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Better Buy: AbbVie Inc. vs. Merck & Co., Inc.

By Cory Renauer - Aug 25, 2018 at 7:20AM

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Which pharma stock is the best vehicle for riding the demographic megatrend that's lifting both drugmakers right now?

The number of American adults over the age of 85 will more than double over the next 22 years and this group's more dependent on expensive medicines than ever. This long-running megatrend will probably drive overall demand for products from AbbVie Inc. (ABBV -0.47%) and Merk & Co., Inc. (MRK 1.58%) in the right direction for decades to come.

Merck and AbbVie offer dividends driven by sales of innovative new drugs and a chance to enjoy strong sales growth in the years to come, but which is poised to grow along with the population of older adults in the U.S. and abroad? Let's stack them side by side to find out.

Person deciding between separate paths.

Image source: Getty Images.

The case for AbbVie Inc.

This big drugmaker has a product lineup firing on all cylinders right now and some promising-looking rookies ready to make a difference. If you've seen television commercials over the past several years, you probably realize that Humira's an important drug, but did you know sales of the rheumatoid arthritis injection AbbVie launched 16 years ago will probably achieve $20 billion in sales this year?

Humira isn't the fastest-growing product in AbbVie's lineup, but it's expanding fast enough to make it the company's lead growth driver by a long shot. Humira sales rose 12% in the first half of the year, compared to the prior-year period to $9.9 billion, and it's not the only drug pushing the needle higher right now. AbbVie's share of sales from blood cancer tablet Imbruvica rose 37% in the first half to $1.6 billion, plus a new hepatitis C virus treatment called Mavyret appeared out of left field to produce a stunning $1.9 billion for the top line.

The company recently launched the first new option to treat endometriosis pain that women have seen in over a decade, and Orilissa could earn an important expansion to treat noncancerous growths that occur in perhaps three-quarters of all women during their lifetime. Uterine fibroids usually aren't a problem, but they are the most common reason women seek hysterectomies. It's hard to pin down just how many women with painful associated symptoms will convince their insurers to pay for Orilissa and find it useful enough to remain on the drug, but it's probably enough to drive sales past the $3 billion-per-year mark at its peak. 

AbbVie's late-stage pipeline also sports two potential new blockbusters, risankizumab for psoriasis and upadacatinib for rheumatoid arthritis.

AbbVie shares currently offer a nice 3.9% yield that could keep rising into the future, if these rookies hit a few home runs. The company used just 44% of free cash flow generated over the past year to make dividend payments, which gives it plenty of room for significant bumps in the years ahead. 

Gold and silver capsules on top of cash

Image source: Getty Images.

The case for Merck & Co.

Sales of this big pharma's aging type 2 diabetes pill, Januvia have flatlined, but its blockbuster cancer therapy's firing on all cylinders. Keytruda plus chemotherapy is quickly becoming a standard treatment for new patients diagnosed with the most common form of lung cancer in advanced stages. This coveted spot on oncologists' go-to lists helped Keytruda sales surge 114% in the first half of 2018 to $3.1 billion. 

Merck spent $1.6 billion up front and promised $6.9 billion in potential milestone payments in order to strike a partnership deal with AstraZeneca (AZN 2.59%) earlier this year. The cross-Atlantic partners will co-commercialize and co-develop the British pharma's breast cancer tablet, Lynparza. Sales of the partnered tablet hit just $269 million in the first half but could rise several times over if the Food and Drug Administration approves an upcoming application for first-line ovarian cancer.

Merck shares offer a 2.8% yield that might not move much higher in the quarters ahead. The company needed 99.7% of free cash flow to make payments over the past year.

The better buy

With a meager pipeline and a dividend that looks stretched to the limit, Merck isn't looking so hot right now. AbbVie's already inked agreements that let us know we can reasonably expect steep Humira sales losses to begin in 2023, which gives risankizumab, upadacitinib, and Orilissa time to shine.

Although there's a chance that a major drug pricing policy shift will disrupt Humira sales much sooner, it looks like a risk worth taking. AbbVie's the better stock to buy right now, hands down.

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Stocks Mentioned

AbbVie Inc. Stock Quote
AbbVie Inc.
$151.01 (-0.47%) $0.71
Merck & Co., Inc. Stock Quote
Merck & Co., Inc.
$93.55 (1.58%) $1.46
AstraZeneca PLC Stock Quote
AstraZeneca PLC
$66.21 (2.59%) $1.67

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