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Better Buy: Johnson & Johnson vs. Merck

Keith Speights, The Motley Fool

Johnson & Johnson (NYSE: JNJ) or Merck & Co. (NYSE: MRK)? If you could go back in time one year, there would be no question which stock you'd want to buy. Merck's share price has soared more than 43% over the last 12 months, while J&J stock has only risen by only 4%.

However, time travel isn't a luxury available to investors. Instead, we only have current information to decide between two stocks. Which of these two big pharma stocks is the better pick now? Here's how Johnson & Johnson and Merck stack up against each other in three key areas that are important to making the decision.

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Image source: Getty Images.

Growth prospects

Both Johnson & Johnson and Merck have good news and bad news when it comes to their growth prospects. First, the bad news: Each of the drugmakers faces headwinds for several key products.

For J&J, the biggest headache is that its top-selling immunology drug, Remicade, must compete against biosimilar rivals. While the company has done a pretty good job of preserving market share, sales for Remicade still dropped nearly 16% last year. And J&J's approach to holding biosimilars at bay is being challenged in court by Pfizer.

Merck is also feeling the pain from biosimilar competition for Remicade. The company markets Remicade in Europe but has also launched its own biosimilar to the blockbuster drug. Merck's greater problems are with declining sales for Zetia and Vytorin, which both now face generic competition.

The good news is that both Johnson & Johnson and Merck have several products that continue to generate solid growth and some promising pipeline candidates. J&J's immunology drugs Stelara and Tremfya are especially performing well. So are its cancer drugs Darzalex, Imbruvica, and Zytiga.

J&J recently won FDA approval for its Spravato nasal spray for treating depression. Analysts think the drug could reach peak annual sales of as much as $3 billion. The company also hopes to spur revenue growth by winning additional indications for several of its current drugs.

Merck's biggest winner by far is cancer immunotherapy Keytruda. The company is also enjoying strong growth for its Gardasil vaccines. Merck's pipeline hopes rest in large part on expanding the use of Keytruda in treating additional indications. The company does have several new candidates in late-stage testing, however, notably including pneumococcal conjugate vaccine V114.

Overall, Merck appears to be in a better position to grow over the next few years. Wall Street analysts project the drugmaker will deliver average annual earnings growth of nearly 10% compared with less than 7% annual growth for Johnson & Johnson.

Dividends

Johnson & Johnson and Merck appear to be pretty evenly matched when it comes to dividends. J&J's dividend yield currently stands at 2.58%, while Merck's dividend yields 2.64%.

Both companies should be in a solid position to keep the dividends flowing and likely growing for a long time to come. Johnson & Johnson claims the better long-term track record, though. The company has increased its dividend for 56 consecutive years.

Valuation

The valuations of the big pharma companies look pretty close -- at least using one popular metric. Johnson & Johnson's shares trade at 15.2 times expected earnings. Merck's forward price-to-earnings multiple is 15.9.

J&J's valuation appears significantly more attractive based on another commonly used metric: The company's enterprise value-to-EBITDA of 13.5 is well below Merck's 17.7.

Better buy

Which of these two stocks is the better buy? My view is that Merck is likely to continue outperforming Johnson & Johnson over the next several years. Keytruda is a powerhouse that should fuel Merck's growth for a long time to come.

However, over the long term -- 10 years or more -- I think that Johnson & Johnson will probably be the winner. Merck's current success largely depends on Keytruda, but it also means the company will have a huge challenge when the patents for the cancer drug begin to expire in 2028. J&J isn't as dependent on one product.

One of Johnson & Johnson's strengths is its diversification across healthcare. The company isn't just a big drugmaker. It also has multibillion-dollar medical device and consumer healthcare businesses. For investors with time horizons that extend beyond the next decade, J&J's diversification could enable it to be like the tortoise in the fabled race between the tortoise and the hare.

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Keith Speights owns shares of Pfizer. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.