Eli Lilly Stock A Better Bet Compared To Pfizer

by Trefis Team
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Pfizer’s stock (NYSE:PFE) has gained 28% since the March 23 lows of this year, in-line with Eli Lilly & Company stock (NYSE:LLY), which has gained 29% of its value. The lockdown in various parts of the world has had a negative impact on the pharmaceuticals industry worldwide due to deferment of elective surgeries and fewer hospital visits. However, we believe Eli Lilly will likely fare better than Pfizer going by its historical performance, fundamentals, and recent developments around the company’s business. Specifically, Eli Lilly’s breast cancer drug – Verzenio – has shown positive results in phase 3 trials.

Our conclusion is based on our detailed dashboard analysis, ‘Eli Lilly Stock Appears Attractive Compared To Pfizer‘, wherein we compare trends in key metrics for the two pharmaceutical giants over the years to determine their relative valuations under the current circumstances. We summarize parts of this analysis below.

What Has Led To The Stock Growth For PFE And LLY Over Recent Months?

Eli Lilly’s P/E multiple based on 2019 earnings has expanded from 22x at the end of 2019 to 25x currently, while Pfizer’s multiple has decreased from 13x to about 12x. The gains in Eli Lilly’s multiple can be attributed to two factors. Firstly, the company’s Olumiant drug is being tested in phase 3 as a possible candidate for Covid-19 treatment, while another similar drug, Kevzara by Sanofi and Regeneron Pharmaceuticals, failed in a late-stage study, and the companies don’t intend to conduct further trials. So far, the FDA has given an emergency use authorization nod to Gilead for its drug – Remdesivir for the treatment of Covid-19, and if successful, Olumiant could garner a significant amount in sales. For perspective, Gilead’s Remdesivir is expected to sell 1 to 1.5 million treatments this year, translating into roughly $3.5 billion incremental sales in the second half of the year. Secondly, the positive results in phase 3 for Eli Lilly’s breast cancer drug Verzenio are also encouraging, given the drug’s peak sales are estimated to be over $7.5 billion. The company is also seeing market share gains for its diabetes drug, Trulicity, which will further bolster sales going forward.

Pfizer’s multiple of 12x trailing earnings also appears to be attractive and it is largely in-line with the levels seen over the past years. Pfizer’s business is equally at risk due to the pandemic but its restructuring initiatives will likely be fruitful in the medium to long run. Pfizer has already de-consolidated its low-margin consumer healthcare business, and it is currently in the process of de-consolidating its legacy drugs business. Pfizer will now be focusing only on its high-growth BioPharma business, and this will likely result in multiple expansion over the coming years. Also, Pfizer is working on a vaccine for Covid-19, which, if approved, could be a strong growth driver going forward, given that the company has vast resources, better access to manufacturing and distribution, providing an edge over some of the other companies developing potential vaccines.

From a valuation point of view, both Pfizer and Eli Lilly look attractive at the current levels. That said, going by the historical performance, with Eli Lilly stock giving 2x returns over Pfizer (between 2009 and 2019), and a superior revenue and earnings growth, which also explains the difference in P/E multiples for both the companies, we believe Eli Lilly will likely offer better returns compared to Pfizer in the near term.

But How Long Before The Economy Recovers And Eli Lilly Stock Gains?

  • The expected timeline for recovery in global economic conditions, and a further rally in Eli Lilly’s stock, hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. 
  • 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 Eli Lilly’s multinational peers, including Johnson & Johnson and Merck. The complete set of coronavirus impact and timing analyses is available here.
  • There are signs of recovery in demand for most sectors already in Q3, 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. In fact, elective surgeries which were deferred earlier in Q2 are now being attended to. This should bode well for pharmaceutical companies. 
  • Although most companies will report a revenue decline for the full year 2020, market expectations will be buoyed by a visible improvement in the situation on the ground and focus on 2021 results.
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