Better Buy: Eli Lilly and Company vs. AbbVie

A less-than-surprising clinical failure recently sent Eli Lilly & Co. (NYSE: LLY) shares tumbling, while AbbVie (NYSE: ABBV) stock has traded sideways for most of the year. Since spinning off from its parent,Abbott, AbbVie has made an impressive effort to diversify its revenue stream away from the world's best-selling drug before it loses patent protection. Eli Lilly also has a chance to offset impending patent losses with new products.

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With so many moving pieces in play, investors are right to wonder which of these big pharma stocks is a better buy right now. Let's look at their strengths and weaknesses to see which comes out on top.

The case for Eli Lilly & Co.

The bottom line at Indiana's biggest pharma hasn't grown in over a decade, but the average analyst on Wall Street expects it to expand by almost 10% annually over the next five years. Lilly's next-generation diabetes treatments are largely responsible for the optimism. The drugmaker's oral diabetes therapy Jardiance reduced the risk of fatal heart attacks and strokes by 38%, and it is the first treatment to do so. Recently it earned FDA approval to reduce cardiovascular risk, and this selling point is expected to resonate with approximately 28 million Americans living with type 2 diabetes.

So far Jardiance sales have been lackluster, but type 2 diabetics have been flocking to Lilly's Trulicity. After about two years on pharmacy shelves, the injectable GLP-1 agonist finished the third quarter with sales at an annualized run rate of about $974.4 million. That's a stunning 231% leap over the same period last year.

Further out, baricitinib could pressure sales of AbbVie's injected Humira. In a late-stage study, a significantly higher percentage of patients treated with baricitinib reported improvements in pain relief and physical function after taking the pills for a year compared to those injected with Humira. The FDA is reviewing the experimental therapy's application, and if it is approved, annual sales of the janus kinase (JAK) inhibitor could peak around $3 billion in annual sales.

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Unfortunately, patent expirations for key products will weigh on Lilly in the quarters ahead. The main U.S. patent for Humalog expired in 2013, and sales of the drug are at a standstill. The diabetes treatment constituted 12.6% of the company's bottom line, and the next two largest revenue streams, Cialis and Alimta, will lose patent exclusivity in major markets next year.

The case for AbbVie

In contrast to the situation at Lilly, sales of AbbVie's best-selling drug are still climbing. During the first nine months of the year, Humira revenue grew 14.5% over the prior-year period to $11.8 billion. Double-digit growth of the world's best-selling drug is nothing to sneeze at, but Humira's trajectory has started to level out.

It's just a matter of time before sales of the popular anti-inflammatory begin contracting, but exactly when that will happen will be decided in the courts. AbbVie's most important U.S. Humira patent expires this month, although the company claims a big basket of patents can keep biosimilar competition at bay until 2022.

In order to offset impending losses for the drug that accounts for 63% of its total revenue, AbbVie will lean heavily on its star oncology therapy. Imbruvica became the first chemo-free option for U.S. patients with the most common form of leukemia this spring, and year-over-year revenue from the drug grew 64.5% in the third quarter to an annualized run rate of about $2 billion.

AbbVie's share of annual Imbruvica sales is expected to top out around $7 billion, which means the company will need to produce another blockbuster -- or several -- to continue expanding its bottom line over the long term in the face of Humira competition. Two assets in clinical development that might fit the bill are anti-inflammatory risankizumab and endometriosis hopeful Elagolix. Risankizumab has produced some impressive response rates in psoriasis patients with a convenient once-quarterly dosing schedule, and it could contribute around $4 billion to the top line each year at its peak.

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In a trial designed to support an application, Elagolix significantly reduced endometriosis-associated pain. AbbVIe intends to file an application next year, and if approved, the drug is expected to generate peak annual sales of about $2.5 billion.

Running the numbers

Five-year growth estimates predicting AbbVie's earnings will rise at an annual rate of 14.95% are clearly expecting the company's patent portfolio to allow continued expansion of Humira sales for years to come. The stock's recent price of just 12.4 times 2017 earnings estimates isn't nearly as optimistic. If the analysts are right, investors buying AbbVie at recent prices would have a lot to be happy about in 2021.

Despite a market thumping after its Alzheimer's disease candidate failed its third late-stage trial, Eli Lilly's shares are still more expensive than AbbVie's. Recently, the stock has been trading around 16.8 times 2017 earnings estimates.

Granted, Humira revenue might begin drying up faster than expected. But with a 4.3% dividend yield and a much lower valuation, it seems like taking a chance on the stock is worthwhile. That's why AbbVie is the better buy right now.

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Cory Renauer has no position in any stocks mentioned. You can follow Cory on Twitter @coryrenauer or LinkedIn for more investing insight.

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