Eli Lilly Stock Is Trending But Is Merck Better?

Merck’s stock (NYSE:MRK) has declined by close to 10% since early February after the WHO declared the coronavirus a global health emergency, while Eli Lilly stock (NYSE:LLY) has fared much better and gained 15%. The lockdown in various parts of the world has had a negative impact on the pharmaceuticals industry worldwide, due to the postponement of elective surgeries and hospital visits for non-emergency cases, resulting in lower prescriptions issued. This will likely have an impact on the business of both the companies. That said, we believe Merck will likely fare better than Eli Lilly because of its continued expansion of Keytruda to different oncology therapeutic areas, while Eli Lilly bets on its diabetes drug – Trulicity – as well as its rheumatoid arthritis drug – Olumiant – which is currently in phase 3 trials for Covid-19 treatment. 

Our conclusion is based on our detailed dashboard analysis, ‘Is Merck Expensive Or Cheap vs. Eli Lilly?‘, wherein we compare trends in key metrics for the two pharmaceutical companies over the years to determine their relative valuations under the current circumstances. We summarize parts of this analysis below.

Merck Will Likely Outperform Eli Lilly Over The Coming Months

Merck’s P/E based on 2019 earnings has declined from over 17x in 2019 to under 15x currently, while Eli Lilly’s multiple has grown from 22x to 26x. The decline in Merck’s multiple can be attributed to its exposure to Animal Health and Vaccines business, which will see more impact due to the current Covid-19 pandemic. However, we believe that the growth in Merck’s blockbuster drug, Keytruda, will likely offset the decline, if any, from the above two businesses. Keytruda has been on a stellar run with a whopping 20x sales growth from $0.6 billion to $11.1 billion between 2015 and 2019. To add, the drug’s sales grew 45% even in Q1 2020, when most of the businesses started to face headwinds from the Covid-19 crisis.

Eli Lilly’s multiple, on the other hand, appears high, considering that the company’s revenues and margins are also at risk, given the decline in prescriptions issued. Notably, Eli Lilly’s P/E is at the highest level of the last 6 years and it is roughly 25% above the figure at the end of 2018. Also, Merck’s P/E is 13% lower from the level seen at the end of 2018. One factor that explains the movement in Eli Lilly’s multiple is its strong Q1 earnings, driven by stocking up of drugs both at patient and the channel level, including Trulicity and Taltz, and its current phase 3 trials for Covid-19 treatment. Having said that, we believe Merck’s stock, based on fundamentals and valuation, will likely offer better returns compared to Eli Lilly over the coming months. In fact, we estimate Merck’s Valuation to be $102 per share, reflecting a strong 34% premium to the current market price of $76.

But How Long Will Merck’s Stock Remain Under Pressure?

• The expected timeline for recovery in global economic conditions, and in Merck’s stock, hinge on the broader containment of the coronavirus spread. Our dashboard forecasting US Covid-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.
• Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture and complements our analyses of the coronavirus outbreak’s impact on a diverse set of Merck’s multinational peers. The complete set of coronavirus impact and timing analyses is available here.
• We believe there will be a recovery in demand for most sectors by late June or early July, with gradual lifting of lockdowns and a gradual rise in number of Covid-19 cases remaining within the manageable capacity of hospitals and care providers.
• Although most companies will report poor Q2 results starting mid-July, market expectations will be buoyed by a visible improvement in the situation on the ground. We believe Merck’s Q2 will be better compared to its peers, given the expected growth in its cancer drug Keytruda.
• While Merck looks like a better investment option compared to Eli Lilly in the long run, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

Overall, Eli Lilly’s stock has given better returns over the recent months, as well as over the recent years, and rightly so, given its historical revenue and earnings growth being better than Merck. That said, Merck’s P/E ratio is lower compared to its own P/E ratio over the recent years, as well as lower when compared to Eli Lilly, and it appears to be an attractive bet compared to Eli Lilly at this time, with more upside potential from the current levels, in our view.

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