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Better Buy: Pfizer Inc. vs. Eli Lilly and Company

By Cory Renauer – Sep 4, 2018 at 9:31AM

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Which of these big American pharma stocks is the better pick right now?

Small biotech start-ups have earned a great deal of attention lately, which is well deserved considering the Nasdaq Biotechnology Index has soared around 13.3% higher in 2018. While everyone's been looking at biotech, some of America's most well-established pharmaceutical companies have been producing enough profit growth to outperform the index that tracks their smaller, scrappier peers.

With new products heading toward blockbuster status and some nearly ready for an FDA review, shares of Pfizer Inc. (PFE 1.07%) and Eli Lilly and Company (LLY 0.71%) have risen around 15% and 25%, respectively, in 2018. Which one has a better chance of doing it again in the years ahead? Let's stack them side by side to see which stands taller right now.

Person deciding between two options.

Image source: Getty Images.

The case for Pfizer Inc.

Prevnar 13 charged out of the gate, but now that most older adults have been given the pneumonia vaccine, Pfizer expects sales to this group to stagnate or decline. With $2.6 billion in first-half sales, the vaccine makes up around 10% of total sales.

Pfizer's nerve pain drug, Lyrica, comprised 9% of total revenue in the first half of this year, but an important U.S. patent expires in December. A pending six-month pediatric extension could delay swift losses to generic competition, but moving the needle forward in 2019 and beyond will require some muscle.

Luckily, Pfizer has a couple more recently launched products that look ready for the set of Baywatch. Sales of the company's breast cancer tablet, Ibrance, grew 28% in the first half to $2.0 billion. Pfizer's slice of revenue from Eliquis, an oral blood thinner the company markets in partnership with Bristol-Myers Squibb, jumped 41% higher in the first half to $1.7 billion.

Recently, Pfizer's clinical development team reported positive results for a rare-disease drug with blockbuster potential. Tafamidis won't be the first drug approved to treat transthyretin amyloidosis in the U.S., but it will probably become the first for most people with this rare disease, which leads to heart disease within several years of diagnosis.

Strong sales helped Pfizer return an impressive $10.1 billion to shareholders in the first half of the year in the form of share repurchases and a dividend that currently offers a nice 3.2% yield. Pfizer has used just 51% of free cash flow to make dividend payments over the past year, which gives it plenty of room to make further increases in the quarters ahead. 

Colorful pills on money.

Image source: Getty Images.

The case for Eli Lilly and Company

Investors buying this stock now will probably find themselves owning shares of its forthcoming animal health spinoff, Elanco, by the end of the year. In theory, a spinoff shouldn't change the combined value of both companies. That said, Pfizer's animal health spin-off, Zoetis, has already tripled investors' money since its 2013 debut.

Eli Lilly investors can also look forward to years of growth driven by eight drugs launched since 2014 that are already responsible for 31% of the company's human pharmaceutical sales. Main patents for the company's top seller, Humalog, have already expired, but Lilly managed to grow sales of the mealtime insulin injection 13% in the first half to $1.6 billion.

Lilly also has a potential new blockbuster for chronic arthritis pain in late-stage development that happens to be partnered with Pfizer. Tanezumab is a long-lasting nerve growth factor inhibitor that significantly improved arthritis patients' pain symptoms and their ability to function during a pivotal trial. There's an enormous unmet need for new drugs to control arthritis pain. If approved, tanezumab could begin producing 10-digit annual sales for both partners within several years.

Lilly shares offer a less attractive 2.1% dividend yield at recent prices. The big pharma can probably manage modest payout bumps in the years ahead, but investors should know the distribution ate up 89% of free cash flow generated over the past year. 

The better buy

Shares of Eli Lilly have been trading at about 19.3 times this year's earnings expectations, which is a bit higher than the average stock in the S&P 500. On the same yardstick, Pfizer looks far more attractive at just 13.9 times forward earnings. 

If Lilly's newer growth drivers continue firing on all cylinders and aging Humalog stays aloft, the stock will continue to deliver market-thumping gains. At a price well above the market average, though, investors need to assume a lot more risk.

Pfizer is made of a lot more moving pieces than Eli Lilly, which makes huge gains nearly impossible, but investors can reasonably expect a steady march forward. That means Pfizer's cheaper shares probably have a better chance to outperform the market over the long run, which makes it the better buy today.

Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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