Pfizer Is 50% More Expensive Than Eli Lilly

Includes: LLY, PFE
by: Dividend Kings

Does your portfolio have any healthcare exposure? It should. We all know that the “baby boom” generation is aging. We know that they make up the largest population cohort in history. They will live for many years to come. One of their largest expenses? Healthcare.

Within the healthcare sector is the great cash cow of drugs. Why do I call it the cash cow? When you get sick and go to the hospital, chances are good that it will be a large onetime expense. When you have high cholesterol, you will take a medication for the rest of your life. Think of just about every disease that is apt to strike a baby boomer as she ages – and chances are good there is a pill to help treat it.

Let’s take a close look at two possible drug makers that you may want to add to a well-balanced portfolio. Eli Lilly (NYSE:LLY) and Pfizer (NYSE:PFE).

Both companies are world class with nice stables of medications and other healthcare items to sell. They both even have healthcare for pet divisions. But dig a little deeper and there are some meaningful differences that could impact your portfolio.


This company is the world's largest pharmaceutical company; Pfizer produces prescription drugs that treat a broad therapeutic spectrum. Pfizer has grown through a few strategic acquisitions, and, on a dividend sustainability basis is a Dividend King.

In October 2009, PFE acquired rival drug maker Wyeth for $68 billion in cash and stock. And last year Pfizer purchased King Pharmaceuticals at a purchase price of $3.6 billion.

Both of these purchases are designed to help Pfizer offset the loss in sales due to the loss of patent protection of Lipitor. Lipitor provided PFE with up to 14% of its annual revenue.

Eli Lilly and CO

Though not the largest prescription drug maker, LLY has a nice stable of drugs to treat aliments such as neurological disorders, diabetes, cancer and other conditions. Like Pfizer, Lilly is also losing patent protection on some of its best sellers.

So, both companies are in the same business and seem similar, even down to the pet care businesses. Now let’s look at a few of the fundamentals:


Mkt Cap




R & D

Drugs in phase 3









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Obviously, LLY is the smaller of the companies, but at a $46 billion market cap, it is not a small company either. Both companies should see lower gross revenue in the upcoming year with the loss of patent protection of key drugs. I would expect that PFE will lose a bit more gross revenue as a percentage due to the scope of its Lipitor loss (14% of 2011 revenue).

To see if either company can bounce back from the revenue loss, I look at the R & D drugs and the phase 3 trial drugs. The phase 3 are the closest to FDA approval and coming to market. In this area, PFE clearly has a short-tem edge. With almost three times the phase 3 drugs (assuming they all make it successfully out of trials), PFE has the potential to bounce back soonest. However, LLY has almost as many potential long-term drugs in the R&D phase (75% of the total that PFE has). For a company that is a quarter the size of PFE, if these drugs come to market – they may have an outsized impact on future revenue in the long term.

One more note on income. PFE has grown from acquisitions. There may still be some synergies in the next few years that could possibly help the bottom line grow for PFE. LLY does not have the same potential for bottom line growth based upon synergy and business combination.

At some point, all companies have some basic metrics that we can look at and judge. Below are a few we can look at:


Div Yield

P/E ratio

Return on Rev

LTD to capital











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Starting with the dividend yield, both companies are on par with each other. Looking at the long-term-debt to capital, it looks like both LLY and PFE are in good shape at a basic balance sheet level. Compare their LTD with another dividend payer like Altria Group (NYSE:MO) with an LTD of 70% and both LLY and PFE look very good indeed.

You may wonder why PFE has lower LTD than LLY after some large acquisitions. PFE makes a portion of its large acquisitions with stock (as opposed to debt or cash). If the acquisition is not positive, this could dilute existing shareholders. PFE’s historic acquisitions look positive, but keep this in mind if it announces another large acquisition.

Comparing the return on revenue metric from the chart above, LLY's is higher. This tells me that LLY management is more efficient at converting revenue to bottom line profit. This is an important metric when we try to project potential new revenue sources (drugs in R&D) and their impact on the profitability of a company.

The last metric is the P/E ratio. This is the ratio of what you pay for a company's earnings. On this metric, LLY is a clear winner. You are paying a 50% premium for PFE earnings.

Is it worth it to pay so much more for the larger company earnings? That is up to you. This is where you do your own due diligence to see if either company should be a part of your portfolio.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.