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Better Buy: GlaxoSmithKline plc vs. Eli Lilly and Company

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Don't think that Big Pharma stocks march in lockstep. GlaxoSmithKline's (NYSE: GSK) stock price is lower than it was five years ago. During the same period, the share price of Eli Lilly (NYSE: LLY) has more than doubled. But which of these two pharmaceutical stocks seems poised to outperform going forward? Here's how Glaxo and Lilly compare.

Why buy GlaxoSmithKline?

We can't gloss over the fact that GlaxoSmithKline faces challenges. Sales for the biggest revenue-generating drug in the company's lineup, Seretide/Advair, fell 16% year over year in the first half of 2016. Likewise, sales for its top-selling vaccine, Infanrix/Pediarix, decreased by 16%.

Probably the single most compelling reason to buy Glaxo is that things should get better. Analysts expect the drugmaker's earnings to grow by 10% annually over the next five years. That would be a huge improvement over its recent performance.

Is that growth rate really attainable? Probably. Glaxo's other products are already doing well enough to make up for the sales declines of its fading stars. Sales for HIV drugs Tivicay and Triumeq are soaring. The company also claims multiple products that might not be blockbusters, but combine to generate solid revenue.

The real potential for GlaxoSmithKline, however, comes from its pipeline. It has 15 drugs and vaccines currently in phase 3 clinical studies. Autoimmune disease drug sirukumab and shingles vaccine Shingrix stand out as solid prospects.

Another reason to buy Glaxo is its dividend. Who wouldn't like a yield of 4.48%? The company might have to reduce the dividend payment at some point; however, even if a smaller payout is on the way, my guess is that the company will continue to distribute a reasonably attractive dividend. 

Why buy Eli Lilly?

Much of Lilly's past success has come on the strength of its insulin product Humalog and its cancer drug Alimta. However, both saw lower sales in the first half of 2016 than in the prior-year period. Humalog's patent expired in 2013, and Lilly is in the middle of litigation to defend its patent protection for Alimta.

The company also faces the loss of U.S. and European patents for Cialis in 2017. That presents another huge challenge. Cialis ranked as Lilly's No. 2 drug in sales during the first half of this year.

How will Lilly replace lost revenue from these drugs? Sales for diabetes drug Trulicity are surging. The drugmaker also hopes to gain regulatory approval in the near future for two potential winners -- rheumatoid arthritis drug baricitinib and sarcoma drug olaratumab. 

Lilly's pipeline includes 18 treatments in late-stage clinical studies. Two potential Alzheimer's disease drugs are in the mix: solanezumab and AZD3293 (which Lilly is developing with partner AstraZeneca).  Goldman Sachs analyst Jami Rubin thinks solanezumab could reach peak annual sales of $7.5 billion if approved. Other analysts see a number closer to $3 billion as more realistic. 

Thanks to these late-stage prospects and plenty more in phase 2, Wall Street expects Lilly will be able to grow earnings at nearly 13% annually over the next five years.These estimates, of course, assume the drugmaker is able to realize much of its pipeline potential.

While Lilly's yield isn't as lofty as Glaxo's, it still stands at a respectable 2.57%. Even better, Lilly has promised to increase its dividend.

Better buy

GlaxoSmithKline and Lilly face similar challenges. Both are relying on their pipelines to deliver revenue and earnings growth to make up for declining sales of older drugs. 

Which is the better buy? Both companies' pipelines come with considerable risk. That being said, Lilly should be able to grow earnings somewhat faster, which is why it gets the nod as the better choice for long-term investors.

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Keith Speights has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.