In this week’s blog post, I will compare two of the largest American multinational pharmaceutical companies – Pfizer Inc and Merck & Co. Using fundamental data, I will determine which one of these two stocks is the better investment. I will talk about the company overview, and then perform the fundamental analysis on each stock. Let’s dive in.
Pfizer (PFE) – Pfizer Inc. develops, manufactures, and sells healthcare products worldwide. It offers medicines and vaccines in various therapeutic areas, including internal medicine, vaccines, oncology, inflammation and immunology, and rare diseases under the Lyrica, Chantix/Champix, Eliquis, Ibrance, Sutent, Xalkori, Inlyta, Xtandi, Enbrel, Xeljanz, Eucrisa, BeneFix, Genotropin, and Refacto AF/Xyntha brands. The company also provides consumer healthcare products that comprise over-the-counter medicines, including dietary supplement products under the Centrum, Caltrate, and Emergen-C names; pain management products under the Advil and ThermaCare names; gastrointestinal products under the Nexium 24HR/Nexium Control and Preparation H names; and respiratory and personal care products under the Robitussin, Advil Cold & Sinus, and ChapStick names. In addition, it offers products that would lose or have lost marketing patent protection; branded generic products; generic sterile injectable products; biosimilars; and anti-infectives under the Lipitor, Premarin family, Norvasc, Lyrica, Celebrex, Viagra, Inflectra/Remsima, Zyvox, Vfend, Revatio, Inspra, Medrol, Sulperazon, Fragmin, Tygacil, Nivestim, and Retacrit, Ixifi Infliximab BS names. Further, the company is also involved in the contract manufacturing business. It serves wholesalers, retailers, hospitals, clinics, government agencies, pharmacies, and individual provider offices, as well as disease control and prevention centers. The company has collaboration and/or co-promotion agreements with Bristol-Myers Squibb Company, Astellas Pharma US, Inc., and Oncolytics Biotech Inc.; licensing agreement with BionTech AG; strategic alliance with Verily Life Sciences LLC; and collaboration agreements with Pfizer, Merck & Co., Inc., and Eli Lilly & Company, as well as Merck KGaA, Nektar Therapeutics, and Syapse, Inc.
Merck (MRK) – Merck & Co., Inc. provides healthcare solutions worldwide. It operates through four segments: Pharmaceutical, Animal Health, Healthcare Services, and Alliances. The company offers therapeutic and preventive agents to treat cardiovascular, type 2 diabetes, chronic hepatitis C virus, HIV-1 infection, intra-abdominal, fungal infection, insomnia, and inflammatory diseases. It also provides neuromuscular blocking agents; cholesterol modifying medicines; and anti-bacterial and vaginal contraceptive products. In addition, the company offers products to prevent chemotherapy-induced and post-operative nausea and vomiting; treat non-small-cell lung, ovarian and breast, thyroid, and cervical cancer, as well as brain tumors; and prevent diseases caused by human papillomavirus, as well as offers vaccines for measles, mumps, rubella, varicella, shingles, rotavirus gastroenteritis, and pneumococcal diseases. Further, it provides antibiotic and anti-inflammatory drugs to treat infectious and respiratory diseases, fertility disorders, and pneumonia in cattle, bovine, and swine; vaccines for poultry; parasiticide for sea lice in salmon; and antibiotics and vaccines for fishes. Additionally, the company offers companion animal products, such as ointments; diabetes mellitus treatment and anthelmintic products; products to treat fleas and ticks in dogs and cats; fertility management products for horses; vaccines for dogs, cats, and horses; and products for protection against bites from fleas, ticks, mosquitoes, and sandflies. It has collaborations with AstraZeneca PLC; Bayer AG; Eisai Co., Ltd.; Intec Pharma Ltd.; Nerviano Medical Sciences; and Healthy Interactions, Inc. The company serves drug wholesalers and retailers, hospitals, government agencies and entities, physicians, distributors, veterinarians, animal producers, and managed health care providers.
