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Better Buy: GlaxoSmithKline plc vs. Bristol-Myers Squibb

Big pharma stocks are arguably set to shine now that the threat of hard caps on drug prices is off the table. Global prescription drug sales, after all, are forecast to grow at a healthy 6.5% per year for the next five years running, according to EvaluatePharma. 

Keeping this theme in mind, GlaxoSmithKline plc (NYSE: GSK) and Bristol-Myers Squibb (NYSE: BMY) are two top big pharma stocks that appear to be well positioned to take advantage of this rising tide. But which stock is the better buy right now?

Image source: Getty Images.

The case for GlaxoSmithKline

Despite the imminent release of a biosimilar version of its top-selling asthma medication, Advair, analysts at Mizuho Securities think Glaxo can still grow its bottom line at a compound annual growth rate (CAGR) of 6% and its top line by a 5% CAGR, over the next five years. That would put Glaxo in the meaty middle in terms of growth among all large-cap pharmas. 

To do so, Glaxo is going to need to keep the momentum headed in the right direction for its newer respiratory medicines, such as Anoro and Breo Ellipta. It will need to have its shingles vaccine, Shingrix -- which is under review in the U.S. and EU -- perform as expected. And it may want to tack on a bolt-on acquisition or two to flesh out its pharma portfolio.

Having said all that, Glaxo is arguably under considerably less pressure now than it was just a year ago, thanks to the stellar performance of its meningitis B shot, Bexsero, that's on track to reach blockbuster status by perhaps 2021. Less than 12 months ago, Bexsero's peak sales were forecast to top out at a mere $570 million in 2025. The key takeaway is that Glaxo now has another bona fide growth product in its portfolio that can help offset any forthcoming losses from Advair. 

The bad news is that even Mizuho's above-average growth estimates may not be enough to stave off a reduction to the drugmaker's top-notch dividend. Glaxo pays a handsome 4.5% dividend, but it also has one of the higher 12-month trailing payout ratios, at 225%, and the company's new management appears to be gearing up for an acquisition that may draw even more free cash away from shareholder rewards.  

The case for Bristol-Myers Squibb

Bristol's top line is forecast to grow at a respectable 5% per year heading into 2021, but its bottom line is expected to rise even faster, at a CAGR of 10% over the next four years. These respectable growth metrics reflect Bristol's strong portfolio of growth products that include immuno-oncology star Opdivo, next-generation blood-thinner Eliquis, and rheumatoid arthritis medicine Orencia, as well as management's renewed focus on improving the company's operational efficiency. Put simply, Bristol is a fundamentally sound growth stock.

The big knock against Bristol, though, is that Opdivo is set to lose major ground to Merck's Keytruda. EvaluatePharma, for example, predicts that Keytruda's sales should grow at a stunning 34% CAGR in the next five years because of its breakthrough in first-line non-small-cell lung cancer (NSCLC), combined with Opdivo's flop in this high-value indication as a monotherapy. Opdivo, by contrast, is believed to be on track to lose its position as the top-selling PD-1 inhibitor to Keytruda by 2022 -- showing the huge impact of this clinical setback

Opdivo's initial miss in NSCLC is arguably amplified by the fact that the drugmaker lacks another standout clinical candidate. In fact, Bristol didn't have a single drug candidate land in the top 20 of the most valuable research projects in a recent report. The basic issue is that Bristol is extremely focused on Opdivo's development as a backbone therapy in a host of potential combination medicines. This laser-like attention to Opdivo may prove to be the right course of action, but Bristol can't afford many more missteps in the clinic as a result. 

On the bright side, Bristol's 2.8% dividend does come across as rock solid. In addition to raising its dividend for eight consecutive years, the drugmaker also sports a reasonable 12-month trailing payout ratio of 53.4%, and the company's free cash flows are headed in the right direction. 

Which stock is the better buy? 

If you're looking for modest growth, a sustainable dividend, and a low-risk profile, Bristol is by far the better bet. While Glaxo's turnaround is starting to materialize, the drugmaker's capital-allocation strategy may change markedly under its new leadership, leaving the sustainability of its dividend in question. Although Bristol's forward PE of 19 is higher than Glaxo's 15, Bristol also has a proven growth platform with Opdivo, Eliquis, and Orencia, whereas Glaxo's pivot toward vaccines as its core growth driver is still in "prove-it" mode for the most part. 

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George Budwell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.