A fast-growing cancer drug. Blockbuster vaccines. Significant challenges.

All three of these apply to Pfizer (NYSE:PFE), but they also all apply to Merck (NYSE:MRK). Both pharmaceutical companies have successful products with sizzling sales, but both have experienced headwinds that have weighed on their overall revenue and earnings growth. 

Which of these big pharma stocks is the better pick for long-term investors? Here's how Pfizer and Merck compare in three key categories.

Three scientists in lab with one in background looking through microscope, one writing on notepad, and another holding a beaker.

Image source: Getty Images.

Growth 

Although quarterly results present only a snapshot of a company's performance, it's still helpful to see how Pfizer and Merck performed in the last quarter. Pfizer posted weak year-over-year revenue growth of 1% in the first quarter with adjusted earnings per share (EPS) growth of 12%. Merck's Q1 year-over-year revenue growth of 6% and adjusted EPS growth of 19% looked much better.

So is Merck the better growth stock? Not necessarily. Wall Street analysts project that Pfizer will be able to generate average annual earnings growth of 7% over the next five years, while they expect Merck's average annual earnings growth to be a little over 6% during the same period.

To understand why Pfizer might have a slight edge, we have to look at both companies' growth drivers and challenges. Pfizer's current growth stems primarily from cancer drug Ibrance, anticoagulant Eliquis, and immunology drug Xeljanz. All three drugs should continue to enjoy solid momentum. Pfizer also claims some up-and-coming approved products with eczema drug Eucrisa, diabetes drug Steglatra, and prostate cancer drug Xtandi.

Pfizer's pipeline includes 28 late-stage programs and several more awaiting regulatory approval. Among the most promising candidates are non-small cell lung cancer drug dacomitinib and pain drug lorlatinib, both of which could win Food and Drug Administration (FDA) approval within the next five months. Pfizer thinks that it will be able to win approval for up to 15 new drugs or new indications for existing drugs over the next five years that have blockbuster sales potential.  

The headwinds for Pfizer, though, are that it continues to experience sales declines for quite a few older products that have lost exclusivity. In addition, product shortages are hurting the company's sterile injectables business. Pfizer expects to make substantial progress on resolving the product shortage issues this year. The company also expects the negative impact from drugs that have lost exclusivity will decrease over the next few years.

Merck's brightest star is cancer immunotherapy Keytruda. Sales are soaring for the drug. Market research firm EvaluatePharma projects that Keytruda will become the No. 3 bestselling cancer drug in the world within the next five years, with sales in the ballpark of $9.5 billion. Merck also continues to see strong sales growth for its HPV vaccine Gardasil and should benefit from the launch of diabetes drug Steglatro, which it co-markets with Pfizer.

What about Merck's pipeline? The company claimed 20 phase 3 programs as of late February, but since then, has initiated at least two more late-stage studies. Many of the studies focus on additional indications for Keytruda. However, Merck also has promising new candidates, including antibiotic relebactam and pneumococcal vaccine V114.

But Merck also has plenty of challenges. Sales are falling for cardiovascular drugs Zetia and Vytorin in the wake of generic competition. Shingles vaccine Zostavax and hepatitis C drug Zepatier are losing market share quickly with newer rivals on the market.

Value

Pfizer appears to have the more attractive valuation no matter which metric is used. The stock trades at less than 10 times trailing-12-month earnings, while Merck's trailing earnings multiple stands at nearly 67. That high multiple is artificially high, however, due primarily to acquisition, divestiture, and collaboration costs.

Using earnings growth projections should give a better comparison of the two stocks' valuations. Pfizer stock trades at roughly 11.4 times expected earnings; Merck's forward earnings multiple is close to 12.7. Again, Pfizer has an advantage.

Income

The easiest comparison between these two big pharma stocks is their dividends. Merck's dividend yield of 3.22% is good, but Pfizer's yield of 3.87% is even better.

Pfizer also appears to be in better shape to increase its dividend in the future. The drugmaker used a little over half of its free cash flow generated over the last 12 months to fund its dividend program. Merck used nearly all of its free cash flow to pay out dividends during the same period.

Better buy

You probably already guessed which of these stocks I think is the better buy. Pfizer clearly has the more attractive valuation and better dividend. And while predicting future growth is tricky, I think Pfizer has a slight edge over Merck in earnings growth over the next several years.

There's also another factor that I think is important. Merck depends heavily on one product -- Keytruda -- for its success. Pfizer doesn't have as many eggs in one basket. In my view, Pfizer is somewhat less risky than Merck because of this better revenue diversification.

Pfizer certainly has risks, though. Its pipeline candidates could stumble, and competitors could win market share against its top drugs. But I think the pharma stock should generate total returns that beat the market over the long run.

Keith Speights owns shares of Pfizer. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.