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We believe that Eli Lilly stock (NYSE: LLY) is currently a better pick than its industry peer – Pfizer stock (NYSE:PFE), given its better prospects. PFE stock trades at a much lower multiple of 2.8x revenues, versus 23.5x for LLY, and we think this gap in valuation will remain wide in favor of Eli Lilly. There is more to the comparison, and in the sections below, we discuss why we think LLY will outperform PFE in the next three years. In this analysis, we compare a slew of factors, such as historical revenue growth, returns, and valuation.

1. LLY Stock Has Fared Much Better In The Last Three Years

PFE stock has seen a decline of 15% from levels of $35 in early January 2021 to around $30 now, while LLY stock has seen extremely strong gains of 450% from levels of $170 to around $935 over this period. This compares with an increase of about 50% for the S&P 500 over this roughly three-year period. Admirably, LLY stock has outperformed the broader market in each of the last three years. However, the decrease in PFE stock has been far from consistent. Returns for PFE were 60% in 2021, -13% in 2022, and -44% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that PFE underperformed the S&P in 2023.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Health Care sector including UNH and JNJ, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could PFE and LLY underperform the S&P over the next 12 months — or will they see higher levels? While we expect both stocks to trend higher, Eli Lilly will likely outperform Pfizer.

2. Pfizer Has Seen Better Revenue Growth But the Future Belongs To Eli Lilly

Pfizer’s revenue rose at an average annual rate of 25.6% from $41.7 billion in 2020 to $58.5 billion in 2023, while Eli Lilly saw its top-line expand at an average annual rate of 11.9% from $24.5 billion to $34.1 billion over the same period.

Pfizer’s revenue over 2021 and 2022 surged due to a very high demand for its Covid-19 vaccine and treatment. But this trend reversed in 2023, with its total sales falling a large 42% y-o-y, amid lower Covid-19 vaccine demand. Lately, the company is facing increased competition for its blockbuster vaccine – Prevnar – which saw its sales growth slow to 1.6% last year versus 20.2% growth in 2022. On the positive side, a strong uptick in Vyndaqel and Abrysvo has aided the overall sales growth lately. Pfizer is also benefiting from its Seagen acquisition, which is expected to add $10 billion to the company’s top-line by 2030, compared to the $3 billion contribution expected in 2024.

Eli Lilly’s revenue growth can be attributed to market share gains for some of its drugs, including Mounjaro, Verzenio, and Zyprexa. Eli Lilly’s diabetes drug – Mounjaro – and its obesity drug – Zepbound – are expected to see explosive growth in coming years, with annual peak sales pegged at a whopping $50 billion. In fact, there is a shortage of Zepbound drug currently, and Eli Lilly is working on capacity expansion to keep up with its demand. Zepbound sales would be even higher if Eli Lilly were to meet the current demand. Furthermore, Eli Lilly has a solid pipeline potential, primarily from its obesity drugs. The rise in Eli Lilly’s P/S ratio lately is primarily based on its future potential.

Looking forward, we expect Pfizer’s revenue to rise at an average annual rate of 3% from $58.5 billion in 2023 to $64.1 billion in the next three years. In contrast, we expect Eli Lilly’s sales to grow at a much faster annual rate of 23% from $34.1 billion to $64 billion over this period.

3. Eli Lilly Is More Profitable And Has A Better Debt Position

Pfizer’s reported operating margin declined from 21.2% in 2020 to 5.7% in 2023, while that for Eli Lilly increased from 28.9% to 31.6%. Although Eli Lilly increased its investments in research and development, with total R&D expenses rising 53% between 2020 and 2023, it cut its SG&A costs. The latter rose only 18% over the same period. The 36% rise in SG&A and R&D expenses combined was still lower than the 39% revenue growth over this period. Pfizer incurred restructuring costs and acquisition related charges associated with Seagen that has weighed on its margin.

Looking at financial risk, both companies are comparable. Given the massive rise in Eli Lilly’s stock, its debt as a percentage of equity is now just 3%, compared to 44% for Pfizer. The Seagen acquisition has led to a significant 2x rise in Pfizer’s debt levels to $68 billion, compared to $35 billion in 2022. Pfizer’s 5% cash as a percentage of assets is marginally higher than 4% for Eli Lilly. This implies that Pfizer has more cash cushion, while Eli Lilly has a better debt position.

The Net of It All

We see that Eli Lilly is more profitable and has a better debt position. On the other hand, Pfizer has seen better revenue growth in the last three years, and it has a better cash cushion. Now, looking at prospects, we still think Eli Lilly is a better pick, given its robust prospects. From a valuation perspective, PFE stock does look attractive, trading at 2.9x sales versus 3.7x average P/S over the last four years. In comparison, LLY stock trades at 23.5x sales, versus 11.1x average over the last four years. However, a rise in valuation multiple for Eli Lilly makes sense given the massive uptick in revenues expected from its diabetes and obesity drugs, along with a promising pipeline. It will take a while for Eli Lilly to even start meeting the current demand for Zepbound. With regulatory approvals for more indications likely, there could be even more upside for potential peak sales of Eli Lilly’s key drugs. Overall, we think that despite a stellar 450% rise in the last three years, Eli Lilly remains a better pick over Pfizer. While we think PFE stock will also see higher levels, the growth in LLY will likely outpace it.

While LLY may outperform PFE in the next three years, it is helpful to see how Pfizer’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 7/10/2024
[2] Cumulative total returns since the end of 2016

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.