Big pharma stocks have enjoyed investors' favor for a long time. They usually generate lots of cash that can be reinvested for growth, and that can be used to reward shareholders through dividends and buybacks.
Two big pharma stocks that often wind up on investors' short lists to consider are Eli Lilly & Company (NYSE:LLY) and Merck & Co. (NYSE:MRK). Which is the better stock to buy right now? Here's how these two large drugmakers compare.
The case for Lilly
With any big pharma stock, the things investors need to focus on are the company's growth prospects and its dividends. Lilly should have better growth prospects now than it has had in a while. The average five-year annual earnings growth projection for Lilly among Wall Street analysts is 11.6%, more than double the drugmaker's growth over the last five years.
Why are analysts more optimistic about Lilly now? First, they probably like the company's current product lineup. Lilly's diabetes drug Trulicity continues to pick up momentum. Market research firm EvaluatePharma thinks that Trulicity will be the No. 1 diabetes drug in the world by 2024. Lilly also claims a couple of other fast growing diabetes drugs in Basaglar and Jardiance.
Although Lilly has been a major player in diabetes for years, it only recently established a presence in the immunology market. But that presence is now a significant one, thanks to tremendous sales growth for Taltz, which treats plaque psoriasis and psoriatic arthritis.
In addition, Lilly's pipeline should fuel revenue and earnings growth, particularly in two therapeutic areas -- pain and oncology. A Food and Drug Administration (FDA) approval decision for migraine drug galcanezumab is expected in the third quarter. Lilly also has two other promising pain medications in late-stage clinical testing, lasmiditan and tanezumab.
The company's oncology pipeline includes several phase 3 clinical studies targeting additional indications for Cyramza. Lilly also added new candidates to its development program with its recent acquisition of ARMO Biosciences.
Lilly's dividend currently yields nearly 2.6%. The drugmaker has put more focus on its dividend program lately, with an 8% increase effective in the first quarter of this year.
The case for Merck
Merck ranked as one of the top three best performing big pharma stocks of the first half of 2018. Brad Loncar, CEO of biotech-focused investment firm Loncar Investments, recently tweeted that "Merck is the '72 Dolphins of lung cancer." In case you're not a sports fan, the 1972 Miami Dolphins is the only NFL team in history to enjoy an undefeated season and win the Super Bowl.
The comparison between Merck and the '72 Dolphins isn't without merit. Merck's Keytruda appears to be on course to become the top selling cancer drug in the world by 2024 and the No. 2 bestselling drug overall. But Keytruda isn't limited to treating just lung cancer. It's also been approved for cervical cancer, classical Hodgkin lymphoma, gastric cancer, head and neck cancer, and melanoma.
While Keytruda is certainly Merck's strongest asset, the company also claims several other solid products in its lineup. Sales are growing strongly for its Gardasil human papillomavirus (HPV) vaccine. Diabetes drugs Januvia and Janumet continue to perform well. Blockbuster immunology drug Simponi, which Merck comarkets with Johnson & Johnson, also is enjoying impressive momentum.
What about Merck's pipeline? Keytruda is a very important component. Merck is evaluating the drug in phase 3 clinical studies targeting additional indications, including breast cancer, colorectal cancer, and liver cancer. The company is collaborating with AstraZeneca on late-stage studies of Lynparza in treating prostate cancer and pancreatic cancer.
In addition, Merck has several promising vaccines in late-stage development. EvaluatePharma lists pneumococcal conjugate vaccine V114 as one of the top vaccine pipeline candidates in the biopharmaceutical industry. Merck is also conducting phase 3 clinical trials for Ebola and herpes zoster (shingles) vaccines.
Merck is no slouch in the dividend department, either. Its dividend yield currently stands north of 3%.
I really like the prospects for Keytruda. My hunch is that good news for the drug could make Merck the better pick over the next year or so. But long-term investors aren't just concerned about a couple of years in the future. Over the long run, I think Lilly might have an edge, thanks in large part to the pain drugs in its pipeline.
Both stocks should perform relatively well, especially with dividend reinvestments thrown into the mix. However, I'm not advocating going out and buying either Lilly or Merck right now. In my view, there are too many better stocks for investors to buy that provide stronger growth prospects.