Pfizer (NYSE:PFE) and Merck (NYSE:MRK) are both multinational pharmaceutical heavyweights, complete with massive development pipelines, numerous subsidiaries, and consistently profitable operations. With nearly identical market caps in the $200 billion range, Merck and Pfizer appear to be two of the most evenly matched competitors in the pharmaceutical sector. 

So, how should potential investors choose between these two seemingly similar stocks? Let's examine the merits of each more closely.

lots and lots of different pills

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Pfizer limps along as Lyrica revenues tank

Pfizer boasts $50.7 billion in trailing 12-month revenue, $10.4 billion in cash on hand, and a profit margin of 31.2%. That said, 2020 hasn't been kind to Pfizer, with the company reporting negative 12.4% year-over-year quarterly earnings growth, caused in part by the recent loss of exclusivity for its best-selling drug for epilepsy and nerve pain, Lyrica. The bright spots in Pfizer's most recent quarterly earnings report include 63% growth in biosimilars revenue and 29% growth in revenue from anticoagulant drug Eliquis. 

In terms of its pipeline, Pfizer has 21 programs in phase 3 clinical trials and six awaiting approval by the U.S. Food and Drug Administration (FDA). Importantly, only two of the company's six approval-ready projects are new molecular entities (NMEs), meaning that the other projects are building on or seeking new indications for previously approved drugs rather than wholly novel therapies. Pfizer also has a potential wild card in its clinical-stage COVID-19 vaccine candidate, which it claims it could be manufacturing at large scale by October. In the current market, if Pfizer can live up to its COVID-19 vaccine aspirations, it will experience an explosion of growth in a way that its other pipeline programs can't promise. 

The pandemic hasn't necessarily helped Pfizer's strategic position outside of creating the opportunity for a blockbuster vaccine. Pfizer announced in March that it was pushing back its plans to release its off-patent drug manufacturing unit, Upjohn, and merge it with generic drug manufacturer Mylan (NASDAQ:MYL). Pfizer still expects to go through with the deal later this year, but Upjohn's first-quarter revenue losses of 37% may continue to drag down the company's earnings reports until then.

Merck captures impressive earnings growth with the help of Keytruda sales

With trailing-12-month revenue of $48.1 billion, Merck's profit margin of 21.1% is smaller than Pfizer's, but its year-over-year quarterly revenue growth of 11.5% merits appreciation. There's also a good chance that Merck's revenue will continue to grow strongly as a result of skyrocketing sales of its cancer immunotherapy, Keytruda, which were up 46% year over year. Given that Keytruda is currently under late-stage clinical trial investigation for a plethora of new indications, it's likely that the drug will be a major and growing revenue source for Merck for the foreseeable future. 

Aside from Keytruda, Merck has two programs awaiting approval from the FDA, and it also has a pair of COVID-19 vaccine candidates that it is moving through clinical trials as rapidly as possible. At present, Merck's COVID-19 vaccine programs appear to be less advanced than Pfizer's because Merck took about a month longer to initiate its program, but this difference is unlikely to be relevant in the long term. 

In terms of its late-stage pipeline programs, Merck has a few more than Pfizer, for a total of 24. This means that Merck will have more opportunities for new revenue sources over the next several years than Pfizer will, but it doesn't have a major lead. 

Merck has ambitious plans to invest $19 billion into expanding its oncology, vaccine, and animal health manufacturing capacity over the next three years. In a head-to-head competition with Pfizer, this is especially relevant because Merck is rapidly growing its manufacturing capacity precisely when Pfizer is trying to spin off Upjohn and reduce its commitment to manufacturing.

Like Pfizer, Merck also has a spin-off transaction to complete over the next two years. While details are scarce, Merck announced that it plans to detach its women's health and biosimilars operations to create a new company called Organon & Co.

Where should investors look for growth?

Over the past five years, Merck's stock has consistently outperformed Pfizer's, with its value growing by 28.6% compared with Pfizer's 3.1% contraction. With the output of Merck's pipeline showing no signs of stopping and Keytruda continuing to expand its market, Merck's growth will continue, making it a better purchase for most investors.

A chart depicting the change in Merck and Pfizer's stock prices.

Image source: YCharts

For investors seeking dividends rather than growth, however, Pfizer has Merck handily beat. Merck's forward dividend yield of 2.98% is more than a full percentage point lower than Pfizer's 4.23%. 

Keep a close watch on Pfizer's attempt to spin off Upjohn. If it can achieve that in the short term and thereby improve its bottom line, its stock might grow more than Merck's in a few years, especially if some of Merck's pipeline projects don't pan out.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.