Australia Markets open in 1 hr 7 mins

Better Buy: Pfizer vs. AbbVie

Keith Speights, The Motley Fool

Pfizer (NYSE: PFE) and AbbVie (NYSE: ABBV) have a lot in common. Both big drugmakers are about to experience the impact of a major blockbuster losing market share. Both have promising new drugs and pipelines. Both have rewarded shareholders with great dividends. And both companies have announced acquisitions of Allergan, although Pfizer ultimately called off its proposed buyout.

There's also another common denominator for Pfizer and AbbVie: Both stocks are underperforming the broader market so far this year. But both stocks also arguably have good long-term prospects. Which big pharma stock is the better choice?

Man with hand held to the side of his head looking at a wall with arrows pointing left and right.

Image source: Getty Images.

The case for Pfizer

Pfizer certainly faces a big challenge with its blockbuster drug Lyrica losing patent exclusivity. It's inevitable that the company is about to enter a serious sales slump as a result. Even with this headwind, though, there's a good argument for Pfizer over the long run.

It's important to think past 2020. Declining sales for Lyrica will weigh heavily on Pfizer over the next 18 months or so. After then, though, the company will begin to move past its Lyrica blues. Pfizer's Upjohn segment, which includes drugs like Lyrica that have lost patent exclusivity or will soon do so, should be able to deliver modest revenue growth beginning in 2021.

More important, Pfizer's biopharmaceuticals segment boasts an impressive roster of drugs that should generate strong growth and several very promising pipeline candidates to boot. Pfizer's two biggest rising stars, breast cancer drug Ibrance and anticoagulant Eliquis (which the company co-markets with Bristol-Myers Squibb), continue to enjoy strong momentum.

Several recently approved drugs could be winners for Pfizer as well. These include lung cancer drugs Lorbrena and Vizimpro, breast cancer drug Talzenna, and rare-disease drug Vyndaqel. Pfizer's pipeline currently has 26 late-stage programs, with pain drug tanezumab and experimental pneumococcal vaccine PF-06482077 among the especially promising candidates.

Pfizer's acquisition of Array BioPharma will also add two great drugs to its lineup: Braftovi and Mektovi. A combination of the two drugs is already approved to treat melanoma. The chances appear to be pretty good that the drugs in combination with Eli Lilly's Erbitux will also win approval as a treatment for colorectal cancer.

Don't overlook how important Pfizer's dividend is, either. The dividend yield currently stands at nearly 3.4%. Over the last 10 years, dividends boosted Pfizer's total return by nearly 69%.

The case for AbbVie

AbbVie's big headwind is the onslaught of biosimilar competition in Europe for its top-selling drug, Humira. Biosimilars will hit the U.S. market in 2023. But AbbVie has known for years that this threat was on the way and has built a strong lineup and pipeline in anticipation of a post-Humira world.

Cancer drug Imbruvica is the most important part of this strategy. Market researcher EvaluatePharma predicts that Imbruvica will become the No. 5 best-selling drug in the world by 2024, with sales more than doubling from 2018 levels. (By the way, Humira is projected to slip from No. 1 to No. 2 -- still pulling in an impressive $12.4 billion in 2024.)

Skyrizi, one of two drugs that AbbVie has groomed to be a successor to Humira, won FDA approval in April 2019. AbbVie thinks that Skyrizi will generate annual sales of around $5 billion by 2023. The company hopes to soon win approval for upadacitinib in treating rheumatoid arthritis. It could be an even bigger winner than Skyrizi over the long run, with projected peak annual sales of $6.5 billion. 

In addition, several other current drugs and pipeline candidates could contribute nicely to AbbVie's growth. Orilissa is already approved for managing endometriosis pain and could add another approval in treating uterine fibroids. Sales are climbing for blood cancer drug Venclexta.

AbbVie plans to significantly reduce its reliance on Humira through its planned acquisition of Allergan. Assuming the transaction is finalized, Humira will account for less than 40% of AbbVie's total revenue compared to around 60% today.

Last but not least, there's AbbVie's dividend. It's hard not to like a dividend yield of nearly 6.3%. AbbVie's executives insist that the dividend will remain a top priority even with the company buying Allergan.

Better buy

I think that both AbbVie and Pfizer look like good long-term picks, and especially so for income-oriented investors. If I had to choose just one of these stocks, though, I'd go with AbbVie.

AbbVie's shares trade at only 7.3 times expected earnings. I think that valuation is too low considering the overall picture for the company. With its mouthwatering dividend yield, AbbVie stock doesn't have to rise much to deliver strong total returns. Although I have been skeptical about the Allergan acquisition, my view is that AbbVie still appears to be a bargain that should pay off over the long run.

More From The Motley Fool

Keith Speights owns shares of AbbVie and Pfizer. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.