Eli Lilly (LLY 0.73%) and Merck (MRK 0.38%) have seen their shares rise by over 17% and 5%, respectively, this year while the S&P 500 Health Care Sector Index has dropped 1.7%. What's interesting is that the two pharmaceutical companies' shares are up, despite first-quarter reports that showed both stocks with declining revenue and net income, year over year.

That's because each company has strong potential for long-term growth, thanks to emerging drugs. For Merck, it is a pipeline bolstered by vaccines and oncology therapies. For Lilly, it's a weight-loss drug and an Alzheimer's disease therapy that are showing huge potential.

Lilly is on the precipice of a breakout

Eli Lilly's tirzepatide, known as Mounjaro when sold as a Type 2 diabetes therapy, just earned a key trial victory as a weight-loss therapy. In a phase 3 trial, Lilly said the drug helped diabetes patients who were obese or overweight lose up to 15.7% of their body weight. The study included 938 adults and also met all key secondary objectives, including a reduction in A1C and other cariometabolic measures, the company said.

Based on the study results, the company said it planned a submission to the U.S. Food and Drug Administration (FDA) to treat overweight or obese adults with weight-related health conditions. Lilly said it is possible the drug could be approved for the new indication later this year. UBS analysts have said the use of tirzepatide to treat obesity in adults with related health issues could be worth $25 billion in annual sales.

Lilly reported $6.96 billion in revenue in the first quarter, down 11% year over year, thanks to a $1.5 billion drop in COVID-19 sales. Net income was down 29% to $3.2 billion. However, Mounjaro, in its first full quarter of earnings, gave a tiny glimpse of what may be ahead with $568.5 million in revenue.

The company also saw gains from three other drugs that have blockbuster potential. Type 2 diabetes therapy Trulicity reported $1.98 billion in sales, up 14% over the same period last year. Breast cancer drug Verzenio had $750.9 million in sales, up 60% year over year, and diabetes and cardiovascular therapy Jardiance had $577.5 million in revenue, up 38% over Q1 2022.

The company has another potential blockbuster if donanemab can be approved to treat Alzheimer's disease, which affects roughly 6.7 million people in the United States and could affect 13.8 million by 2060, according to the Alzheimer's Association. In a phase 3 trial, the company said that 47% of the 1,182 participants in the study with early Alzheimer's, compared to 29% on placebo, showed no clinical progression after one year of donanemab treatment. Lilly said that the drug slowed clinical decline by 35% and led to 40% less decline in activities used for daily living.

It's important to note that two other therapies approved to treat Alzheimer's, Lequembi and Aduhelm, from a combined effort by Eisai and Biogen, have not had a big effect because there's little evidence that they slowed cognitive decline. 

However, a report by Jefferies said that donanemab could be worth $7.5 billion annually in peak sales.

Merck using Keytruda to rebuild its pipeline

In its first quarter, Merck saw similar declines, year over year, to what Lilly posted. The company reported revenue of $14.5 billion, down 9% year over year, and clocked net income at $2.8 billion, down 35% over the same period last year. However, if you take out the effect of lost sales from COVID-19 antiviral Lagevrio, the company's sales would have been up 11% compared to the same period last year.

The big drivers for Merck are oncology multitool Keytruda, which had $5.8 billion in sales, up 20% year over year, and continues to add new indications, and human papillomavirus (HPV) vaccines Gardasil and Gardasil 9, which reported $2 billion in sales, up 35% over Q1 2021. 

While Keytruda will begin to lose some patent protection in 2028, the company is using its blockbusters' revenue to beef up its pipeline. The company just spent $10.8 billion to buy clinical-stage biotech Prometheus Biosciences and is expected to close the deal by the third quarter.

Prometheus has a therapy with big prospects in PRA023, a monoclonal antibody that is in late-stage trials to treat various immune-related diseases, including ulcerative colitis and Crohn's disease. The drug has similar potential to what AbbVie immunology blockbuster Humira has produced -- worth as much as $20 billion a year in peak annual sales, Citi analyst Andrew Baum said.

Merck has a big late-stage pipeline of its own, with more than 80 programs in phase 2 trials and over 30 in phase 3 trials. The lead prospects include pulmonary arterial hypertension therapy Sotateracept and MK-0616, designed to lower low-density lipoprotein (LDL) cholesterol. But Dr. Dean Y. Li, the president of Merck Research Laboratories, said last June that the company hopes to have more than 80 approvals through 2028.

Getting paid to wait

The breakouts for Lilly and Merck in terms of revenue and earnings growth may take a couple of years, but in the meantime, the companies have dividends that reward patient investors. Lilly has increased its quarterly dividend for nine straight years, including a raise of 15% this year to $1.13, giving it a yield of around 1.05%. Merck's dividend is even better. It raised it by 6% this year to $0.73 per quarterly share, delivering an above-average yield of around 2.48%. It was the 12th consecutive year it has increased its dividend.