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Better Buy: Celgene Corporation vs. Merck & Co.

By Keith Speights - Nov 17, 2018 at 4:02PM

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Which stock wins in a battle between a beaten-down biotech and a booming big pharma company?

Two drug stocks diverged in a yellow wood. And sorry I could not buy both and be one investor, long I stood.

My apologies to Robert Frost for butchering his famous poem "The Road Not Taken." But Celgene Corporation (CELG) and Merck & Co. (MRK 1.23%) certainly are two drug stocks headed in different directions. Celgene is down more than 30% so far in 2018, while Merck is up more than 30% year to date.

Unlike the individual in Frost's poem, you're not limited to buying only one of these stocks. But if you did face such a restriction, which would be the better pick? 

Man with hand on his head looking at a wall with arrows pointing left and right

Image source: Getty Images.

The case for Celgene

If you look at Celgene's financial performance, it might make you wonder why there's been such negativity about the stock. The biotech reported year-over-year revenue growth of 18.4% in the third quarter and 19.9% adjusted earnings-per-share growth. Celgene easily topped Wall Street expectations.

The company's top drugs -- Revlimid, Pomalyst, and Otezla -- continue to generate impressive sales growth. So why have many investors been down on Celgene? There are concerns about the biotech's dependence on Revlimid for nearly 63% of its total revenue. Celgene faces generic competition for its best-selling drug beginning in 2022 at the latest.

But the biotech expects to launch five new drugs over the next couple of years that arguably could replace all of the revenue generated by Revlimid. Celgene plans to file for U.S. approval of fedratinib in treating myelofibrosis by the end of this year with a European submission in 2019. It anticipates submitting for ozanimod for both U.S. and European approvals in treating multiple sclerosis in the first quarter of 2019.  

Three other drugs could win approval by late 2020. Liso-cel is Celgene's cell therapy picked up with its acquisition of Juno Therapeutics. Celgene partnered with Acceleron Pharma on hematology drug luspatercept. And it's working with bluebird bio on another promising cell therapy, bb2121. Each of these drugs, along with fedratinib and ozanimod, should be blockbusters if approved.  

In addition, Celgene hopes to gain approvals for additional indications for Revlimid, Otezla, and Abraxane. This is one reason why investors shouldn't write off Revlimid just yet. EvaluatePharma projects that Revlimid will still rank as the No. 3 best-selling drug in the world in 2024

The case for Merck

Keytruda. There's your one-word reason to buy Merck stock. The immunotherapy has become something of a wonder drug in treating cancer. Keytruda is on track to generate sales approaching $7 billion this year. EvaluatePharma thinks it will soon be the second-best-selling drug in the world behind only longtime champ Humira.

Merck does claim other winning products, though. Gardasil stands at the top of the list. The human papillomavirus (HPV) vaccine is Merck's No. 2 drug in terms of sales and has come back strong so far this year after weakness in 2017. The company's new diabetes drugs -- Stelatro, Steglujan, and Sujanu -- and cancer drug Lymparza, which Merck is co-marketing with AstraZeneca, should also provide more good news for Merck in the near future. 

It's true that quite a few of Merck's current products aren't producing much sales growth. However, these drugs still contribute to the company's strong cash flow.

Merck could also see its pipeline contribute to growth over the next few years. The company awaits European approval for its newest HIV drugs and U.S. approval for its pediatric hexavalent combination vaccine. Merck also has 10 late-stage programs in addition to exploring new indications for Keytruda. The most exciting of these programs is experimental pneumococcal conjugate vaccine V114.

Then there's the dividend. Merck's dividend currently yields a little under 3%. With the company's earnings likely to improve over the next few years thanks largely to Keytruda, the addition of Merck's dividend should enable the stock to deliver a solid total return. 

Better buy

I'm biased in favor of growth. Because of this, my pick as the better buy is Celgene.

While I understand the skittishness of some investors about Celgene's continued reliance on Revlimid, I'm optimistic that the biotech's other drugs and pipeline candidates will generate strong growth for a long time to come. With Celgene's shares trading at less than seven times expected earnings, I think this stock is one of the best bargains around.

Investors have flocked to Merck a lot more than they have Celgene this year. But I think taking the stock "less traveled by" is the smarter move now. And I suspect it will make a big difference in profits over the long run.

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