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Pfizer Inc. (PFE), Merck & Co., Inc. (MRK): Which Pharmaceutical Giant Is the Best Investment?

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Amid sluggish sales growth, the Pharmaceutical Industry giants are struggling with declining revenues and profits. Banking on the introduction of new blockbuster drugs and securing new FDA approvals is essential for survival in the industry. In the following article I aim to analyze how Pfizer Inc. (NYSE:PFE) and Merck & Co., Inc. (NYSE:MRK) are catering to the changing industry dynamics, with Novartis AG (ADR) (NYSE:NVS) taking the lead.

Pfizer Inc. (NYSE:PFE)

Recent Events:

Lower overall costs, improved performance and fiscal discipline have helped Pfizer Inc. (NYSE:PFE) to increase its profits by 53%, during the first quarter. Revenues from Emerging Markets grew 6%, with emerging markets accounting for 20% of the total sales. However, Pfizer Inc. (NYSE:PFE)’s revenue dropped by 9% quarter-over-quarter, due to loss of exclusivity on various products for instance patent expiration on blockbuster drugs like Lipitor and Viagra coupled with slower than expected sales growth of two of its new top pills.

Pfizer Inc. (NYSE:PFE) has been aggressively pursuing share buybacks, with recently announcing a $10 billion share repurchase in exchange for its equity in Zoetis , hence completely spinning off its Animal health care business. Furthermore, the company aims to divest all of its non-pharmaceutical and generic drug business in order to focus on its core prescription drug business, which has far higher profits.

For Novartis AG (ADR) (NYSE:NVS),2% surge in sales resulted in a year-over-year increase of 7% in its net income. Growth products (products with patent lasting up till 2017 in key markets such as US, EU and Japan) grew by 14%, contributing a total of 30% to the net sales. Growth in net income is attributable to surge in the growth rates of growth products, accelerated growth of emerging markets by 9% coupled with cost reductions

Additionally, Serelaxin, a heart drug gets the status of a breakthrough drug by FDA, which would potentially rake as much as 2.5 billion dollars in annual sales. However, the company has been able to secure 8 key approvals for drugs in its pipeline across the pharmaceutical divisions, which is responsible for more than half of its sales. Along with that the Novartis AG (ADR) (NYSE:NVS) is filing NDAs for several existing drugs to extend their uses in other indications. Moreover, it has secured 2 drug approvals in China. One of which is Galvus, used to treat Type II diabetes, considering China has the largest population of diabetic patients reaching 75 million this year.

Merck & Co., Inc. (NYSE:MRK) in its latest quarterly report reported a 9% decline in its sales, attributable to patent expiry on block buster drugs such as Singulair, Clarinex and Maxalt. Due intense competition from generic drug business, the company’s net income took a hit of 8.3%. Moreover, Januvia, a drug which has always posted double digit gains ever since it has gone on sale, decline by 4% this quarter.

The pharmaceutical division accounts for 83% of the total sales for the company; hence the company is heavily exposed to lower sales and revenues, since Merck & Co., Inc. (NYSE:MRK) is suffering from patent expiry of several major drugs. On the other side, Merck & Co., Inc. (NYSE:MRK) is buying back $15 billion worth of its shares to supports it’s earning amid pressure on its sales; helping Merck & Co., Inc. (NYSE:MRK) to execute and achieve its EPS targets.

Competition:

Indicator Pfizer Novartis Merck
Price/Earnings TTM 20.3 18.7 24.6
Price/book 2.5 2.7 2.8
Revenue Growth (3 Yr. average) 5.7 8.5 19.9
Net Income Growth (3 Yr. average) 19.1 4.2 -21.8
Return on Equity 18.8 14.8 11.2
Dividend Yield, % 3.19% 3.44% 3.52%
Current Price $28.81 $73.65 $48.54

Data from Morningstar on July 13th, 2013

Novartis AG (ADR) (NYSE:NVS) offers the 2nd highest dividend yield among the three rivals.

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