Eli Lilly or Merck: which pharma stock to buy in 2026?

2026-09-24 · By Lubin Danilo, founder of Lubin Investment

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Eli Lilly is booming on obesity drugs, but its growth is eating its own cash: inventory and receivables nearly quadrupled, debt has doubled. Merck posted a $4.2 billion accounting loss in one quarter, without its real business losing a cent. My model flags both stocks as too expensive, for opposite reasons.

On September 23, 2026, on CNBC, Eli Lilly's CEO explained that its obesity treatments already capture 70% of new senior patients since Medicare agreed this summer to cover these drugs. The same day, a Home Depot co-founder publicly claimed the stock could be worth $2,000 within three to four years. It already trades above $1,150.

At the same time, in New Jersey, Merck just reported a quarter that shows, on paper, a net loss of more than $4 billion. Not a collapse in sales: a $9 billion check written to acquire a biotech whose flagship drug hasn't even received marketing approval yet.

Two pharmaceutical companies, two quarters, two stories Wall Street is telling very differently. My job is never to prefer one story over the other: it's to separate, for each, what belongs to the real quality of the business from what belongs to the price you have to pay to own it. Here is what my 10-criteria screen says, numbers in hand.

The Eli Lilly vertigo: a growth machine

Eli Lilly's revenue rose from $24.5 billion in 2020 to more than $65.2 billion in 2025, a 2.7-fold jump in five years driven by its diabetes and obesity drug family (tirzepatide, sold as Mounjaro and Zepbound). In the first quarter of 2026 alone, sales jumped another 56% year over year to $19.8 billion, pushing the company to raise its 2026 revenue guidance to a range of $82 to $85 billion, according to its fourth-quarter 2025 earnings release filed with the US regulator.

On Lilly's full analysis page, my 10-criteria screen validates most of the boxes: a 33.5% net margin (the company keeps a third of every sales dollar as profit), net buybacks rather than dilution, margins that widen instead of shrinking. The quality score comes out at 6 out of 10, lifted by a solid moat (a competitive edge that's hard to copy): my resilience model estimates tirzepatide's patent protection still has about 11 years left, with a verdict that the future economic role supports the profile, disruption resilience being the main thing to watch.

But one number stands out in this otherwise flattering picture: free cash flow (the cash that truly stays in the bank once every bill and every investment is paid) per share has declined by an average of 1.8% a year over five years, by my calculation. A company whose sales triple while its cash available per share shrinks: that's the paradox to understand before paying anything for this stock.

Why growth isn't (yet) turning into cash

The first explanation is inventory. Eli Lilly held $4.0 billion of inventory at the end of 2020; that reached $13.7 billion by the end of 2025, and already $16.8 billion by mid-2026 according to its latest quarterly report filed with the US regulator. A precise slice of that pile, $1.5 billion, is pre-launch inventory built ahead of approval for orforglipron, the future oral obesity pill still awaiting approval, up from just $548 million a year earlier. The logic is sound (the sector has already suffered GLP-1 shortages from insufficient production capacity, and Lilly would rather stock up in advance), but building inventory ties up cash before the product is even sold.

The second explanation is more worrying: accounts receivable (money distributors and insurers still owe Lilly for products already delivered) rose from $5.9 billion to $17.8 billion over the same period, and the average collection period now stands at 373 days, lengthening by 43 days a year. In other words, Lilly is selling more and more, booking the sale immediately, but taking longer and longer to actually collect the cash. The result, measured by my screen: only 42% of accounting profits turn into real cash, below my warning threshold.

To fund this widening gap between billing and collecting, while also building new factories, the group's total debt rose from $16.6 billion to $40.9 billion between 2020 and 2025, more than doubling. My cash return on capital criterion, which needs to clear 15% to pass, comes out at 13.7%: below the bar. A company in the middle of a commercial explosion, then, but whose cash discipline is deteriorating exactly as it accelerates.

