Better Buy: Pfizer Inc. vs. Merck

By Keith Speights Markets Fool.com

This year is turning out quite differently for two of the biggest pharmaceutical companies. Pfizer's (NYSE: PFE) stock is barely above where it started at the beginning of 2016. Merck's (NYSE: MRK) shares, though, are up nearly 20% for the year. But which of these two drug stocks is the better pick for investors now? Here's how Pfizer and Merck compare.

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Image source: Getty Images.

The case for Pfizer

There's good news and bad for Pfizer's current product lineup. A few of its products are performing very well, particularly Ibrance, Lyrica, and Xeljanz. However, Pfizer hasn't seen significant sales growth for its vaccines or rare-disease drugs. Even worse, sales are fallingfor legacy drugs, including Lipitor and Premarin.

How will Pfizer grow earnings in the years ahead? One key way is from new products and new indications for drugs already on the market.Pfizer's pipeline includes 94 clinical programs. Eight of those are waiting for regulatory approval. Another 33 are late-stage programs.

A few of the upcoming regulatory decisions are for additional indications for existing products. Ibrance, for example, is awaiting European approval as a first-line treatment for advanced breast cancer. The others, though, are for new products such as avelumabin treating metastatic Merkel cell carcinoma (MCC).Both of these drugs are also being evaluated in multiple late-stage studies.

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Another important way that Pfizer is laying a foundation for future growth is through acquisitions. Pfizer bought Anacor Pharmaceuticals in June for $5.2 billion. Through this deal, the company gained access to crisaberole. Adecision by the U.S. Food and Drug Administration (FDA) on the potential dermatitis atopic treatment is expected within the next few weeks.

Pfizer made an even bigger acquisition in September. The drugmaker paid $14 billion to scoop up Medivation, landing the latter's crown jewel Xtandi in the process. Xtandi is currently approved to treat advanced prostate cancer thatno longer responds to a medical or surgical treatment that lowers testosterone and that has spread to other parts of the body. The drug is also being evaluated in late-stage studies for treating other prostate cancer indications and triple-negative breast cancer.

Wall Street expects Pfizer's new products and acquisitions to drive average annual earnings growth of close to 7% over the next few years. While that's not exactly mouth-watering growth, it's much better than what the company has achieved during the past five years -- a period in which Pfizer's stock price increased roughly 60%.

Pfizer's dividend should also be attractive to investors. The yield currently stands at 3.79%. Although Pfizer is paying out more in dividends than it's making in net income right now, its cash flow should allow continued dividend payments in the future.

The case for Merck

Merck is like Pfizer in several respects. Where Pfizer has fast-growing cancer drug Ibrance, Merck lays claim to fast-growing cancer drug Keytruda. Pfizer's vaccine sales have been flat; Merck's vaccine sales are declining somewhat.

Pfizer is already experiencing falling sales for its legacy drugs that have lost patent protection. Merck is getting ready to deal with loss of patent exclusivity for cardiovascular drugs Zetia and Vytorin.

Also like Pfizer, Merck is counting on its pipeline to deliver growth. Clostridium difficileinfection(CDI) drug Zinplaza recently won FDA approval. Merck's pipeline includes 24 late-stage clinical programs, 10 of which are evaluating additional indications for Keytruda.

Merck and Pfizer are partnering on experimental diabetes drug ertugliflozin, which is being evaluated in three late-stage studies as a stand-alone treatment and in combination with other therapies. A potential wild card isBACE inhibitorverubecestat, which is in a late-stage study targeting treatment of Alzheimer's disease.

Merck has also been in acquisition mode this year. The drugmaker boughtIOmet Pharma in January. Merckstruck three deals in July, buyingAfferent Pharmaceuticals and controlling interest in animal health companyValleeand health engagement solutions providerThe StayWell Company.

How much can Merck grow earnings? Analysts project average earnings growth of nearly 6.5% over the next five years, with high expectations for Keytruda overcoming concerns about sales losses from Zetia and Vytorin.

Merck claims a solid dividend yield of 3.07%. That's not at Pfizer's level, but Merck isn't using quite as much of its earnings to fund its dividend program as Pfizer is.

Better buy

It's a pretty close call between Pfizer and Merck. If we were just matching up their star cancer drugs, I'd definitely pick Merck and Keytruda over Pfizer and Ibrance. However, looking at the entire picture for both companies, my nod goes to Pfizer.

I like the chances for several programs in Pfizer's pipeline, especially avelumab andcrisaberole. While the Medivation acquisition was pricey, Xtandi is definitely a hot commodity. I really like Pfizer's dividend and don't think there's a serious risk of cuts. 2016 might have been Merck's year, but I think Pfizer shareholders might be the bigger winners in the new year.

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Keith Speights has no position in any stocks mentioned. 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.