Better Buy: GlaxoSmithKline vs. Merck

Which stock wins in a matchup between these two big drugmakers?

Keith Speights
Keith Speights
Jun 6, 2019 at 8:15AM
Health Care

Both GlaxoSmithKline (NYSE:GSK) and Merck (NYSE:MRK) are big pharma companies. Merck is by far the bigger one, though, with a market cap roughly twice that of GlaxoSmithKline (GSK). However, less than a decade ago GSK was the bigger company. Merck's stock performance has handily beaten GSK's in recent years.

But which of these two drugmakers is better positioned to deliver solid returns to investors? Here's how GlaxoSmithKline and Merck compare.

Two scientists side by side in a lab

Image source: Getty Images.

The case for GlaxoSmithKline

Perhaps the first thing that investors will notice about GlaxoSmithKline is its mouthwatering dividend yield of more than 5.8%. That yield is higher than any of its peers and definitely sets GSK apart. There has been some speculation that the company may have to cut its dividend, but it seems safe at least for this year. GSK CFO Iain MacKay reaffirmed the drugmaker's projected dividend for 2019 in its Q1 conference call in May

What about growth prospects? The good news for GSK is that its lineup includes several products that are generating strong growth already. Total sales for its Ellipta respiratory products climbed 20% year over year in the first quarter, led by Trelegy Ellipta and Incruse Ellipta. Another respiratory drug, Nucala, delivered 41% year-over-year sales growth in Q1. 

GSK also claims an HIV franchise that has been a big winner. New HIV drug Juluca is performing very well after receiving regulatory approvals last year. However, growth has slowed considerably for its two other dolutegravir-based HIV drugs, Tivicay and Triumeq.

Then there's GSK's vaccines business, which has been a mainstay for the company for quite a while. Sales are soaring for shingles vaccine Shingrix. GSK is also enjoying solid growth for its influenza and meningitis vaccines.

The company has become a major player in a couple of other therapeutic areas as well. Benlysta first won U.S. approval in 2011 for treating lupus but picked up an additional indication for treating lupus in children earlier this year. GSK also gained another winner with ovarian cancer drug Zejula thanks to its acquisition of Tesaro.

GSK's late-stage pipeline isn't especially deep, but the company does have several promising programs. The drugmaker is conducting a late-stage study evaluating Zejula as a first-line maintenance treatment for ovarian cancer. It also has a checkpoint inhibitor, dostarlimab, in phase 3 testing targeting the treatment of ovarian cancer. In addition, GSK has several other HIV and respiratory candidates. 

The case for Merck

Since we started with GlaxoSmithKline's dividend, let's look at Merck's dividend first, too. It's a pretty good one: Merck's dividend currently yields 2.8%. That's not nearly as lofty as GSK's, but there also aren't any worries that Merck will cut its dividend in the future. 

Merck lays claim to a superstar in its lineup with Keytruda. The cancer drug is on track to rake in more than $5 billion this year. Market research company EvaluatePharma projects that Keytruda will be the No. 2 best-selling drug in the world in 2024, with estimated sales of close to $12.7 billion.

In addition to Keytruda, Merck has a couple of other cancer drugs for which sales are increasing briskly. It partners with AstraZeneca (NYSE:AZN) on Lynparza, which is currently approved for treating ovarian cancer and could be in good shape to pick up a second approved indication in the not-too-distant future for treating pancreatic cancer. Merck also partners with Japanese drugmaker Eisai (OTC:ESALY) on thyroid cancer drug Lenvima.

Vaccines are another strong point for Merck. The company's Gardasil human papillomavirus (HPV) vaccine and its lineup of measles, mumps, rubella, and varicella vaccines continue to deliver solid sales growth.

Some of Merck's current products aren't generating much, if any, growth, but nonetheless contribute significantly to its total revenue and cash flow. These include allergy and asthma drug Singulair, its diabetes drugs Januvia and Janumet, and its women's health drugs NuvaRing and Implanon/Nexplanon.  

Much of Merck's late-stage pipeline centers around clinical studies seeking to pick up additional indications for Keytruda. The company also has several new late-stage candidates, though, notably including its promising pneumoconjugate vaccine, V114.

Better buy

We've looked at several reasons to like GlaxoSmithKline and Merck. However, both companies also face some significant headwinds. 

GSK's growth is being held back by generic competition for its longtime best-selling respiratory drug, Seretide/Advair. Merck is experiencing slowing sales for its older cardiovascular drugs Zetia and Vytorin, immunology drugs Remicade and Simponi, and hepatitis C drug Zepatier.

Merck has been able to keep growing sales despite the headwinds, while GSK has seen sales fall. However, both companies should be able to deliver overall sales growth in the future.

My view is that Merck's cancer lineup, led by Keytruda, gives it the edge over GlaxoSmithKline. I'm also concerned that the potential for a dividend cut down the road could hurt GSK's stock price.

While I think that Merck is the better pick over GSK, though, I'm not suggesting that investors buy Merck stock right now. Why? My take is that there are too many stocks that should provide even better growth over the long run. The better buy isn't always the best buy.