If you only looked at stock performance for 2018, GlaxoSmithKline plc (GSK 0.12%) would seem to be in much better shape than AbbVie Inc. (ABBV -0.30%). GSK stock is up nearly 20% year to date, while AbbVie's share price isn't much higher than it was at the beginning of the year. 2017 was a different story, though, with AbbVie gaining more than 50% and GSK falling 8%.
But past stock performance can't help much in determining which of these two big pharma stocks is the better buy now. Instead, we need to look at the strength of each company's current products, the potential for their pipelines, their dividends, and their stock valuations. Here's how AbbVie and GlaxoSmithKline compare on these important criteria.
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The case for AbbVie
AbbVie claims the top-selling drug in the world -- Humira. The good news is that Humira still should be a huge moneymaker for years to come and even keep its No. 1 spot at least through 2024. The bad news is that sales are expected to decline in Europe beginning later this year and in the U.S. in 2023 as Humira faces biosimilar competition.
But AbbVie has other current products that are enjoying strong momentum. Market research firm EvaluatePharma projects that cancer drug Imbruvica will be the No. 6 best-selling drug in the world by 2024. Two of AbbVie's other products, hepatitis C drug Mavyret and cancer drug Venclexta, are expected to rank in the 50 top-selling drugs.
AbbVie's pipeline also includes several potential blockbuster candidates. The company expects to win Food and Drug Administration (FDA) approval for elagolix in treating endometriosis in the third quarter of 2018. AbbVie submitted for FDA approval of risankizumab for treating plaque psoriasis in April. It also hopes to obtain regulatory approval for rheumatoid arthritis drug upadacitinib next year.
Overall, Wall Street analysts project that AbbVie's current and forthcoming products will enable the drugmaker to grow earnings by an average of nearly 17% annually over the next five years. Investors also can realistically expect dividend hikes from the company. AbbVie's dividend currently yields 3.73%, and the big pharma company has boosted the dividend payout by 140% over the last five years. AbbVie's payout ratio of 66% combined with its earnings growth prospects indicate flexibility to increase the dividend even more in the future.
AbbVie stock is priced attractively, especially considering its potential for growth and its solid dividend. Shares currently trade at only 11 times expected earnings.
The case for GlaxoSmithKline
GlaxoSmithKline's product lineup is strong in three different areas. Sales are booming for the company's respiratory drugs, especially Nucala and its Ellipta franchise drugs. GSK's HIV drugs, led by Tivicay and Triumeq, are performing very well in the marketplace. GlaxoSmithKline also claims a big winner with its shingles vaccine Shingrix. Nucala could have even more growth potential in the near future. GSK hopes to win FDA approval of the drug in treating COPD later this year.
GlaxoSmithKline also has several promising pipeline candidates. At the top of the list is GSK2857916, a B-cell maturation antigen (BCMA) antibody-drug conjugate currently being evaluated in phase 2 clinical studies for treatment of multiple myeoloma. GSK could have additional HIV winners with its dolutegravir/lamivudine and cabotegravir/rilpivirine combos.
The company faces some headwinds with its older legacy drugs for which sales are declining due to loss of exclusivity. However, Wall Street still thinks that GSK will grow earnings by nearly 9% annually, on average, over the next five years thanks to its strong newer products.
GSK's dividend yield of 5.26% looks especially attractive. With the company using most of its free cash flow to fund the dividend program, though, investors shouldn't expect any dividend hikes.
What about valuation? GlaxoSmithKline stock trades at 14 times expected earnings. The stock looks like even more of a bargain based on its enterprise value-to-EBITDA ratio of a little over 10.
Better buy
The one area where GlaxoSmithKline clearly comes out on top is in dividend yield. However, AbbVie's dividend appears to be more stable. AbbVie also should have stronger growth prospects and has a lower forward earnings multiple. Based on all these considerations, I think that AbbVie is the better stock.
AbbVie does face some risks. The company remains heavily dependent on Humira. If its other products and pipeline candidates don't deliver as expected, AbbVie could be in trouble in a few years. My view, though, is that the company should be in good shape. I see AbbVie as a winning long-term investment.
