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Better Buy: Eli Lilly and Co. vs. GlaxoSmithKline

By George Budwell - Apr 4, 2016 at 1:04PM

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Between two of largest drugmakers in the world, here are one Fool's thoughts on which stock is the better buy right now.

Big pharma stocks like Eli Lilly (LLY -2.85%) and GlaxoSmithKline (GSK -0.54%) can be great long-term additions to your portfolio, especially in turbulent economic environments. After all, pharma companies tend to fare well even in the worst of times due to the nature of their underlying business: People generally don't stop buying medicine simply because the economy isn't doing well. 

Image source: Wikimedia Commons. 

With this in mind, let's consider whether Lilly or Glaxo is the better buy right now.  

Eli Lilly is struggling to overcome the patent cliff
By 2017, Lilly's top three best-selling medicines at the moment (Humalog, Alimta, and Cialis) will have lost all, or at least part, of their patent protection in many major European and U.S. markets. Unfortunately, this avalanche of patent problems follows fairly closely on the back of the entry of generics for Lilly's former best-selling drug, Cymbalta, starting in 2014. 

The good news is that generic versions, known as biosimilars, for its blockbuster diabetes drug Humalog still look to be a ways off from entering the U.S. market due to the current regulatory landscape for biologically based products. But that situation won't last forever -- and Humalog will eventually face competition from biosimilars. 

The really disappointing news for shareholders, though, is that Lilly's late-stage clinical pipeline has essentially failed to produce enough new products over the last decade to offset these staggering losses. After all, the company shuttered a pivotal-stage trial for its high-risk atherosclerotic cardiovascular disease drug, evacetrapib, last year, and its experimental lupus medicine, tabalumab, also failed two late-stage trials in 2014, leading the drugmaker to discontinue its development as well.

Lilly is thus being forced to rely on more speculative clinical-stage medicines -- such as its experimental Alzheimer's drug solanezumab that's already failed two pivotal stage studies -- to hopefully usher in its next generation of blockbuster products moving forward. 

Despite these headwinds, Wall Street has remained overtly bullish on Lilly's shares, however. According to S&P Global Market Intelligence, for instance, the drugmaker's average 18-month price target currently stands at $96.90, or 33% higher than where Lilly's shares are trading right now. Personally, I don't have much confidence in this rather optimistic price target, given that Lilly's shares are already trading at a forward P/E ratio of 20, based on expected 2016 earnings, and the drugmaker's clinical pipeline hasn't exactly inspired confidence lately. 

Glaxo may have finally hit rock bottom
Like Lilly, Glaxo has been dealing with its own patent issues -- most notably the patent expirations for the drugmaker's top-selling asthma medicine Advair and its lipid-lowering drug Lovaza. To top it off, Glaxo has run smack dab into the drug pricing debate that's raging inside the U.S. right now, leading to slower than expected commercial launches for next-generation respiratory medicines like Anoro and Breo Ellipta.

Making matters worse, Glaxo's clinical pipeline has also disappointed investors lately -- especially in the realm of oncology, where the drugmaker's once highly touted cancer vaccine MAGE-A3 failed multiple late-stage clinical trials.  

The good news is that Glaxo seems to be nearing the light at the end of the tunnel, so to speak. After swapping its oncology unit for a portion of Novartis' vaccine portfolio, brokering more favorable reimbursement terms with U.S. payers for some of its most important respiratory products, and entering the HIV market via its joint venture called ViiV Healthcare, Glaxo's management seems to have steadied the ship for the most part.

In fact, the Street has the drugmaker's revenue coming in flat in 2016, but growing by a respectable 3% in 2017, according to analysts polled by S&P Global Market Intelligence. Keeping with this theme, the average 18-month price target for this embattled pharma stock presently stands 10% higher than current levels, implying that Wall Street thinks the worst is over as well. 

Which stock comes out on top?
Based on Glaxo's more favorable outlook moving forward (plus its monstrous 6.77% dividend yield), I think it's the clear winner in this matchup. Lilly simply has more work to do to make sure that it can sustain its cash flows at current levels over the long haul, and that may require the drugmaker to engage in a costly merger or acquisition, especially if it strikes out again with solanezumab. 

Saying that, Glaxo may also end up opening up its wallet in the not-so-distant future to rebuild its high-margin oncology unit, but that event probably won't take place until the drugmaker's current CEO Andrew Witty retires -- a move that's expected to occur in 2017. After all, this transaction with Novartis for its vaccine portfolio may have calmed the waters to some degree, but it's not the type of deal that will drive high single- or double-digit sales growth down the line.

So, while Glaxo is probably a better buy than Lilly at the moment because there is less uncertainty about its core revenue streams, both companies appear primed to eventually make a major splash on the M&A front -- and that could change this picture rather quickly. Stay tuned.

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Stocks Mentioned

Eli Lilly and Company Stock Quote
Eli Lilly and Company
$286.79 (-2.85%) $-8.40
GlaxoSmithKline plc Stock Quote
GlaxoSmithKline plc
$43.40 (-0.54%) $0.23

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