Better Buy: Eli Lilly and Company vs. Merck & Co.

Pharmaceutical heavyweights Merck & Co. Inc. (NYSE: MRK) and Eli Lilly and Company (NYSE: LLY) are getting a lot of attention after outperforming the market by a mile in 2018. Both stocks have risen more than 30% this year, but investors need to know which of these industry leaders can deliver more gains in the years ahead.

Lilly and Merck contain multiple moving pieces heading in different directions. Let's look at what could drive growth -- and hold it back -- in the years ahead to determine which stock is the better pick right now.

The case for Eli Lilly and Company

Eli Lilly's product lineup boasts eight brands launched since 2014 that already contribute an annualized $7.5 billion in combined revenue. The largest growth driver in Lilly's young lineup is Trulicity, a weekly injection for millions of people with type 2 diabetes. Since its launch in 2014, Trulicity has rocketed up to an annualized run rate of $3.3 billion based on third-quarter results that were 55% higher than the previous-year period.

Lilly recently added a ninth drug with blockbuster potential to its rookie lineup. Emgality isn't the only new migraine prevention drug of its class to launch in 2018, but there could be enough demand for all three to generate more than $1 billion in annual sales. Migraine headaches affect more than 30 million adults at an annual estimated expense as high as $56 billion annually.

In the quarters ahead, investors will want to look out for rising sales of Verzenio, a breast cancer tablet similar to Ibrance, a blockbuster from Pfizer that's on pace to rack up $4 billion in sales this year. Ibrance sales shot up when it earned an approval to treat newly diagnosed women with a certain type of breast cancer based on data that showed it reduced patients' risk of disease progression by 42% when added to standard care.

In February, the Food and Drug Administration (FDA) approved Verzenio for similar patients based on a 46% risk reduction. Since these weren't head-to-head studies, any comparisons to Ibrance need to be taken with a grain of salt. Third-quarter Verzenio sales that jumped 46% from the previous quarter, though, suggest oncologists and insurers are convinced it's a viable new option.

Lilly will continue to tussle with generic competition for Cialis in 2019. Now that the drug is responsible for just 8% of total revenue, it's a headwind the company's young product lineup can overcome.

At recent prices, Lilly shares offer a meager 2% yield, and the company used around 78% of free cash flow operations generated over the past year to make the payments. Rising stars probably won't embolden the company to commit to a large pay raise in the near term, but I wouldn't be surprised if the payout doubles from its present rate a few more years down the road.

The case for Merck & Co. Inc.

While Eli Lilly has a stable of growth drivers, Merck's future rests almost entirely on one cancer therapy: Keytruda. Since the PD-1 checkpoint inhibitor solidified its position in the lung cancer space, it seems there's nothing that can stop the blockbuster from becoming the best-selling cancer drug of all time. Keytruda's already a huge success, with $5 billion in sales during the first nine months of 2018, and EvaluatePharma thinks it can achieve $14 billion annually by 2024.

Merck's top-selling franchise, Januvia for diabetes, has been around for more than a decade, and sales have started to flatten out. At 14% of total revenue, Januvia could create a strong headwind for Merck if it begins losing ground to new competition earlier than expected.

Merck's late-stage pipeline doesn't really have any new drug candidates worth mentioning, but addressable patient populations for Keytruda and Lynparza could rapidly expand. Merck markets Lynparza in partnership with AstraZeneca. It's a tablet that reduced the risk of disease progression by 70% when given to ovarian cancer patients following their first round of chemo. As a treatment for recurrent ovarian cancer, it never really took off, but sales could explode higher if approved to treat earlier-stage patients next year.

Merck recently hiked its dividend 15% higher this year, and the stock offers a 2.9% yield at the moment. The company used just 58% of free cash flow to make dividend payments over the past year, which means there's plenty of room for big payout bumps in the years ahead.

The better buy

This isn't an easy call, and the better buy really comes down to your personal risk tolerance. Eli Lilly's diverse line of recently launched blockbusters makes the stock seem a little safer than Merck, which is depending almost entirely on Keytruda for growth. You'll pay dearly for that diversity, though. Lilly's shares have been trading at 20.1 times this year's earnings expectations.

Merck's shares are trading at a relatively modest 17.7 times 2018 earnings expectations, and exploding sales growth for Keytruda in the years ahead is probably the safest prediction for a single drug that a biopharma analyst can make right now. Although I'd rather be holding Eli Lilly shares purchased a year ago, Merck looks like the better stock to buy right now.

10 stocks we like better than Merck & Co.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 quadrupled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Merck & Co. 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 November 14, 2018

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