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Why What’s Bad for Merck Is Good For Bristol-Myers

Guggenheim Analyst Tony Butler, who has a Buy rating on Merck stock, sums up what happened: Last Friday, after the close and after its third-quarter earnings call, Merck announced the withdrawal of its regulatory application for Keytruda with chemotherapy drugs as an initial treatment for metastatic nonsquamous non-small cell lung cancer. Butler thinks that while some details about the Europe application remain unclear, future drug trials can add "robustness" to data. But analysts at Barclays, SunTrust Robinson Humphrey and Morgan Stanley are more skeptical.

Morgan Stanley analysts write that the thesis on the drug and Merck is "derailed" and they downgraded the stock to equal weight. Barclays analysts Paul Choi and Evan Seigerman write:

" ... We are downgrading Merck shares to Equal Weight from Overweight based on diminished upside potential from Keytruda, which is by far Merck's biggest value driver. Our prior thesis had assumed that Keytruda could drive better than expected growth over the intermediate term, supporting a higher multiple ..."

SunTrust Analyst John Boris downgraded Merck to Hold from Buy and lowered his price target to $54 from $73, and lowered his 2017 and 2018 sales estimates citing the Keytruda setback and rising competition among other problems that are "impacting operating performance." But Boris upgraded Bristol-Myers to Buy from Hold, raised his price target to $75 from $55, and bumped up estimates, saying Merck's woes provide competitive advantages.


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