Over the last five years, AbbVie (ABBV -0.77%) and Pfizer (PFE -0.61%) have both produced market-crushing returns for investors -- that is, when their top-notch dividends are figured into the equation. This year, however, hasn't exactly been kind to either company. Key patent expires and the drug pricing controversy have weighed on both of these elite pharma stocks over the course of 2019.
Which of these top drugmakers has a better shot at returning to form? Let's take a deeper look at each company to find out.
The case for AbbVie
AbbVie is a company on the cusp of a major metamorphosis. The company's flagship arthritis medication Humira is now facing competition from copycat versions in Europe and its patent protection is set to end in the U.S. in 2023. As a result, investors lately have been largely shying away from this former star, causing the drugmaker's shares to tumble by a whopping 11.4% in 2019.
This blanket opposition to AbbVie, though, may not be warranted. The company already has a promising hematologic oncology franchise consisting of the two rising stars Imbruvica and Venclexta. Moreover, the drugmaker grabbed a key regulatory approval for its next-generation immunoncology drug Skyrizi last month, and the rheumatoid arthritis candidate, upadacitinib, should also get a green light from the Food and Drug Administration in the third quarter of this year. Topping it off, AbbVie launched a new, high-value endometriosis drug, Orilissa, last year as well. The drugmaker thus has five potential megablockbusters that should more than offset Humira's loss of exclusivity.
Unfortunately, AbbVie's business development and clinical activities designed to carry it past Humira's decline have come at a steep cost. At the end of the most recent quarter, for example, the company only had $5.23 billion in cash but an eye-popping $37.1 billion in debt. AbbVie, therefore, doesn't have much room to maneuver in terms of future business development activities.
AbbVie's super-aggressive dividend program -- that's culminated in a sky-high yield of 5.39% -- also appears to be running out of steam. While the drugmaker has raised its dividend by a stellar 20.6% every year for the last five years, its trailing payout ratio of 110% strongly implies that this trend won't continue.
The case for Pfizer
Pfizer is a company in transition. The drug giant reorganized itself into three largely independent units at the start of 2019: an innovative biopharma and biosimilar segment, an Upjohn off-patent drug business headquartered in China, and a consumer healthcare segment that's set to be combined with GlaxoSmithKline's unit and subsequently spun off into a separate entity.
Looking ahead, the drugmaker seems poised to carve out its Upjohn generic drug business into a stand-alone segment as well. Such a move would unlock the tremendous growth occurring in the company's branded medication and biosimilar segment. The generic drug space, after all, has been in steady decline over the past four years due to pricing challenges in the United States. Packaging this generic unit into a separate entity would also further shield the company's top line from the upcoming loss of exclusivity for the megablockbuster nerve pain medication Lyrica.
Keeping with this theme, Pfizer's top-notch clinical pipeline has brought numerous high-growth products to market over the last few years, such as the blood thinner Eliquis, breast cancer medication Ibrance, pneumococcal disease vaccine Prevnar 13, and anti-inflammatory treatment Xeljanz, among others. These burgeoning drugs have been posting double-digit sales growth across the board, but their collective impact has been blunted to a large degree by the company's flagging legacy drug and consumer healthcare segments.
On the financial side of the equation, Pfizer's balance sheet isn't in the greatest shape. With a total debt-to-equity ratio of 65.8 and less than $12 billion in cash, the company's deal-making capacity isn't what it was a few years ago. Then again, Pfizer has already tacked on several value-adding units over the past few years with the acquisitions of Anacor Pharmaceuticals, Hospira, and Medivation. Pfizer, in turn, probably won't be a big player on the mergers-and-acquisition scene anytime soon, either.
With a forward-looking dividend yield of 3.55%, Pfizer does offer a moderately above-average payout for a big pharma stock. However, the company's trailing payout ratio of 70.7% and the uncertainty that comes with a major restructuring both suggest that further increases to the dividend may not be in the cards for a while. In fact, Pfizer's dividend has only grown by an anemic 6.72% per year over the last five years, which is one of the lowest dividend growth rates in the large-cap biopharma space over this period.
Both of these elite pharma stocks will more than likely turn out to be big winners at the end of the day. Pfizer has an impressive cohort of new growth products in hand and a feasible plan in place to realize their full value for shareholders. AbbVie, for its part, has also built out a strong group of products capable of delivering strong levels of revenue growth in the company's post-Humira era.
Which stock is the better buy? From a risk-to-reward perspective, Pfizer is the hands-down winner in this comparison. The simple reason is that Pfizer isn't overly reliant on any one product for top-line growth, whereas AbbVie arguably needs its rheumatoid arthritis candidate to get off to a blistering start to assuage the market's fears over Humira. That may not be fair, but the market has already shown that it doesn't believe in AbbVie's real-world ability to keep growing once Humira loses patent protection in the U.S.