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Pfizer or Merck: Which Pharma Stock Has More Upside Potential?

support@smarteranalyst.com (Ben Mahaney)
·7 min read

With COVID-19 cases continuing to surge, the attention of the whole world is currently on pharma companies developing potential treatments and vaccines for the virus. But there are other pharma and biotech stocks out there that are also worth tracking- companies with blockbuster drugs, strong pipelines and attractive dividends.

Here we will use the TipRanks Stock Comparison tool to place Pfizer and Merck alongside each other and see which pharma giant offers a more compelling investment opportunity.

Pfizer (PFE)

Pfizer investors seem to be disappointed with the company’s performance in the third quarter and the latest update about its COVID-19 vaccine candidate (BNT162b2) which it is developing in collaboration with BioNTech (BNTX). Pfizer, which is a leading player in the COVID-19 vaccine race, had earlier said that it expects a conclusive readout on the efficacy of the vaccine by the end of October.

But on its 3Q conference call held on Oct. 27, the company said “..we may know whether or not the vaccine demonstrates efficacy soon. In case of a conclusive readout, positive or negative, we will inform the public as soon as we complete the necessary administrative work, which we estimate to be completed within one week from the time we know.” However, it said that it expects to apply for emergency use authorization with the FDA in the third week of November if the safety milestone is achieved.

Meanwhile, Pfizer delivered mixed 3Q results with earnings beating expectations but revenue falling behind. Adjusted EPS in the quarter declined 4% to $0.72 as revenue fell 4.3% Y/Y to $12.1 billion with the pandemic impacting the top-line by $500 million. The company’s biopharma revenue grew about 3% to $10.2 billion in 3Q while Upjohn (the off-patent drugs unit) continued to be a drag on Pfizer’s performance with an 18% drop in revenue to $1.9 billion.

Pfizer is spinning off its Upjohn unit to Mylan and expects the transaction to be completed this quarter. It believes that following the Upjohn separation it will be a smaller but more focused and innovative biopharma company. Excluding the Upjohn business, it expects a five-year revenue growth rate (CAGR) of at least 6% on a risk-adjusted basis and adjusted EPS growth of about 10%.

Within the biopharma business, Pfizer’s rare heart disease drugs Vyndaqel and Vyndamax delivered revenue of $351 million in 3Q, reflecting a 125% growth. The company also experienced continued strength in its key drugs like Eliquis, Ibrance, Xeljanz, Inlyta and Xtandi. Also, revenue from biosimilars rose 80% to $424 million due to recent launches of oncology biosimilars Ruxience, Zirabev and Trazimera in the US and the continued growth of Retacrit.

Meanwhile, Pfizer has a strong product pipeline, which has 92 programs, including 21 in Phase 3 and 6 in the registration phase. (See PFE stock analysis on TipRanks)

Following the earnings release and the commentary on the COVID-19 vaccine, Mizuho Securities analyst Vamil Divan reiterated his Buy rating for Pfizer with a price target of $43. The analyst stated, “It appears Pfizer has wisely decided to no longer provide running updates on the progress of the trial and, instead, will next communicate when they have conclusive results (positive or negative) from the DMC[data monitoring committee]. We continue to see upside from the vaccine and, more importantly, the rest of Pfizer's pipeline.”

The rest of the Street is cautiously optimistic about Pfizer. A Moderate Buy consensus for the stock is based on 4 Buys versus 8 Holds and no Sells. With shares down 9.5% so far in 2020, the average analyst price target of $41.36 indicates an upside potential of 16.7% in the months ahead.

Merck (MRK)

Merck’s strength lies in its oncology drug Keytruda, which has accounted for over 29% of the company’s sales in the first nine months of 2020. Over recent years, Merck has been able to extend the use of Keytruda beyond melanoma and lung cancer by winning approvals for several other indications like cervical cancer and esophageal cancer. The drug is in Phase 3 trials for several new indications like ovarian cancer, prostate cancer and others, which if approved will further boost Keytruda’s growth prospects.

Merck’s oncology portfolio is also gaining strength from Lynparza and Lenvima. The company’s strong oncology sales along with growth in its Animal Health business helped it in delivering better-than-anticipated results in the third quarter. Merck’s 3Q sales grew 1.2% to $12.6 billion driven by a 21% rise in Keytruda sales to $3.7 billion and a 9% growth in Animal Health sales to $1.2 billion.

The pandemic dented Merck’s 3Q pharmaceutical sales by $475 million due to reduced access to healthcare providers and a weak back-to-school demand, which affected vaccine sales. Overall, Merck’s adjusted EPS grew 15.2% to $1.74 in 3Q despite pandemic-related pressures. Following the 3Q results, the company raised its 2020 adjusted EPS guidance to the range of $5.91 to $6.01 from the prior forecast of $5.63 to $5.78. The company expects full-year revenue between $47.6 billion to $48.6 billion.

Speaking about Merck’s 2020 guidance, Mizuho Securities analyst Mara Goldstein noted, “Key drivers of this include a faster-than-anticipated return to growth in many franchises, accompanied by lower COVID-19-related spend, other expense management and higher income from equity security investments. As a result, our new FY20 non-GAAP EPS is now $6.07 (up from $5.79), representing a 17% increase from FY19, and above the top end of MRK's guidance, but doable in our view given the strong beat.”

As part of its efforts to further strengthen its position in the oncology space, Merck inked a deal with Seagen (formerly Seattle Genetics) under which it will acquire a $1 billion equity stake in Seagen stock and make certain upfront payments. As part of two new strategic collaborations, the companies will co-develop and co-commercialize Seagen’s cancer drug ladiratuzumab vedotin and will also accelerate the global reach of Seagen’s cancer therapy Tukysa . (See MRK stock analysis on TipRanks)

With regard to COVID-19 developments, Merck is working on two vaccines—V590 in collaboration with IAVI (International AIDS Vaccine Initiative) and V591, which it acquired with the June acquisition of the Austrian vaccine maker Themis Bioscience. It has also teamed up with Ridgeback Biotherapeutics to develop an oral antiviral candidate for COVID-19. This compound is in two large Phase 2/3 clinical trials.

Meanwhile, Merck is on track to complete the spin-off its women’s health, biosimilars and legacy products business into a company called Organon. The spin-off is expected to be completed in 2Q21 and will help Merck focus on its oncology, vaccines and animal health businesses. Merck’s pipeline (as of July) included 24 Phase 3 trials.

Merck shares have declined 16.2% year-to-date. The average analyst price target of $95.91 indicates an upside of 25.9% in the coming months. The stock scores a Moderate Buy analyst consensus based on 8 Buys, 3 Holds and no Sells.

Conclusion

Dividend savvy investors might prefer Pfizer over Merck based on Pfizer’s dividend yield of 3.98% compared to Merck’s yield of 3.06%.

However, about 33% of analysts covering Pfizer have a Buy rating for the stock compared to 73% in the case of Merck. Aside from a more bullish sentiment, the continued strength in Merck’s cancer drug Keytruda and the higher upside potential in the stock make Merck appear a better pharma pick than Pfizer currently.

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment

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