In this article, we will explore a fundamental analysis of two prominent pharmaceutical companies, Pfizer Inc. (PFE) and Eli Lilly and Company (LLY). I believe that LLY has more potential gains this month for reasons explained throughout the article.
Rapid technological advancements and the rising demand for generic medications are boosting the pharma industry. The United States is expected to maintain a market share of 43.7% in the global pharmaceutical industry by 2023. Moreover, the U.S. is estimated to invest between $605 billion and $635 billion in pharmaceuticals by 2025.
In addition, surging demand for personalized medicine and targeted therapy is boosting the industry. According to Statista, revenue in the pharmaceutical industry is projected to reach $1.48 trillion by 2028, expanding at a CAGR of 5.8%.
LLY is a clear winner in terms of price performance. PFE has declined 9.1% over the past three months, while LLY returned 15.2%. Also, PFE’s 18.6% decline over the past six months compares to LLY’s 49.9% returns. Moreover, in terms of annual return, LLY is the clear winner with 61.1% gains versus PFE’s 25.1% decline.
Given below are the reasons why I think LLY is a better pick:
Latest Developments
On September 27, 2023, PFE and Ginkgo Bioworks Holdings, Inc (DNA) announced a collaboration focused on the discovery of RNA-based drug candidates. In the collaboration, PFE will leverage DNA's proprietary RNA technology to advance the discovery and development of novel RNA molecules across priority research areas.
In return, DNA will receive an upfront payment and is eligible to receive research fees, development, and commercial milestone payments, up to an aggregate total of $331 million across three programs.
Conversely, on October 4, LLY’s oncology unit Loxo@Lilly announced that preclinical data for agents targeting KRAS G12D, multiple oncogenic KRAS mutations, and Nectin-4, will be presented at the 2023 AACR-NCI-EORTC International Conference on Molecular Targets and Cancer Therapeutics, taking place October 11-15, 2023, in Boston.
These programs are among the next slate of new oncology agents planned to enter clinical trials for Loxo@Lilly in 2024.
Moreover, on October 3, LLY announced a definitive agreement to acquire POINT, a radiopharmaceutical company with a pipeline of clinical and preclinical-stage radioligand therapies in development for the treatment of cancer.
Recent Financial Results
PFE’s revenues declined 54% year-over-year to $12.73 billion for the fiscal second quarter that ended June 30, 2023. The company’s adjusted income and EPS decreased 67% year-over-year to $3.84 billion and $0.67.
On the contrary, during the fiscal second quarter that ended June 30, 2023, LLY’s revenue increased 28.1% year-over-year to $8.31 billion. Its operating income rose 74.7% from the year-ago quarter to $2.13 billion.
The company’s non-GAAP net income and non-GAAP EPS amounted to $1.90 billion and $2.11, representing increases of 68.3% and 68.8% from the prior-year quarter, respectively.
Past and Expected Financial Performance
While PFE’s revenue grew at a CAGR of 7.9% over the past five years, its levered free cash flow declined at a CAGR of 3.4%. Analysts expect PFE’s revenue to decline 36.7% in the current quarter, 17.1% in the next quarter, and 33.8% in the current year. Its EPS is expected to decrease by 67.3% in the current quarter, 29.6% in the next quarter, and 49.9% in the current year.
On the other hand, LLY’s revenue and levered cash flow grew at a CAGR of 5.7% and 29% over the past five years. Analysts expect LLY’s EPS to rise 41.2% in the current quarter, 48% in the next quarter, and 21.2% in the current year. Its revenue is expected to increase 28.6% in the current quarter, 27.7% in the next quarter, and 16.9% in the current year.
Valuation
In terms of forward EV/Sales, LLY is currently trading at 14.79x, higher than PFE, which is currently trading at 3.15x. LLY’s forward P/S multiple of 14.32 is lower than PFE’s 2.83.
Thus, PFE is more affordable.
Profitability
LLY is more profitable, as its trailing 12-month gross profit margin of 77.77% is higher than PFE’s 69.82%. LLY’s trailing-12-month levered FCF margin of 17.13% is higher than PFE’s 15.85%.
POWR Ratings
PFE has an overall rating of C, which equates to a Neutral in our proprietary POWR Ratings system. Conversely, LLY has an overall rating of B, which translates to a Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight different categories. PFE has an F grade for Growth, reflecting the company's declining financial performance. In contrast, LLY has an A grade for Growth, aligning with its strong financial performance in the recent quarter.
Moreover, PFE has an F grade in Momentum, which is consistent with its diminishing price performance. LLY, on the other hand, has a B grade for Momentum, in sync with favorable price performance.
In the 159-stock Medical – Pharmaceuticals industry, PFE is ranked #64, while LLY is ranked #18.
Beyond what we’ve stated above, we have also rated both stocks for Value, Stability, Quality, and Sentiment. Get all PFE ratings here. To access LLY ratings, click here.
Winner
The pharmaceutical sector has witnessed remarkable growth in recent years and seems poised for further expansion due to robust demand. During economic turbulence, the industry's enduring strength makes it an appealing investment prospect.
Both LLY and PFE are positioned to benefit from these favorable industry tailwinds. However, LLY’s superior profit margins and favorable analysts’ estimates make it a better buy than PFE.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Medical-Pharmaceutical industry here.
What To Do Next?
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LLY shares were trading at $538.93 per share on Thursday morning, up $7.47 (+1.41%). Year-to-date, LLY has gained 48.49%, versus a 11.60% rise in the benchmark S&P 500 index during the same period.
About the Author: Kritika Sarmah
Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.
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