Better Buy: Eli Lilly and Co vs. GlaxoSmithKline plc

By Cory Renauer Markets Fool.com

A couple recent events helped shares of Eli Lilly and Co(NYSE: LLY) bounce back from a big clinical trial failure that sent the stock tumbling late last year. Despite some ups and downs over the past year, the big pharma stock notched an 12% gain.

Continue Reading Below

Lilly's peer across the pond, GlaxoSmithKline plc(NYSE: GSK) hasn't inspired nearly as much enthusiasm lately. Its shares are up just 5% over the past 12 months, but it does offer a tempting 4.8% dividend yield at recent prices.

Let's take a closer look at some challenges and opportunities facing both to see which of these big pharma stocks is the better pick right now.

Image source: Getty Images.

Arguments for Eli Lilly and Co

Sagging sales for aging drugs have kept Eli Lilly's bottom line from rising for years, raising the stakes for its clinical-stage pipeline. When an expensive third attempt to advance an Alzheimer's disease candidate flopped late last year, the stock took a hit. Luckily, surprising success with a handful of recent launches are reversing the trend. In 2016 earnings per share rose 14% over 2015 results, giving the stock some lift.

Continue Reading Below

Leading the charge is a type 2 diabetes treatment called Trulicity. Sales of the once-weekly injection surged 272% last year to $925 million. The condition affects an estimated 28 million Americans, which suggests the Trulicity rocket could fly much higher.

More recently, European regulators granted Lilly's highly anticipated rheumatoid arthritis (RA) candidate an approval. Olumiant (formerly baricitinib) is a tablet that showed a significant benefit in a head-to-head trial against the leading RA treatment Humira, which happens to be the world's best-selling drug.

Better performanceand more convenient dosing (Humira must be injected) could help Olumiant break into this increasingly competitive space. With peak annual sales expectations of around $2 billion, this could be one of the biggest new drug launches this year, but it still needs to earn its first U.S. approval. A busy FDA lengthened its review of the drug by a few months, but it's widely expected to announce a thumbs up soon.

Further ahead, success with experimental cancer treatment abemaciclib and pain management candidate tanezumab could help the company return to growth and drive the stock higher in the process.

Arguments for GlaxoSmithKline plc

Impending generic competition for GlaxoSmithKline's blockbuster asthma medicine Advair in the vital U.S. market will be this big pharma's biggest challenge in the near term. Glaxo recently stated expectations of flat to slightly declining earnings for the full year in the event a generic entrant begins digging into Advair sales later this year.

Luckily, Glaxo's recently launched HIV drugs are exceeding expectations. Combined sales of Tivicay and Triumeq shot up 82% to about $3.4 billion last year. Triumeq alone is expected to reach peak annual sales of around $5 billionif it can overcome competition from Gilead Sciences' entrenched and recently launched HIV antivirals.

Glaxo has also enjoyed some surprising success from its industry leading vaccines segment. Combined sales of meningitis vaccines Bexsero and Menveo shot up 96% last year to $748 million. The segment as a whole contributed $5.7 billion to the top line, about 14% more than it did in 2015.

Looking ahead, a shingles vaccine under FDA review could generate about $800 million in annual sales at its peak, if approved. The Shingrix vaccine was one of four applications Glaxo filed in the last half of 2016. It also boasted the initiation of four late-stage clinical trials. Favorable regulatory decisions, trial data, and another year of Advair exclusivity in the U.S.could make 2017 a comeback year for the troubled company.

A look at valuation

Fear of impending losses to generic competition for Advair in the U.S. has driven the price of Glaxo shares down to about 14.7 times this year's earnings estimates. That's fairly cheap for company Wall Street analysts expect to grow at an annual rate of 13.7% over the next five years.

Image source: Getty Images.

By the same yardsticks, Eli Lilly's stock looks far less attractive. It's trading at around 19.9 times forward earnings, with a lower annual growth forecast of 12.3% over the next five years.

Glaxo isn't just looking better looking in terms of value, its stock also offers a juicy 4.5% dividend yield at recent prices and exchange rates. Again Eli Lilly comes up a short with meager 2.6% yield at recent prices.

If their valuations and dividends were equal, a more diverse revenue stream would tip the scales in Lilly's favor. However, at recent prices, I have to call GlaxoSmithKline stock the better buy.

10 stocks we like better than GlaxoSmithKline
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and GlaxoSmithKline wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of February 6, 2017

Cory Renauer owns shares of Gilead Sciences. The Motley Fool owns shares of and recommends Gilead Sciences. The Motley Fool has a disclosure policy.