The drug/biotech industry has regained its lost momentum in the past couple of months after a mild struggle in the initial part of the year, probably on broader market correction.
We believe that strong quarterly results, consistent increases in full-year guidance, new product sales ramp up with rising demand, successful innovation and product line extensions, strong clinical study results, and frequent FDA approvals have brought the sector back on growth track this year. Importantly, mergers and acquisitions (M&A) activity is ramping up with the tax reform in place.
Though headwinds like government scrutiny of high drug prices, pricing and competitive pressure, slowdown in sales of some of the most high-profile older drugs and major pipeline setbacks remain, pipeline success, cost cutting, share buybacks, product launches, increased M&A activity and appropriate utilization of cash should keep the sector afloat through the rest of this year and next.
Within this broader sector, one of the better performing industries is Large-Cap Pharmaceuticals, which includes some of the world’s largest and most recognizable drug making companies. The Large-Cap Pharmaceuticals industry features among the top 29% of the 255 Zacks-ranked industries
In this sector, Merck MRK and Pfizer PFE are two of the biggest names. Both the companies have equally diversified drug portfolios and strong pipelines.
Given this backdrop, let’s try to ascertain which of these two drug giants is a better investment option. We need to delve deeper into factors beyond rank, since both the companies carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Strong Oncology Portfolio/ Pipelines
Pfizer boasts a strong presence in oncology with key marketed drugs being Ibrance (breast cancer), Sutent (kidney cancer), Xalkori (lung cancer) and Xtandi (prostate cancer).
Pfizer’s newest immunotherapy, Bavencio, an anti-PD-1 antibody, is being considered a significant top-line driver for this New York-based pharma giant.
Bavencio is already approved in metastatic Merkel cell carcinoma in the United States, Europe and Japan. It has also received accelerated approval for second-line treatment of locally advanced or metastatic urothelial carcinoma in the United States. Pfizer is focusing on continuously growing and expanding Bavencio into new indications and markets globally. Pfizer has developed Bavencio with its Germany-based partner Merck KGaA MKGAF.
Two leukemia treatments — Besponsa for relapsed/refractory acute lymphoblastic leukemia (ALL) and Mylotarg for newly diagnosed CD33-positive acute myeloid leukemia (AML) — were approved in the United States in 2017 and have started adding to sales.
Pfizer is also working on expanding the label of Ibrance and Xtandi.
Key drugs in Merck’s oncology portfolio are Keytruda (several cancers) and Lynparza (ovarian and breast cancer). Keytruda is the second largest drug in Merck’s portfolio and is already approved for use in 12 indications across eight different tumor types in the United States
Though Merck does not have many cancer candidates in its pipeline, it is conducting numerous studies to evaluate Keytruda for more than 30 types of cancer in more than 800 studies, including more than 400 combination studies. Keytruda is being studied in phase III studies for breast, colorectal, esophageal, gastric, head and neck, hepatocellular, nasopharyngeal, renal and small-cell lung cancers while Lynparza, which Merck markets for ovarian and breast cancer in partnership with AstraZeneca AZN, is being evaluated for pancreatic and prostate cancer.
Promising Non-Oncology Pipeline
Merck has many pipeline candidates in advanced stages of development targeting multiple disease areas such as cardiovascular diseases, diabetes, infectious diseases, neurosciences, obesity, pain, respiratory diseases, and vaccines. Some of the important pipeline candidates include MK-7655A (relebactam+imipenem/cilastatin) (bacterial infections),MK-7264 (refractory, chronic cough), V920 (Ebola vaccine), V114 (pneumococcal vaccine) and MK-1242/vericiguat (chronic heart failure).Key recent approvals for Merck include that of Steglatro and its fixed-dose combinations for type II diabetes, two new HIV drugs — Pifeltro and Delstrigo — containing doravirine and Prevymis (letermovir) for cytomegalovirus (CVM) infection.
Other than oncology, Pfizer has committed significant resources toward the development of treatments for metabolic disease and cardiovascular risks, rare diseases, immunology, inflammation and vaccines as well as immuno-oncology. Pfizer expects approximately 25 to 30 drug approvals through 2022. Of these, around 15 products have blockbuster potential, including line-extensions for Xtandi, Ibrance & Xeljanz/XR. Half of these potential blockbusters are expected to receive approval by 2020.
Interesting non-oncology pipeline candidates include Vyndaqel/tafamidis(transthyretin cardiomyopathy), PF-04965842 (JAK selective inhibitor for atomic dermatitis) tanezumab (osteoarthritis pain, chronic low back pain, and cancer pain) and fidanacogene elaparvovec/PF-06838435(gene therapy for hemophilia B).
These new products and line extensions should bring in additional sales for both the companies in the future quarters.
Active on Licensing/Collaboration Front
Both Pfizer and Merck, in order to build their long-term portfolio, are tapping external sources. Both have entered into several licensing deals in the past few years and are targeting more such deals. In June 2018, Merck acquired an Australian company Viralytics Limited. In March 2018 and July 2017, it entered into profit sharing deals with Japan’s Eisai (for Lenvima) and AstraZeneca (for Lynparza and selumetinib), respectively.
Pfizer hasa co-marketing deal with Merck for Steglatro, with Bristol-Myersfor Eliquis, Japan’s Astellas for Xtandi and Merck KGaA for Bavencio.
Share Price, Key Metrics and Estimate Revisions
In terms of share price, both stocks have moved more or less in tandem and therefore it is difficult to single out a winner.
While shares of Merck have risen 24.3% so far this year that of Pfizer have rallied 19.4%, outperforming an increase of 6.3% for the industry.
Price Comparion of MRK and PFE
Merck’s earnings estimates for 2018 have gone up 1.2% while that for 2019 have moved up 2% in the past 60 days. Merck’s earnings performance has also been pretty impressive, with steady positive surprises. The average earnings beat for the last four quarters is 5.25%.
Pfizer’s earnings estimates for 2018 as well as 2019 went up 1% in the past 60 days. Its earnings performance has also been pretty impressive, with consistent positive surprises. The average earnings beat for the last four quarters is 6.46%.
However, in terms of the stocks’ valuation on a P/E basis, Pfizer has an edge.
A study of Merck’s forward twelve months price-to-earnings ratio (P/E F12M) shows that the stock is a little overvalued. The multiple currently stands at 15.58, stretched when compared to its own range (median of 13.96). In comparison with the industry, it is unfavorable as the current P/E F12Mfor the industry is 15.3.
Pfizer, meanwhile, is trading at a discount in terms of P/E F12M ratio. The multiple currently stands at 14.15 for Pfizer, representing a discount to the industry.
A Neck and Neck Contest
Without doubt, both Merck and Pfizer have delivered the goods this year and choosing between the two is a tall order. Both have their share of strengths and weaknesses. Pfizer and Merck are facing genericization of several products and competitive pressure on some key drugs. They have also suffered pipeline and regulatory setbacks. So, we can say that the two companies stand on an equal footing ahead of the fourth quarter and next year.
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