Better Buy: Pfizer Inc. vs. Merck & Co. Inc.

By Keith Speights Markets Fool.com

Investors have really liked Merck(NYSE: MRK) stock over the last 12 months, with shares jumping around 30%. Pfizer (NYSE: PFE) has performed pretty well also, but not nearly at the level of Merck. The big drugmaker's stock is up close to 15%.

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But past performance doesn't necessarily mean much for the future. Which of these stocks is the better buy now? Here's how Pfizer and Merck compare.

Image source: Getty Images.

The case for Pfizer

One of the top reasons for investors to like Pfizer is its dividend. Pfizer's dividend yield currently stands at 3.81% -- one of the highest of all big pharma stocks. The company increased its dividend in December by 7%, with CEO Ian Read stating that the dividend hike showed Pfizer's commitment to the dividend as a "key component" of delivering value to shareholders.

Of course, dividends don't mean much if the stock drops so much that investors receive a negative return overall. That shouldn't be a problem for Pfizer, though. The company's prospects for earnings growth is yet another reason to like the stock.

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Pfizer admittedly hasn't been able to grow earnings much over the past few years. Now, however, the company claims several high-performing products in its portfolio and even more strong pipeline prospects potentially on the way to market.

Ibrance stands at the top of the list among Pfizer's current drugs. Sales for the cancer drug nearly tripled in 2016 from the prior year to $2.1 billion. Analysts think Ibrance could reach peak annual sales of between $3 billion and $5 billion.

Several other drugs should help Pfizer grow. Rheumatoid arthritis drug Xeljanz was a big winner last year, with sales soaring 78% year over year to $927 million. Prostate cancer drug Xtandi could hit peak annual sales approaching $5 billion. Recently approved eczema drug Eucrisa could generate peak annual sales of $2 billion or more.

Both Xtandi and Eucrisa were picked up from acquisitions made by Pfizer last year. Xtandi came with the company's buyout of Medivation. Eucrisa was the crown jewel of Anacor Pharmaceuticals.

Pfizer also has some home-grown candidates in its pipeline that should help fuel growth in the future. The drugmaker has 30 late-stage clinical studies in progress. Two of the candidates involved in those studies are a Pfizer-Merck collaborations -- experimental anti-PD-L1 cancer drug avelumab and diabetes treatment ertugliflozin.

The case for Merck

Merck also has a nice dividend. However, its yield of 2.88% isn't quite as attractive as Pfizer's is. There are other reasons for investors to be bullish about Merck, however.

Front and center among those reasons is Merck's super-successful cancer drug Keytruda. Sales for the anti-PD-1 immunotherapy topped $1.4 billion last year, up roughly 150% year over year. Analysts think that Keytruda is on the way to reaching peak annual sales of between $12 billion and $15 billion.

Other than Keytruda, Merck's best performance among its current lineup stems from its vaccines. Sales for the company's Gardasil and Gardasil 9human papillomavirus (HPV) vaccine increased 14% in 2016 to just under $2.2 billion. Sales for Merck's Pneumovax pneumococcal vaccine rose 18% last year to $641 million.

Merck's pipeline includes 24 late-stage programs. One of those is forverubecestat in treatingAlzheimer's patients with early symptoms of the disease. The experimental drug recently failed to show improvement in a phase 2/3 study of patients withAlzheimer's disease. Another 10 of the late-stage clinical studies are for additional indications for Keytruda.

One of the most promising new candidates in Merck's pipeline isertugliflozin, which is being developed with Pfizer. Three of Merck's late-stage clinical studies include the experimental diabetes drug.

Better buy

With Merck, the story is essentially all about Keytruda. That makes for a very good story, though, considering the drug's incredible potential. Pfizer doesn't have a winner of Keytruda's magnitude in its arsenal.However, I still think Pfizer is the better buy right now.

Pfizer's current products and pipeline potential should produce earnings growth along the lines of Merck's over the next few years -- and perhaps a little better than Merck's. But Pfizer's higher dividend should generate an overall return that makes investors more money. Merck has enjoyed a nice run over the last year thanks to Keytruda. However, I suspect that the future favors Pfizer.

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Keith Speights owns shares of Pfizer. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.