Merck's accounting shock: a real loss, not a real problem

On April 30, 2026, Merck reported quarterly revenue of $16.3 billion (+5% year over year), a fairly steady cruising speed. And yet the same announcement shows a net loss of $4.24 billion, or a loss of $1.72 per share, according to Merck's official first-quarter 2026 results release. Enough to scare off any investor in a hurry, on Merck's full analysis page as much as anywhere else.

Except that loss comes down almost entirely to a single line: a $9 billion charge ($3.62 per share) tied to the acquisition of Cidara Therapeutics, an antiviral-focused biotech, for roughly $9.2 billion announced in late 2025, at a 109% premium to its pre-offer share price according to Merck's acquisition announcement. Its lead asset, CD388, a long-acting flu-prevention treatment, currently only holds an FDA breakthrough therapy designation, not marketing approval.

This is where a pharma-specific accounting rule kicks in, one worth knowing before judging any quarterly result: when a company acquires research and development still in progress, with no alternative use beyond that one specific product, US accounting rules force the entire purchase price to be expensed immediately, all at once, rather than spread over several years like a normal investment. A genuine, cash-funded strategic bet turns into a quarterly accounting loss, even though nothing in the company's real operations actually deteriorated. By comparison, Merck's acquisition of Verona Pharma (closed in October 2025, a bit over $10 billion), whose flagship respiratory drug was already approved, only cost a $237 million inventory step-up: the difference in accounting treatment comes down to the acquired product's regulatory status, not the size of the check.

This mechanic explains why my screen shows contradictory signals on Merck: net margin is crushed to 4.8% (a clear fail on my profitability criterion), while cash return on capital stays excellent at 17.5% and the ratio of profits converted into cash jumps to 419%. That last, spectacular number isn't a sign of operational genius: it's a mathematical artifact. When accounting profit (the ratio's denominator) collapses because of a one-off charge, any normally generated cash makes that same ratio explode. A number to read with caution, not to wave around as proof of quality.

The real risk for each: growth on credit versus an approaching cliff

The messy accounting quarter isn't the real story at Merck. The real story is Keytruda, its flagship cancer drug, which alone accounts for about $31.7 billion in 2025 sales, nearly half the group's total revenue. Its US patent exclusivity expires in late 2028. Merck's answer is to shift patients toward Keytruda Qlex, a new under-the-skin injectable version protected by separate, more recent intellectual property: but that version only generated $128 million in the first quarter of 2026, an almost rounding-error sum next to the $8.0 billion the original version still brings in every quarter. The other growth lever, Winrevair (a pulmonary hypertension treatment), is growing fast (+88% year over year to $525 million in the first quarter of 2026), and market analysts expect $4.9 billion in annual sales by 2029. Real, but still far from being able to replace, on its own, what Keytruda will lose.

Eli Lilly's risk is the mirror image of Merck's: it isn't a demand problem, it's a financial discipline problem. Debt has more than doubled, inventory and receivables are inflating faster than sales, and cash return on capital has fallen below the bar I require. If GLP-1 demand were to slow, or a competitor were to take market share, Lilly would be carrying far more leverage and working-capital needs than five years ago for a comparable level of business. In short, Merck's risk is dated and already known to the entire market (2028); Lilly's is more insidious, a growth story that could keep climbing without ever really turning into cash available to shareholders.

The price, without emotion

Eli Lilly currently trades at 98.5 times its annual free cash flow. The drug manufacturers sector my model compares it against (46 companies, including Sanofi at 8.8 times, Bristol-Myers Squibb at 11.5 times, Gilead at 13.8 times, Novartis at 13.8 times, or GSK at 15.5 times) shows a median valuation of only 22.6 times. Lilly thus ranks in the 96th percentile of its sector: more expensive than 96% of its peers. Against its OWN five-year history, though, it only sits in the 60th percentile: this price level is nothing new for this specific stock, which has always traded rich. What changed is the gap with the rest of the sector: the market is betting that obesity treatments are opening an entirely new category. My reasonable buy price model, which projects the real cash-per-share trajectory rather than relying on today's ratio alone, comes out at $578.21 against a $1,150.99 share price: a 49.8% premium.

