We believe that Merck stock (NYSE: MRK) is currently a better pick than its peer Eli Lilly stock (NYSE: LLY), given its comparatively lower valuation of 3.9x trailing revenues vs. 10.8x for Eli Lilly. Investors have assigned a higher P/S multiple for LLY stock owing to its pipeline potential. If we look at stock returns, Eli Lilly’s 18% growth this year is slightly better than the 14% return for Merck stock, both outperforming the broader S&P 500 index, down 24%. There is more to the comparison, and in the sections below, we discuss why we believe MRK stock will offer better returns than LLY stock in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation multiple, in an interactive dashboard analysis of Merck vs. Eli Lilly: Which Stock Is A Better Bet? Parts of the analysis are summarized below.
1. Eli Lilly’s Revenue Growth Has Been Better In Recent Years
- Both companies posted sales growth over the last twelve months. Still, Merck’s revenue growth of 30.2% is much higher than 8.8% for Eli Lilly.
- However, if we look at a longer time frame, Merck’s sales grew at an average growth rate of 5.3% to $48.7 billion in 2021, compared to $42.3 billion in 2018, while Eli Lilly’s sales rose at an average annual rate of 9.7% to $28.3 billion in 2021, compared to $21.5 billion in 2018.
- Merck, over the recent years, has benefited from the label expansion of Keytruda and strong demand for vaccines, primarily Gardasil.
- Eli Lilly’s revenue growth has been driven by continued market share gains for drugs such as Trulicity, Verzenio, Jardiance, and its Covid-19 antibodies. The company recently secured U.S. FDA approval for its diabetes drug – Tirzepatide – which is expected to garner over $5 billion in peak sales.
- Eli Lilly has a robust product cycle, including Alzheimer’s treatment – Donanemab – one of the most anticipated drugs with peak sales pegged as high as $10 billion.
- Our Merck Revenue and Eli Lilly Revenue dashboards provide more insight into the companies’ sales.
- Looking forward, Eli Lilly’s revenue is expected to grow marginally faster than Merck’s over the next three years. The table below summarizes our revenue expectations for the two companies over the next three years. It points to a CAGR of 2.1% for Eli Lilly, compared to a 1.6% CAGR for Merck, based on Trefis Machine Learning analysis.
- Note that we have different methodologies for companies negatively impacted by Covid and those not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively affected by Covid, we consider the quarterly revenue recovery trajectory to forecast recovery to the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed three years before Covid to simulate a return to normal conditions. For companies registering positive revenue growth during Covid, we consider yearly average growth before Covid with a certain weight to growth during Covid and the last twelve months.
2. Merck Is More Profitable
- Eli Lilly’s operating margin of 24.5% over the last twelve-month period is slightly lower than 33.0% for Merck.
- This compares with 21.8% and 18.7% figures seen in 2019, before the pandemic, respectively.
- Eli Lilly’s free cash flow margin of 24.4% is also lower than 33.2% for Merck.
- Our Merck Operating Income and Eli Lilly Operating Income dashboards have more details.
- Looking at financial risk, Merck’s 14.3% debt as a percentage of equity is higher than 5.7% for Eli Lilly, while its 9.7% cash as a percentage of assets is higher than 5.8% for the latter, implying that Eli Lilly has a better debt position, but Merck has more cash cushion.
3. The Net of It All
- We see that Eli Lilly has demonstrated better revenue growth over recent years and has a better debt position. On the other hand, Merck is more profitable, has more cash cushion, and is available at a comparatively lower valuation.
- Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we still believe Merck is currently the better choice of the two.
- The table below summarizes our revenue and return expectations for Merck and Eli Lilly over the next three years and points to an expected return of 15% for Merck over this period vs. an -8% expected return for Eli Lilly stock, implying that investors are better off buying MRK over LLY, based on Trefis Machine Learning analysis – Merck vs. Eli Lilly– which also provides more details on how we arrive at these numbers.
Furthermore, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised at how counter-intuitive the stock valuation is for Xylem vs. Merck.
Despite inflation rising and the Fed raising interest rates, Merck stock has risen 14% this year. But can it drop from here? See how low Merck stock can go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.
|S&P 500 Return||2%||-24%||63%|
|Trefis Multi-Strategy Portfolio||3%||-24%||200%|
 Month-to-date and year-to-date as of 10/10/2022
 Cumulative total returns since the end of 2016