Over the past six months, shares of Eli Lilly and Company (LLY) and AbbVie Inc. (ABBV -1.36%) have been traveling in opposite directions that might seem a bit bizarre on the surface. AbbVie has reported much faster growth on the top and bottom lines than Lilly, but AbbVie's stock price fell 13% while Eli Lilly's rocketed 41% higher.
These big pharmaceutical companies generate a lot of cash, and they aren't shy about returning it to their shareholders. Let's stack their operations side by side to see which is positioned to deliver the most gains over the long run.
The case for Eli Lilly and Company
Eli Lilly launched the world's first insulin product in 1923, and the company's still at the forefront of diabetes care. Third-quarter sales of Lilly's next-generation diabetes treatment, Trulicity, surged 55% to an annualized $3.3 billion run rate, and it isn't showing any sign of a slowdown. The company's oral diabetes treatment, Jardiance, is also on the rise after Lilly proved it can lower diabetes patients' risk of heart attacks and other cardiovascular problems.
Jardiance and Trulicity are just two of eight products Lilly has launched since 2014 that are surging right now. Combined sales of the company's young lineup grew 53% year over year to an annualized $7.5 billion in the third quarter.
Unfortunately for Lilly, sales of many established products have already started fading. Cialis began losing ground to generic competition in Europe last year, and more recently in the U.S. The company's fast-acting insulin product, Humalog, began losing ground to competition from a similar drug that launched in the U.S. during the second quarter.
Cialis and Humalog are still responsible for around 19% of total revenue, so their continued losses will create a strong headwind to overcome in the quarters ahead. With a bit of luck, though, Lilly's new migraine program can go a long way toward offsetting the losses. The FDA recently approved Emgality for the prevention of migraine headaches, a condition that affects an estimated 36 million people in the U.S. alone.
Emgality isn't the first new migraine prevention drug to enter the market recently, but Lilly could launch the first new pain reliever for the acute treatment of the vicious headaches we've seen in a long time. The FDA is currently reviewing an application for lasmiditan that's supported by a clinical trial where those treated were 82% more likely to report being migraine pain-free after two hours than those given a placebo.
At recent prices, Eli Lilly shares offer a fairly meager 2.1% dividend yield that probably won't rise very fast in the years ahead. Even though the company has only raised its payout 15% over the past five years, dividend payments ate up 89% of the free cash flow that operations generated over the past 12 months.
The case for AbbVie Inc.
While Lilly's dividend program has limped along over the past five years, AbbVie raised its payout a stunning 168%, and investors can expect the 4.9% yield the stock offers at recent prices to continue rising in the near term. Dividend payments ate up just 44% of free cash flow over the past year.
Sales of AbbVie's mega-blockbuster arthritis drug, Humira, could reach $20 billion this year, but further gains will be difficult. Less-expensive biosimilar versions of Humira became available in the EU this October. Just 69% of Humira sales originate in the U.S., where biosimilar competition has been thwarted until 2023. U.S. sales rose 13% in the third quarter, but it will be hard to offset European losses, which are expected to be swift.
AbbVie markets Imbruvica, an oral leukemia treatment in partnership with Johnson & Johnson (JNJ), that is quickly becoming the standard of care for newly diagnosed patients. AbbVie's share of Imbruvica sales hit an annualized $3.9 billion in the third quarter, a 41% increase over the previous year.
During the third quarter, AbbVie launched the first of a few potential blockbusters in late-stage development. Orilissa is the first new pill for endometriosis pain the FDA has approved in over a decade, and an expansion to reduce uterine fibroids could happen next year. With millions of potential patients in need of new treatment options, Orilissa sales are expected to pass the $1 billion per year threshold by 2020.
The FDA is currently reviewing an experimental psoriasis treatment, risankizumab, which could go much further than Orilissa. During a head-to-head study with a drug that boasts sales on pace to reach $5 billion this year, Stelara, patients treated with risankizumab were twice as likely to report feeling symptom-free after 16 weeks.
The better buy
Eli Lilly has a lot going for it right now, but at 19.8 times forward earnings expectations, it looks like investors are asking a little too much from the company's young lineup. If Lilly's more recently launched drugs can't offset sagging sales of Cialis and decades-old insulin products in the quarters ahead, the stock's recent gains could get wiped out.
At just 10.9 times forward earnings, it looks like a European biosimilar onslaught is already baked into AbbVie's share price. That gives AbbVie a better chance to outperform if its late-stage pipeline delivers, and it makes the company the better buy right now.