 4.12%) stock 10 years ago and held it, your initial investment would now be worth roughly $22,660 with dividends reinvested. However, if you had used the same amount of money to buy and hold Johnson & Johnson (JNJ 1.46%) stock, you would be sitting on close to $28,590 -- a much better total return.

But things are a lot different in 2018 than they were in early 2008. Which of these big pharma stocks is the better pick for investors now? Here's how Eli Lilly and Johnson & Johnson compare.

Man facing wall with line and points A and B drawn on wall

Image source: Getty Images.

The case for Eli Lilly

You'd have to put Lilly's diabetes franchise near the top of any list of arguments in favor of buying the stock. Lilly has a couple of established diabetes blockbusters that are still making a lot of money for the company with Humalog and Humalin. Add newer diabetes drugs like Trulicity and Jardiance to the list of big winners. Sales for both drugs more than doubled in 2017 from the prior year.

While revenue fell last year for Lilly's super-successful chemotherapy Alimta, the company has other oncology products for which sales are growing. Cyramza isn't quite a blockbuster yet, but the chemotherapy chalked up 23% year-over-year growth with revenue of $758 million in 2017. Lartruvo, which won FDA approval for treating advanced soft tissue sarcoma in October 2016, came on strong in its first full year on the market with sales of $203 million.

Psoriasis and psoriatic athritis drug Taltz has turned out to be another big winner for Lilly. Sales for the drug nearly quintupled in 2017 from the prior year to $559 million.

Lilly should get help from its pipeline also. The pharma company is pursuing additional indications for several existing products, including Cyramza and Jardiance. However, Lilly CEO Dave Ricks stated in January that the "next chapter of growth" for Lilly will be in treating pain.

The company expects to receive approval for galcanezumab for the prevention of migraine in adults later this year. Galcanezumab is also being evaluated in a late-stage study for the prevention of cluster headache. In addition, Lilly and Pfizer have several late-stage studies in progress for promising pain drug tanezumab in treating cancer pain, chronic lower back pain, and osteoarthritic pain.

Investors will also like Lilly's dividend. The dividend currently yields a little over 3%. Although Lilly's payout ratio of nearly 99% is certainly higher than ideal, the company is using only around 58% of free cash flow to fund the dividend program. Lilly's dividend doesn't seem to be in any trouble right now.

The case for Johnson & Johnson

Johnson & Johnson isn't just a big pharma; it's a big consumer healthcare and big medical device company, too. These other two business segments have generated only modest growth for the healthcare giant recently, though. J&J's pharmaceutical business is where the company makes nearly half of its total revenue and gets most of its growth. 

Two therapeutic areas are especially driving sales growth for J&J -- oncology and pulmonary hypertension. The company's oncology products include Imbruvica, which J&J co-markets with AbbVie, and Darzalex. Both are blockbusters with strong sales momentum. Johnson & Johnson's pulmonary hypertension franchise, which includes Opsumit, Tracleer, and Uptravi, was gained with the company's acquisition last year of Swiss drugmaker Actelion. 

J&J also claims a few other products that generated double-digit percentage sales growth in 2017. Sales for psoriasis and psoriatic arthritis drug Stelara jumped 24% from the prior year to top $4 billion. J&J's antipsychotic Invega franchise saw sales climb 16% year over year to nearly $2.6 billion.

One great thing about Johnson & Johnson is that the company doesn't rest on its laurels. Despite being in business for 132 years, J&J continues to look for ways to growth, whether it's through internal innovation, partnerships, or acquisitions. Speaking earlier this year, J&J CEO Alex Gorsky said that he wants the company to be actively "creating a crisis" to stay on top. That mindset led to J&J's acquisition of Actelion and could mean more deals are on the way.

Johnson & Johnson generates plenty of cash flow to fund more acquisitions. It also uses that cash flow to pay out a nice dividend, which currently yields 2.59%. J&J has increased its dividend for 55 consecutive years. The company uses only 57% of earnings and 48% of free cash flow to fund the dividend, so that streak should keep going.

Better buy

Both Lilly and J&J have similar challenges. Lilly's top-selling drug, Humalog, lost patent exclusivity and faces potential loss of market share. J&J's top-selling drug, Remicade, already is losing some sales to biosimilar rivals. Both companies also sell products in categories with fierce competition.

Still, both of these pharma stocks should perform well over the long run. But which is the better buy right now? My pick would be Johnson & Johnson.

J&J's tremendous cash flow gives it plenty of flexibility to reward shareholders through dividends and share buybacks as well as fund strategic acquisitions and licensing deals. In addition, the company's diversification into multiple areas of healthcare gives J&J a moat that few other big pharma companies enjoy. I think the future remains bright for this longtime favorite for investors.

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Stocks Mentioned

Johnson & Johnson Stock Quote
Johnson & Johnson
$182.29 (1.46%) $2.63
Eli Lilly and Company Stock Quote
Eli Lilly and Company
$325.62 (4.12%) $12.90
Pfizer Inc. Stock Quote
Pfizer Inc.
$51.59 (3.00%) $1.50
AbbVie Inc. Stock Quote
AbbVie Inc.
$152.34 (1.93%) $2.89

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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