Better Buy: Eli Lilly and Co vs. Pfizer

By Markets Fool.com

Eli Lilly (NYSE: LLY) and Pfizer (NYSE: PFE) are two of the most widely recognized dividend-paying Big Pharma stocks in the world. However, these two elite drugmakers appear to be on drastically different trajectories, thanks to their varying strategies in dealing with a spate of fairly recent patent expirations. With this in mind, let's consider which of these dividend stocks is the better long-term buy right now.

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Which stock offers the better near-term growth prospects and income opportunity?

Eli Lilly, despite some recent successes on the clinical front, is still battling the effects of widespread patent expirations across its drug portfolio. For example,Lilly's top three best-selling products at the moment -- Humalog, Alimta, and Cialis -- are all set to face generic threats within the next year or so. That's a serious problem, given that these three drugs presently make up over a third of Lilly's total revenues:

Data source: Eli Lilly and Co.

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The good news is that Lilly's strategic pivot to oncology recently received a major boost with the accelerated FDA approval of thesoft tissue sarcoma therapy Lartruvo as an add-on to thechemotherapy medication doxorubicin. And as a bonus, Lilly's fairly new metastatic colorectal, non-small-cell lung, and stomach cancer drugCyramza has also been performing admirably of late, pulling in a noteworthy $147 million in sales during the second quarter of 2016.

Lilly's key endocrine franchise, which makes up around a third of its total revenues, has also been getting a welcome boost as a result of new product launches, such as the type-2 diabetes medication Jardiance and the long-acting insulinBasaglarthat are both co-marketed withBoehringer Ingelheim.

The net result is that the Street is forecasting a respectable 4.2% rise in the drugmaker's top line in 2017.

On the dividend side of the equation, Lilly's fairly average yield of 2.6% could be at risk based on the company's 12-month trailing payout ratio of 87%, meager free cash flows of $2.98 billion, and low-single-digit growth prospects. In short, Lilly is arguably on the brink of being forced to reduce its dividend, especially as Alimta's revenues continue to decline moving forward.

Pfizer, for its part, remains in the midst of its patent headwinds as well, with top-selling nerve-pain treatment Lyrica set to lose exclusivity within the U.S. in 2018. Unlike Lilly, though, Pfizer has had much better luck at developing novel new products with megablockbuster potential to offset these losses.

The breast cancer drug Ibrance and thepneumococcal vaccine Prevnar 13, for instance, have quickly transformed into two of Pfizer's top-selling products over the past two years, replacing former stars such as the pain medication Celebrex. So, despite losing exclusivity for a whopping 11 products since 2013, Pfizer's top line is still expected to grow by nearly 5% in 2017.

Apart from its modest near-term grow prospects, Pfizer also offers one of the highest yields at 3.7% among large-cap pharma stocks. The downside, though, is the drugmaker's sky-high payout ratio of 102%, suggesting that its dividend may not be sustainable over the long term, especially if Pfizer continues to be aggressive on the M&A front.

Which company has the better late-stage clinical pipeline?

Lilly's most exciting late-stage product candidate is undoubtedly solanezumab, an experimental treatment for mild Alzheimer's disease. Lilly is reportedly hoping to present the drug's pivotal stage data readout before year's end and perhaps file for its regulatory approval in the U.S. in early 2017. The drawback is thatsolanezumab has a rather checkered history in prior late-stage studies, and Alzheimer's drugs in general have dismal success rates. That said,solanezumab could generate peak sales in the range of $2 billion to $5 billion if approved.

Pfizer, on the other hand, sports a vast clinical program for theimmuno-oncology compound avelumab, called JAVELIN. Pfizer brought this key experimental drug into the fold viaa global strategic alliance with its developer, Merck KGaA, approximately two years ago. Long story short, this single drug candidate has the potential to produce sales revenue in the $4 billion to $6 billion range and become a go-to treatment for a diversity of malignancies. Even though Merck KGaA still owns a portion of the drug's commercial rights, avelumab could push Pfizer's top line into the top of its peer grown down the line, making it a key drug to keep an eye on moving forward.

Is Eli Lilly or Pfizer the better buy right now?

As Pfizer offers more compelling near- and long-term growth prospects, along with a higher yield and lower valuation on both a trailing and forward basis, it's arguably the better stock to buy right now. Having said that, Lilly's fortunes could change overnight if it hits a home run withsolanezumab. Solanezumab, after all, would essentially have no immediate competitive threat and could end up serving as the first backbone therapy for the next generation of Alzheimer's diseasedrugs. Until Lilly develops -- or simply buys -- another megablockbuster product to reduce the threat of generics to its top line, however, Pfizer appears to be the far safer Big Pharma play.

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George Budwell owns shares of Pfizer. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.