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Pfizer Inc Vs. Merck & Co: Which Pharmaceutical Giant Should You Buy?

Summary

Pharmaceutical giants are attractive investments both from growth and income perspectives.

Two of the biggest, PFE and MRK have recently caught my attention as potential new investments. Yet which should you choose?.

Although a close run thing, I argue that PFE continues to be a more appealing investment today than MRK for dividend growth investors.

The mega-cap pharmaceutical giants have interested me recently. Having recently freed up a little capital, I am looking to boost my exposure to this attractive secular growth industry. Already I have large holdings in GlaxoSmithKline (NYSE:GSK)- whose Q1 results I recently reviewed-and AstraZeneca (NYSE:AZN) as well a much smaller position in Johnson & Johnson (NYSE:JNJ) who I last fully reviewed in late-2015.

Whilst GlaxoSmithKline and AstraZeneca are full positions for me, Johnson & Johnson is not and I will be looking to build up in time. Yet I'd like to add a new healthcare position if there is an attractive option out there.

Two mega-cap pharma plays which have attracted my attention for some time are Pfizer (NYSE:PFE) and Merck & Co (NYSE:MRK). These are, for me, the front-runners in this particular race. Although I covered Pfizer back in December, Merck has never received my attention before. Yet which should I consider adding to my portfolio? Here I plan to pitch the two against one another to see whether one of them comes out on top.

Diversification

First, let's consider their revenue diversification. Since Merck sold its consumer care segment back in October 2014, the Kenilworth-based company has become far less diverse on this front than its New York rival:

With over 20% of its revenue coming from either consumer healthcare (my favoured form of diversification) or vaccines its revenue stream appears more attractively diversified. Yet, Merck's animal health segment is a highly attractive asset. Nonetheless, I would argue Pfizer leaves this stage ahead.

I'd also argue that Pfizer's drug pipeline looks stronger. I judge this by a crude but useful measure: Pharma Revenue per Drug Trial. In other words, looking as the Phase III and Phase II drug trials I divide the revenue derived from pharmaceuticals by the number of trials in progress to give the amount of revenue each drug being trialed is needed to replace the entire current pharma revenues. Although lacking nuance, I have found this a useful measure to quickly and easily compare pipeline strength. On that front, Pfizer and Merck both have robust looking pipelines:

Yet clearly Pfizer has a more advanced one with regards to simply numbers. If we divide the FY2015 pharmaceutical revenues it is clear that Pfizer looks better placed at present:

Pfizer's revenue per Phase III trial is lower at $1,283 million rather than Merck's $1,391 million suggesting their Phase III pipeline is stronger. Pfizer's Phase II pipeline is even more impressive compared to Merck's at $2,139 million as opposed to $3,162 million.

All told, Pfizer has a greater degree of revenue diversification beyond the more "boom and bust" pharmaceutical industry. Similarly, its pipeline appears stronger than Merck's at present. Pfizer takes the lead here.

Revenue

Next let's look at their revenue figures. Patent cliff discussions have, of course, been swirling around almost every mega-cap pharma in recent years...


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