Biogen (BIIB 1.90%) and Eli Lilly (LLY 0.66%) have a lot in common. Both companies are among the leaders in the biotech industry. Both have deep lineups and pipelines. And both are looking to dominate an area with a severe and growing need for new therapies: Alzheimer's disease (AD).

However, these two stocks have moved in very different directions over the past three years, with Eli Lilly delivering substantially better returns to its shareholders. Will that continue to be the case? Or will Biogen be the better performer from here on out?

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The case for Biogen

Biogen hasn't been a great investment in recent years for several reasons. First, the company's revenue has declined as some of its most important products have faced generic competition:

BIIB Revenue (Quarterly) Chart

BIIB Revenue (Quarterly) data by YCharts.

Second, Biogen has failed to replace older drugs with newer ones capable of generating more than $1 billion annually -- until now. Biogen recently earned full approval for Leqembi, a therapy for AD it developed with its longtime partner, Japan-based Esai. Some analysts predict sales of $12.9 billion for Leqembi between 2023 and 2030. But that's not all.

In late July, Biogen announced it would acquire Reata Pharmaceuticals, a mid-cap drugmaker specializing in neurology, which is also one of Biogen's core areas of expertise. As part of this deal, Biogen will get its hands on Skyclarys, a treatment for a progressive neurogenerative condition called Friedreich's ataxia (FA).

In February, Skyclarys became the first drug for FA to be approved by the U.S. Food and Drug Administration (FDA). It also boasts blockbuster potential, with some estimating that it will generate sales of $1.5 billion annually by 2030.

Elsewhere, Biogen has sought to improve its business in other ways. The company is decreasing its workforce to cut expenses, a move that could boost its bottom line. Furthermore, Biogen has many other programs in its pipeline that could yield approvals in the coming years. So Biogen could turn out to be a good investment for patient investors, provided it executes its comeback strategy (nearly) flawlessly.

The case for Eli Lilly

Eli Lilly has an impressive lineup of medicines and an equally impressive pipeline. The company's revenue growth has been solid in recent years, although pandemic-related dynamics disrupted it somewhat. Eli Lilly marketed coronavirus medicines whose sales have fluctuated along with the number of COVID-19 cases. But other than that, Eli Lilly's business looks great:

LLY Revenue (Quarterly) Chart

LLY Revenue (Quarterly) data by YCharts.

The company's most important recent approval is diabetes therapy Mounjaro. It's been on the market for a little over a year, and is already generating nearly $1 billion in quarterly sales. There are more label expansions on the way for Mounjaro, too. It could become one of the best-selling therapies in the industry's history.

Eli Lilly is going after other targets, including AD, with donanemab. After the medicine reported excellent results in a late-stage clinical trial, Eli Lilly submitted it to the FDA for review.

The biotech has other promising therapies that have earned or could soon earn approval. One is mirikizumab, an immunology medicine that failed to pass the final FDA hurdle earlier this year. But since the thumbs-down was due to manufacturing issues only, Eli Lilly should eventually get the nod.

Another one is lebrikizumab, a potential eczema treatment currently being reviewed by health authorities. Then there is efsitora alfa, a potential once-weekly insulin product that could be highly successful. That's in addition to Eli Lilly's existing portfolio, which features several fast-growing medicines not named Mounjaro.

Lastly, Eli Lilly is a solid dividend stock, too. With all that going its way, Eli Lilly looks like a top biotech stock to buy and hold.

The verdict

Eli Lilly's business is stronger than Biogen's, but does that mean it's the better buy? Here's another argument in favor of Biogen: valuation.

BIIB PE Ratio (Forward) Chart

BIIB PE Ratio (Forward) data by YCharts.

With a forward price-to-earnings (P/E) ratio of almost 17, Biogen isn't cheap, but it looks a lot more so than Eli Lilly. For reference, the average forward P/E for the biotech industry is currently 15.7.

Even considering Eli Lilly's much richer valuation, it remains a better buy, as its mid-term outlook seems solid. Biogen's prospects are less certain; it will spend more on its commercialization expenses for Leqembi this year than it will receive in revenue. Also, Biogen's pipeline doesn't look nearly as solid, nor does it pay a dividend. For all those reasons, Eli Lilly wins this battle hands down.