The year has been fraught with challenges for the pharma/biotech sector, which has faced immense flak for steep drug prices. Democratic presidential candidate Hillary Clinton had pledged to find ways to curb drug prices and lower prescription drug costs for all Americans. Naturally, with Trump’s election victory last month, the pharma/biotech industry rallied on anticipation of fewer drug pricing headwinds.

However, the relief rally turned out to be short-lived. In a recent interview with Time magazine, the President-elect clarified that some stock analysts may have “misread his intentions” and he does not like what happened to drug prices which he will bring down.

Obviously, pharma/biotech stocks took a beating with the statement with concerns regarding drug pricing one again coming to the limelight.

But not all pharma stocks saw declining share prices in 2016. Johnson & Johnson (JNJ Quick QuoteJNJ - Free Report) and Merck & Co. Inc. (MRK Quick QuoteMRK - Free Report) are some of the better-performing large-cap pharma stocks that outperformed the Zacks categorized Large Cap Pharmaceuticals industry. While J&J and Merck gained 11.9% and 17.0%, respectively, year to date (YTD), the Zacks categorized Large Cap Pharmaceuticals industry declined 5.4%. These stocks also look well-placed to enjoy a good run.

So which of the two is a better stock? Here is a look at a few factors that may help in making a choice.

What Defines These Two Pharma Giants?

J&J has a strong presence in the pharmaceutical, medical devices and consumer care markets across the world. Its pharmaceutical division boasts several multi-million dollar drugs in the wide fields of neuroscience; cardiovascular and metabolism; immunology; oncology and infectious diseases/vaccines. This New Jersey-based company is well known for its baby-care products and brands like Tylenol in addition to drugs like Remicade and Concerta.

Merck, also based in New Jersey, is a global research-driven pharmaceutical products company. Well known products in Merck’s portfolio include Remicade, Nasonex, Simponi, Vytorin and Zetia, Januvia and Janumet, Isentress, PegIntron, Maxalt, Cosopt/Trusopt, Temodar, Emend, Keytruda, Cozaar/Hyzaar, Zocor, Proscar, ProQuad, Gardasil, RotaTeq, Zostavax and NuvaRing.

How Have the Results Been?

J&J has consistently delivered strong earnings results. It came up with positive sales and earnings surprises in all the three quarters of 2016 backed by consistent strength in the pharmaceutical division. The Pharma segment continues to perform well despite challenges like generic competition for a few products, potential biosimilar competition and lower hepatitis C virus (HCV) revenues. While Pfizer’s pending launch of biosimilar Remicade creates some uncertainty regarding the segment’s sales growth in 2017, we believe that the impact may be manageable.

Moreover, new products like Imbruvica, Xarelto and Darzalex have been well received by the market. J&J also raised its full-year earnings expectations in each of the three quarters. Contribution from new as well as core products, share buybacks and restructuring initiatives should help it to achieve the guidance.

Merck’s sales and profits have also been relatively strong this year. It delivered positive earnings surprises in all the three quarters of 2016. Merck’s new products like cancer drug Keytruda have been contributing meaningfully to its top line, somewhat making up for the generic competition for several drugs. In October, Keytruda received an earlier-than-expected FDA approval for the first-line treatment of metastatic lung cancer. This is an important milestone for the company and Keytruda sales should improve sharply with the first-line NSCLC indication.

At the third-quarter call, Merck raised both its sales and earnings outlook for the year. Continued strong performance of newer drugs and cost-cutting initiatives should help it to achieve its guidance.

Pipeline Matters

For any pharma or biotech company, the pipeline is of utmost importance and plays an important role in investment decisions. So, it always makes sense to take a look at a company’s pipeline.

J&J, which has launched 12 new products since 2011, intends to seek approval for more than 10 new products between 2015 and 2019. The company said that each of these products have blockbuster potential. It is targeting more than 40 line extensions of existing and new drugs as well. This should help it to lessen the impact of the genericization of key products in the pharma portfolio.

Key candidates in J&J’s pipeline include esketamine (treatment-resistant depression), apalutamide (pre-metastatic prostate cancer), imetelstat (myelofibrosis and myelodysplastic syndrome), sirukumab (rheumatoid arthritis and major depressive disorder), guselkumab (psoriasis) and niraparib (prostate cancer) among others. The company is also working on expanding the label of the currently marketed products like Simponi, Stelara, Zytiga and Imbruvica.

Merck also has many pipeline candidates in advanced stages of development targeting multiple disease areas such as atherosclerosis, cancer, diabetes and cardiovascular diseases. It has more than 10 candidates in phase III development. Some of the important pipeline candidates include MK-0859 (anacetrapib - cholesterol management), verubecestat (Alzheimer’s disease), MK-8228 (letermovir, cytomegalovirus (CVM) infections) and MK-8835 (ertugliflozin, type II diabetes).

Importantly, Keytruda is being studied for more than 30 types of cancer. Merck is collaborating with several companies including Amgen, Inc. (AMGN Quick QuoteAMGN - Free Report) , Incyte, GlaxoSmithKline plc (GSK Quick QuoteGSK - Free Report) and Pfizer Inc. (PFE Quick QuotePFE - Free Report) among others separately for the evaluation of Keytruda in combination with other regimens. The last few months saw a series of positive news related to Keytruda, raising sales expectations for the drug.

Share Price, Key Metrics and Estimate Revision

Both J&J and Merck carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

n terms of share price, the performances are too close to call a winner. As discussed, both companies’ stocks have risen so far this year. In the past six months, while Merck’s shares rose 7.5%, J&J’s share price declined 1.4% possibly due to uncertainty surrounding the Remicade biosimilar in the U.S. So far this month, however, while J&J is up 3.3%, Merck has gained 1.0%.

As regards next year and long-term EPS growth, both are neck-and-neck. J&J’s next year’s EPS growth rate is 5.18%, while that of Merck’s is 3.80%. J&J’s long-term EPS growth rate is 6.11% while Merck’s is slightly higher at 6.54%.

But both stocks are a tad overvalued as is evident from their unfavorable P/E and P/S ratios compared to the Large Cap Pharmaceuticals industry.

Price to earnings (P/E) ratio is 16.4 and 17.6, respectively, for Merck and J&J while for the industry it is 15.6. Similarly, price to sales (P/S) ratios for Merck and J&J are 4.3 and 4.5, respectively, both at a premium to the industry’s 4.0. However, J&J’s shares look a little more expensive compared with Merck. Its P/E and P/S are relatively higher than Merck’s. Moreover, the price to book (P/B) ratio for J&J is 4.3, higher than 4.2 for the industry while Merck’s P/B ratio of 3.9 is lower than the industry.

Over the last 60 days, Merck’s earnings estimates per share for 2016 and 2017 have risen 0.5% and 1.3%, respectively. For J&J, the 2016 earnings per share estimate was raised by 0.3%, while that for 2017 was narrowed by 0.4%.

A Draw?

Without doubt, both Merck and J&J have delivered the goods in 2016 and choosing between the two is a tall order. Both have their share of strengths and weaknesses. J&J and Merck are facing generic competition and pricing pressure for some products. J&J also has issues with its consumer segment manufacturing facilities. They have also bitter experiences from pipeline and regulatory setbacks.So we can say that two companies stand on an equal footing to take on yet another year.

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