Better Buy: Eli Lilly and Company vs. Johnson & Johnson

By Keith Speights Markets Fool.com

Eli Lilly and Company (NYSE: LLY) ranks as one of the largest drugmakers on the planet. But Lilly looks relatively small when compared to Johnson & Johnson (NYSE: JNJ). Based on market cap, J&J is over 3.5 times bigger than Lilly.

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Both of these companies' stocks have enjoyed success over the past five years. Lilly's shares jumped over 80% during the period, while Johnson & Johnson's share price more than doubled. Which stock is the better pick for investors now, though? Here's how Lilly and J&J compare.

Image source: Getty Images.

The case for Eli Lilly

Let's first address Lilly's negatives. Sales declined last year for two of the company's three top-selling drugs -- Humalog and Alimta. The bigger worry for now is with Alimta. The chemotherapy lost patent exclusivity in several countries and faces stiff competition.

Although sales for Humalog were down in 2016, volume actually increased. However, the injectable insulin lost U.S. patent protection in 2013. It's just a matter of time before rivals significantly threaten Humalog's market share.

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Lilly also faces challenges from losing patent exclusivity for Cymbalta in Europe and Canada and for Zyprexa in Japan. Even worse, the company loses patent protection for three other drugs this year: Cialis, Effient, and Strattera. Of the 12 drugs Lilly currently markets that made more than $500 million in sales last year, seven have either lost patent exclusivity or will soon do so.

So what's the good news for Lilly? The company has some great new drugs for which sales are soaring. Diabetes drug Trulicity came close to reaching the magic $1 billion revenue mark last year. Sales for Cyramza, which is currently approved for treating three forms of cancer, jumped 60% in 2016 from the prior year.Lilly is also getting solid sales growth from diabetes drug Jardiance and autoimmune disease drug Taltz.

More promising products could be on the way. An FDA decision for baracitinib in treating rheumatoid arthritis is expected by April. Lilly licensed the experimental drug from Incyte in 2009.

Lilly's pipeline includes 17 late-stage clinical programs. Four of those are studies evaluating Cyramza in treating additional cancer indications. The company alsorecently announced plans to acquireCoLucid Pharmaceuticals. CoLucid's experimental migraine druglasmiditan is in late-stage testing, with results expected to be announced later this year.

Investors will also get paid as they wait for Lilly's new drugs and pipeline candidates to blossom. Lilly's dividend yield currently stands at 2.59%.

The case for Johnson & Johnson

Like Eli Lilly, Johnson & Johnson has some drawbacks. Two of the healthcare giant's business segments saw sales fall in 2016 compared to the prior year. Sales for J&J's consumer business declined by 1.5% year over year, while sales for its medical devices segment slipped 0.1% year over year.

And while the company's pharmaceutical segment grew sales by 6.5% last year, there were some weak spots. Sales fell by double-digit percentages for J&J's infectious diseases franchise, antipsychotic drug Invega, and hepatitis C treatment Olysio. Blockbuster autoimmune disease drug Remicade could soon be hurt by competition from biosimilars.

However, there's plenty to like about Johnson & Johnson. For one thing, the situation with its consumer and medical devices segments isn't really all that bad. Both businesses actually achieved positive operational growth last year, but currency fluctuations weighed down year-over-year comparisons.

J&J's pharmaceutical business should be well positioned for more growth. Sales for autoimmune disease drugs Stelara and Simponi continue to grow strongly. Invega Sustenna is performing very well, as is blood thinner Xarelto.The company's biggest growth, though, could come from its oncology lineup. Sales for cancer drugs Darzalex and Imbruvica are skyrocketing.

Johnson & Johnson also claims some pipeline candidates with tremendous potential. Experimental autoimmune disease drugs guselkumab and sirukumab could gain regulatory approval this year. The company also hopes to win approval for additional indications for Imbruvica, Simponi, and Stelara in 2017.

And while Lilly has a nice dividend yield, J&J's yield of 2.73% is even better. It's also a big plus that the company has steadily increased its dividend for 54 years in a row.

Better buy

Eli Lilly has the bigger set of challenges, in my view. However, the company could still experience higher earnings growth than Johnson & Johnson if its pipeline pays off as expected. Does that make Lilly the better buy? I don't think so.

Johnson & Johnson might have some negatives, but none of them is significant enough to offset the considerable strengths of the company and its stock. I like J&J's cash flow, which allows the company to keep increasing its dividend and grow the business. Lilly isn't a bad stock pick, but Johnson & Johnson appears to be the better choice.

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Keith Speights has no position in any stocks mentioned. The Motley Fool recommends Johnson and Johnson. The Motley Fool has a disclosure policy.