Is Pfizer Stock A Better Bet Compared To Eli Lilly?

We think that Pfizer (NYSE: PFE) currently is a better pick compared to Eli Lilly & Company (NYSE: LLY). PFE stock trades at about 5x trailing revenues, compared to around 8x for LLY. Does this gap in Pfizer’s valuation make sense? We don’t think so. While Pfizer’s near term revenue growth has been driven by its Covid-19 vaccine, increased sales of Trulicty, Verzenio, Olumiant, and Bamlanivimab have led Eli Lilly’s top-line expansion.

LLY stock comparatively has been more favored by investors over the recent past, owing to increased hopes of regulatory approval for the company’s Alzheimer’s drug – Donanemab – especially after the U.S. FDA’s recent approval of Biogen’s Aduhelm for the treatment of Alzheimer’s disease. Note that Donanemab’s peak sales are touted to be as high as $10 billion.

Pfizer has been focused on its Covid-19 vaccine for now, with the company expecting sales from the Covid-19 vaccine to be over $26 billion, which is a very conservative figure in our view. However, there is more to the comparison. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at historical revenue growth as well as operating income and operating margin growth. Our dashboard Pfizer vs. Eli Lilly: PFE stock looks undervalued compared to LLY stock has more details on this. Parts of the analysis are summarized below.

1. Revenue Growth

Between 2018 and 2020, Pfizer’s Revenues grew by about 3%, from around $40.8 billion to $41.9 billion. While this number may appear small, it should be noted that Pfizer divested its consumer healthcare business as well as its generic drugs business. Increased sales of Eliquis, Ibrance, Xeljanz, and Vyndaqel have aided the company’s top-line over the recent years. However, 2021 will be a year of record revenue for Pfizer with its Covid-19 vaccine sales estimated to be $35 billion per Trefis analysis. The company’s overall top-line is expected to surge over 90% to $80 billion.

Looking at Eli Lilly, its total revenue grew 14% to $24.5 billion in 2020, compared to $21.5 billion in 2018. Market share gains for Trulicity has aided the company’s top-line growth. Looking forward, Eli Lilly’s sales are expected to grow only 11% in 2021 (compared to 90% for Pfizer).

It is true that Pfizer will see most of the Covid-19 vaccine sales in 2021, but that doesn’t mean that the figure will vanish over the coming years. Pfizer has stated that people will require booster shots within a year of them being fully vaccinated and potentially require an annual shot thereafter, much like seasonal flu shots, to protect against the virus as it evolves. As such, the Covid-19 vaccine will bolster Pfizer’s top-line growth over the foreseeable future.

2. Operating Income

Pfizer’s operating income grew from $5.7 billion in 2018 to $8.2 billion in 2020, led by both modest revenue gains and a 560 bps rise in operating margins – to 19.5% in 2020. On margin front, Eli Lilly has fared much better, with a consistent gradual rise over the last few years. Between 2018 and 2020, Eli Lilly’s operating margins expanded by 660 bps to 23.6% in 2020. Over the last twelve month period, Pfizer’s margins have seen a modest rise to 19.7% while the figure for Eli Lilly rose to 26.7%. Eli Lilly’s margin expansion has primarily been led by controlled SG&A expenses, which as a percentage of revenue declined from 28% to 25% over the same period.

The Net of It All

Although Eli Lilly’s historical revenue growth, operating margin growth, and operating margin, all compare favorably with Pfizer over the recent years, one should also take into account Pfizer’s restructuring, and looking forward, we believe Pfizer will fare better in these metrics over the coming years. Pfizer is one of the largest pharmaceutical companies, and it shouldn’t be difficult for it to work on other vaccines using the mRNA technology (used for the Covid-19 vaccine) to further enhance its pipeline. Beyond vaccines, Pfizer has cancer drug Ibrance, biosimilars for some of the top-selling cancer drugs, Xeljanz, and anticoagulant, Eliquis – as well a solid late stage pipeline, that will aid its top-line growth. Now that the company has completed its restructuring with the divestiture of the generic drugs business as well as the consumer health business, the company can look forward to much better margins over the coming years. Overall, we think the difference in valuation for Pfizer versus Eli Lilly will likely narrow going forward in favor of more attractively priced candidate, implying better returns for Pfizer.

While PFE stock may see a rise, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Johnson & Johnson vs Quest Diagnostics
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