Better Buy: Johnson & Johnson vs. Eli Lilly

Investors couldn’t go wrong choosing between Johnson & Johnson (NYSE: JNJ) and Eli Lilly and Co. (NYSE: LLY) a decade ago. Over the past 10 years, the big pharma stocks delivered a respective 152% and 163% total return. That makes it awfully tempting to buy shares of each and call it a day — but past performance doesn’t guarantee future results.

Which of these two stocks makes the most sense for investors to buy now? Here’s how Johnson & Johnson stacks up to Eli Lilly.

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The case for Johnson & Johnson

The world’s largest healthcare conglomerate is selling more pharmaceuticals than ever, but its slower-growing medical device and consumer goods operations still contribute 51% of total revenue. All three segments are moving in the right direction, and a stable of new cancer treatments could keep the needle moving forward.

Johnson & Johnson’s share of blood cancer drug Imbruvica contributed $587 million to the top line in the first quarter and could climb to $4 billion annually as the first chemo-free treatment option for people newly diagnosed with the most common form of leukemia. But Imbruvica isn’t the only blood cancer drug that’s pushing up J&J’s top line. Sales of a multiple myeloma therapy that launched in 2015 called Darzalex rose 69% on year to reach an annualized $1.7 billion run rate during the first quarter.

The National Cancer Institute thinks 161,360 Americans received their first prostate cancer diagnosis last year, and between 10% and 20% of their tumors won’t respond to standard hormonal treatments. Earlier this year, Erleada became the first drug specifically approved to prevent this group’s tumors from spreading.

During a long clinical trial leading to its approval, a majority of patients treated with Erleada went 40.5 months without signs of metastasis versus just 16.2 months in the group given a placebo. Erleada carries a $10,900 per month list price that could push J&J’s top line $4 billion higher each year if it becomes a popular option among the fairly large group of patients it’s approved to treat.

Erleada, Darzalex, and Imbruvica were all discovered by other companies that sold rights to their drugs to Johnson & Johnson, and there could be more deals ahead. Strong profits from drug sales helped the company churn out an impressive $18.1 billion in free cash flow that it can use to assemble more growth driving new drugs. Strong cash flows have also allowed J&J to reward shareholders with a dividend that’s risen 36.4% over the past five years and offers a 2.9% yield at recent prices.

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The case for Eli Lilly and Co.

This big pharma nudged its dividend just 14.8% higher over the past five years, as sinking sales for aging drugs have limited the company’s overall performance. Losing patent protection for old cash cows like Cialis will continue to sting in the years ahead, but the company’s revenue mix is quickly shifting toward more recently launched products.

Sales of eight drugs launched since 2014 rose 80%, to a combined $1.45 billion during the first quarter of 2018. The stable of rookies kicked in 25% of the company’s total haul during the first three months of the year, up from 15% a year earlier.

Eli Lilly caught a tough break in the U.S. with a new rheumatoid arthritis tablet, but sales of the company’s next-generation diabetes treatments are on the move. Trulicity sales jumped 82%, to $678 million, and Basaglar, the company’s biosimilar version of Sanofi‘s Lantus, popped 261%, to $166 million.

Lilly recently took a bold step into the growing market for oncology treatments that enlist the immune system with a $1.6 billion cash buyout of ARMO Biosciences (NASDAQ: ARMO), to get its hands on pegilodecakin. ARMO’s lead candidate bolsters the immune system’s cancer-fighting ability in a way that appears to provide a survival benefit for advanced stage pancreatic cancer patients. A majority of people fitting this description expire within five to six months after beginning a common chemotherapy regimen. Lilly’s dealmaking radar went “beep” when ARMO reported 10.2 month median overall survival among a group of 21 patients who added pegilodecakin to standard care.

ARMO didn’t include a control group for comparison, so we’ll need to see results from an ongoing pivotal trial to know if pegilodecakin really makes a difference for this underserved population. If so, it could help Eli Lilly achieve double-digit top-line growth within a few years.

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In the numbers

Eli Lilly stock offers a 2.6% dividend yield, which is a bit less than you’d receive from shares of Johnson & Johnson at recent prices. Over the past year, both companies needed roughly half of the free cash flow they generated to make dividend payments. That gives both ample runways to make further increases in the years ahead.

Lilly shares trade at around 16.8 times this year’s earnings estimates, and the company is expected to grow its bottom line at an 11.8% annual rate over the next five years. That’s faster than J&J, which is being held back by a sluggish consumer goods segment. Johnson & Johnson’s a bit less expensive at just 15 times 2018 earnings estimates, but it’s only expected to grow its bottom line at a 7.8% rate in the years ahead.

If you’re more interested in a steadily growing income stream, Johnson & Johnson fits the bill, but I think investors buying Eli Lilly at recent prices have a slightly better chance of beating the market in the years ahead.

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Cory Renauer owns shares of Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson. The Motley Fool has a disclosure policy.

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