Better Buy: Eli Lilly vs. Merck
Merck (NYSE: MRK) and Eli Lilly (NYSE: LLY) are two of the largest
Let's examine the situations with their underlying businesses, and attempt to predict whether Merck will keep outpacing Eli Lilly, or whether the latter is the more attractive stock to buy today.
Product lineup
Merck's most lucrative area of focus at the moment is oncology. In particular, its crown-jewel drug, Keytruda, is approved for a plethora of cancers, including lung cancer and melanoma. Lynparza and Lenvima round out its oncology segment, and although their sales figures are nowhere close to Keytruda's, they are on the rise. Second in importance for the company's top line is its vaccine business, led by HPV vaccines Gardasil and Gardasil 9. Merck's portfolio includes a raft of treatments for conditions across the medical landscape, but its oncology and vaccine segments will likely be its key growth drivers for the foreseeable future.
Eli Lilly's top-selling product is Trulicity. However, the diabetes medication faces intensifying competition from rival products developed by companies such as Novo Nordisk (NYSE: NVO). Some investors fear that Trulicity's sales will lose steam, following the downward path of several of Eli Lilly's former growth drivers such as Humalog, Humulin, and Cialis.
The company can count on other products, though, including Taltz and Cyramza. Taltz was initially approved as a treatment for moderate to severe plaque psoriasis in 2016, and has received a couple more approvals since, and Cyramza is approved for several forms of cancer, including liver cancer.
Financial results
Comparing Merck's and Eli Lilly's top-line growth is illuminating. During the third quarter of 2019, Merck's sales grew by 15% year over year, propelled by Keytruda's 64% sales spike. Eli Lilly's revenue only climbed by 3% for the quarter, when Trulicity sales increased by 24%. Merck has consistently grown its revenue at a faster pace than Eli Lilly recently, as the following table shows.
Revenue Growth (Year Over Year)
Company |
Q3 2018 |
Q4 2018 |
Q1 2019 |
Q2 2019 |
Q3 2019 |
---|---|---|---|---|---|
Merck |
4% |
5% |
8% |
12% |
15% |
Eli Lilly |
7% |
5% |
3% |
1% |
3% |
Further, Merck's non-GAAP net income for Q3 rose 22% to $3.9 billion, while Eli Lilly's comparable net income increased 5% to $1.4 billion.
However, despite its faster revenue growth and higher non-GAAP earnings, Merck is currently trading at 15.8 times expected future earnings, while Eli Lilly's forward P/E ratio is less attractive at 18.
Growth prospects
Keytruda is projected to become the world's bestselling drug by 2024, which gives Merck much to look forward to. It recently landed a major approval in China where Keytruda was cleared as a lung cancer treatment. There are 787,000 new cases of lung cancer every year in China and about 631,000 deaths associated with it. Lastly, the company
Eli Lilly, too, is pinning some of its hopes to a recent acquisition -- namely that of Loxo-Oncology, which it purchased earlier this year for $8 billion in cash. With that deal, Eli Lilly got its hands on Vitrakvi, an innovative cancer drug that received an accelerated approval from the U.S. Food and Drug Administration. Also part of the package were several promising pipeline candidates, including cancer treatments LOXO-305 and LOXO-292, the latter of which could receive FDA approval as early as next year.
Which is the better buy?
Merck's revenue is currently growing at a faster rate -- and will likely continue to, as Keytruda's sales rise is still getting started, and it has other products to rely on. Further, even after its healthy share price gains in 2019, Merck's valuation remains more attractive than that of Eli Lilly. For those reasons, I think Merck is clearly the better option to buy right now.
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