Pfizer’s product pipeline is improving with several successful recent drug launches such as Xeljanz (immunology drug) and Ibrance (breast cancer drug). Pfizer currently has 97 drugs in its pipeline. However, Pfizer has had some major cost cutting in research and development in the recent past; this could hurt Pfizer’s long term prospects because the late stage pipeline doesn’t look strong enough to drive robust growth. Furthermore, many of Pfizer’s late stage pipeline drugs are entering crowded markets, which could limit share gains due to delayed entry.
Merck’s Keytruda drug seems to be best positioned in the immuno-oncology landscape, and its Januvia drug appears to be potentially safer than other diabetes drugs. Both of these drugs should help Merck drive future growth. However, Merck could face generic competition on Januvia as early as 2022. Outside of oncology, Merck needs to increase the number of late stage pipeline drugs. Lastly, advancements in oncology can happen quickly, which could cause disruption to Keytruda, Merck’s leading growth driver.
As you can see in the table below, I compared each company’s profitability by looking at Return on Equity (ROE) % and Return on Invested Capital. I compared each company’s quality of cash flow by looking at Free Cash Flow to Net Income. I looked at each company’s financial health through Debt to Equity Ratio and Current Ratio. Lastly, I compared each company’s efficiency by looking at the Asset Turnover. The Price to Earnings (P/E) ratio gives us an idea of how expensive the stock price is compared to the company’s earnings. Here is the pdf version of the table below.
As we can see from the table above, Pfizer has the lower P/E ratio, but Merck has the better asset turnover ratio. Pfizer has the better Free Cash Flow to Net Income ratio, return on equity %, return on invested capital %, debt to equity, and current ratio. The fundamental numbers above show that Pfizer is slightly better than Merck. Now, let’s look at the intrinsic value and expected rate of return of each stock.
Intrinsic Value and Expected Rate of Return
I performed a Discounted Cash Flow (DCF) analysis with a 10% discount rate. As pictured below, I found the Intrinsic Value of PFE to be $31.28 per share, and MRK to be $43.34 per share. In comparison to the intrinsic value, the current price of PFE is $42.65 per share, and MRK is $81.75 per share. So, it looks like neither of these stocks are undervalued. Even though neither of these stocks are cheap, the difference between Pfizer’s intrinsic value and current price is smaller than that of Merck. So, Pfizer might be a safer bet than Merck. Here is the pdf version of the table below.
The last row in the table above is for Expected Rate of Return (RoR). If you were to invest your money at the current stock price, the expected RoR gives you an idea of what kind of annual return can you expect to get on that investment for the years to come. Expected RoR takes into account the Free Cash Flow (FCF) for the past 10 years, and the likelihood of FCF growth for the next 10 years. Here are the past and projected FCF arrays along with the Upperband, Lowerband, and Most Likely assumptions for PFE and MRK:
Looking at the free cash flows for the past 10 years, we can tell that Merck has a volatile chart, and Pfizer has a steadily declining chart since 2011. For both of these stocks, I assumed 10% likelihood of 5% FCF growth, 65% likelihood of 1% FCF growth, and 25% likelihood of (-3)% FCF growth. After taking this into account, I got an expected rate of return of 3.7% for Pfizer and 1.5% return for Merck.
Although neither of these stocks provide a margin of safety given its current stock price, Pfizer appears to be fundamentally superior to Merck. Moreover, Pfizer provides a higher expected rate of return than Merck. As a result, if I were given a choice today to invest in Pfizer or Merck, I would most likely pick Pfizer. Please note that I personally would not actually invest in either of these stocks since they do NOT provide any margin of safety (a huge difference between a stock’s intrinsic value and current price).
Hope you learned a little and found this blog post helpful. We analyzed 2 major pharmaceutical companies: Pfizer (PFE) and Merck (MRK). We compared various fundamental ratios, intrinsic values, and expected rate of returns. As always, you can sign up for our mailing list here. Like us on our Facebook page here. Thank you!
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Superior North LLC’s content is for educational purposes only. The calculators, videos, recommendations, and general investment ideas are not to be actioned with real money. Vyom Joshi is not a professional money manager or a financial advisor. Contact a professional and certified financial advisor before making any financial decisions