Merck trades at 27.9 times its free cash flow, above the sector median but far from Lilly's extreme: the 63rd sector percentile. Against its own history, though, it sits at the 88th percentile, close to the richest it has ever been, which fits an observation made in mid-September by the financial press: the stock has nearly doubled in a year without its sales growth really changing pace, carried by hope that Winrevair and the rest of the pipeline will pick up where Keytruda leaves off. My reasonable buy price for Merck comes out at $118.21 against a $148.08 share price: a 20.2% premium.

Both stocks therefore fail my price-discipline test today, but for opposite reasons: Lilly is expensive because the market is paying for a growth story that already shows up in the numbers; Merck is expensive, relative to itself, because the market is paying for a turnaround story that hasn't yet materialized in the results.

Two opposite ways of telling a good story: one where growth explodes but pays for its own expansion in cash, the other where a one-off accounting decision eclipses a real structural risk that is anything but one-off. Neither stock passes my price test today, which isn't a judgment on their long-term quality, only a rule I hold myself to: never pay more, just because a story is compelling, than my own math allows. Judging a company's quality and the price you pay for it separately, in seconds, for any stock: that's exactly what I wanted to be able to do, so I built my investing website for that.

• Eli Lilly (score 6/10) multiplied its revenue by 2.7 in five years thanks to obesity treatments, but its inventory and receivables nearly quadrupled and its debt more than doubled over the same period: free cash flow per share is slightly declining despite the sales explosion.
• Merck (score 5/10) reported a $4.24 billion net loss in the first quarter of 2026, $9 billion of which came from an accounting charge tied to the Cidara Therapeutics acquisition, not from any deterioration in its real business.
• Merck's real risk is dated and known to the whole market: Keytruda, half its sales, loses US patent exclusivity in late 2028. Lilly's real risk is quieter: debt that keeps doubling and cash that takes longer and longer to actually come in.
• My reasonable buy price model judges both stocks overvalued today (49.8% for Lilly, 20.2% for Merck), for opposite reasons: an already-paid growth premium for one, a not-yet-verified hope premium for the other. This is not investment advice, do your own research.

FAQ

Eli Lilly or Merck: which one scores better on my quality screen?

Eli Lilly passes 6 out of 10 criteria on my screen, versus 5 out of 10 for Merck, lifted by a far more comfortable net margin (33.5% versus 4.8%, the latter temporarily crushed by a one-off accounting charge) and much faster sales growth.

Why did Merck report a quarterly loss in 2026?

A $9 billion accounting charge tied to the acquisition of biotech Cidara Therapeutics (whose flagship drug isn't approved yet) turned an otherwise solid quarter (+5% revenue) into a $4.24 billion net loss. This is not an operating problem.

Why is Eli Lilly's cash flow declining despite exploding sales?

Its inventory and accounts receivable nearly quadrupled in five years to fund its production ramp-up, funded by debt that more than doubled. The result: free cash flow per share is slightly declining despite sales that nearly tripled.

Eli Lilly or Merck, which one is more expensive on the stock market?

Eli Lilly, by far: it trades at 98.5 times its annual free cash flow, versus 27.9 times for Merck, and ranks in the 96th, most expensive percentile of its sector. My model still flags both stocks as overvalued relative to their current price.

What's the real risk to watch for Merck by 2028?

The loss of US patent exclusivity for Keytruda, its cancer drug that accounts for nearly half of its sales. Merck is betting on a new under-the-skin injectable formulation and on other drugs like Winrevair to offset this, but those remain, for now, very small next to Keytruda.

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About the author

Written by Lubin Danilo, founder of Lubin Investment. A self-taught individual investor, I find fundamental analysis fascinating, and it has delivered excellent results. For three years now, my performance has beaten the S&P 500. But analyzing every stock took too much time: sites with incomplete data, calculation methods and criteria never aligned with mine. And spotting the best stocks was just as time-consuming, even with my own well-defined checklist. So I put my software development background to work to build this software, base my investment strategy on its results, and share it with people who share the same passion as me. It judges a company's quality and its price separately, using criteria drawn from the financial literature (Warren Buffett, Michael Mauboussin, Aswath Damodaran).