Better Buy: Pfizer Inc. (PFE) vs. Eli Lilly (LLY)

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Now that market jitters have brought plenty of great drugmaker stocks down to more attractive prices, it's a good time to stack two important players, Eli Lilly and Co. (NYSE: LLY) and Pfizer Inc. (NYSE: PFE), side by side to see which comes out on top.

Both big U.S. pharma stocks generate strong cash flows and they aren't shy about returning plenty of that cash to shareholders. Let's take a look at what's driving profits for both companies to see which stock is poised to deliver a better return over the long run.

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The case for Pfizer Inc.

Pfizer's biggest growth driver at the moment is Ibrance, a breast cancer tablet that added $3.1 billion to Pfizer's top line in 2017, which was 46% more than a year earlier. While I think Ibrance will eventually become a $6 billion-per-year drug, incoming competition will make the road ahead a little rockier.

Last year, the FDA approved two similar therapies that will compete with Ibrance, Kisquali from Novartis (NYSE: NVS) and Verzenio from Eli Lilly. All three therapies require frequent monitoring of patients' white blood cell counts, but treatment with either of Pfizer's competitors requires frequent monitoring for liver toxicity and other issues.

Ibrance isn't the only drug pulling up Pfizer's top line. Last year sales of Eliquis, a next-generation anticoagulant, jumped 47% to $2.5 billion, and Xeljanz, a rheumatoid arthritis treatment jumped 45% to $1.3 billion.

Expanding annual sales of three drugs in three separate fields of medicine is an enormous achievement, but steadily declining sales for older offerings is a difficult headwind to overcome. Viagra's main U.S. patent expired last December, causing fourth-quarter U.S. sales to plummet 63% on year to an annualized $408 million. Pfizer could suffer an even bigger hit this December when Lyrica's main U.S. patent expires. A longer-lasting version might retain some patients loyal to the brand, but the $3.5 billion in U.S. sales this drug generated last year could begin disappearing in 2019.

With a bit of luck, some new drug candidates emerging from Pfizer's late-stage pipeline, and important label expansions for marketed drugs will help offset the losses in the years ahead. Pfizer expects 15 such approvals over the next five years, including one that could expand Xeljanz's availability to hundreds of thousands of Americans suffering from ulcerative colitis. The FDA is expected to issue an approval decision this June.

The case for Eli Lilly and Co.

Lilly's been a leader in the diabetes space for years, so it's no surprise that its leading growth driver is gaining ground in the huge, but highly competitive diabetes space. Trulicity sales bounded 119% higher in 2017 to $2.0 billion, which helped lift the company's entire top line 7% higher to $22.9 billion for the year.

Lilly's popular once-weekly injection is about to run into a new competitor. Lilly investors will be chewing their fingernails to stubs as another once-weekly GLP-1 agonist, Ozempic from Novo Nordisk (NYSE: NVO) enters the fray. In a head-to-head study leading to Ozempic's approval, it helped a significantly higher percentage of patients reach their blood sugar goals plus it helped patients lose twice as much weight.

If Trulicity takes a hit, Lilly new product lineup is strong enough to keep moving the needle forward. Taltz launched into a crowded psoriasis market in 2016 and still managed to generate $559 million in sales last year.

Late last year, Lilly launched Latruvo which is now first new treatment specifically approved for the treatment of soft tissue sarcoma. Oncologists in the U.S. see around 12,000 new cases of this disease each year and Latruvo is available in the first-line setting, in combination with standard chemo. Given the dearth of treatment options, Latruvo-plus-chemo will probably become the new standard, driving sales of Lilly's drug from an impressive $203.0 million in its first full year to more than $1 billion at its peak.

Further out, Lilly has an impressive 18 programs in late-stage clinical trials, or under review at the FDA. The company's awaiting a decision for a drug to prevent migraines, called galcanezumab. A new drug application for a candidate intended to become an acute treatment for the vicious headaches, called lasmiditan, should be on its way to regulators later this year. Migraine headaches send millions to seek treatment each year, but most give up on those treatments within a year. This huge unmet need gives both candidates blockbuster potential if approved.

What the numbers say

Pfizer might find top-line growth hard to come by over the next several years, but profits are on the rise. Adjusted earnings rose 11% in 2017 to $2.65 per share and the company expects a similar gain this year with the assistance of corporate tax reform and continued cost-cutting.

The possible sale of the company's consumer goods business could also give Pfizer a great deal of cash to work with over the next year or two, but losses to generic competition are expected to limit bottom line growth to an annual rate of around 6.8% over the long term.

Shares of Eli Lilly have been trading at around 15.7 times earnings, which isn't bad for a company set up for double-digit long-term growth. The average analyst following Lilly expects the company to grow earnings at a zippy 11.9% annual rate over the next five years. That's just fast enough to nudge it ahead of Pfizer in this tight race for the better stock pick.

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Cory Renauer has no position in any of the stocks mentioned. The Motley Fool recommends Novo Nordisk. The Motley Fool has a disclosure policy.

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