Bristol-Myers rises after Merck pulls cancer drug combo filing in Europe

Shares of Bristol-Myers Squibb (BMY) are on the rise after competitor Merck (MRK) announced it is withdrawing its European application for a combination regimen featuring Keytruda, the company’s cancer immunotherapy drug. Following the news, SunTrust analyst John Boris upgraded the former’s stock to Buy as he believes Merck’s KN-189 data delay and withdrawal of its European application for Keytruda improves Bristol-Myers’ competitive position. Meanwhile, several Wall Street analysts downgraded Merck to hold-equivalent ratings. EUROPEAN WITHDRAWAL: Merck has announced that it has withdrawn its European application for Keytruda in combination with pemetrexed and carboplatin as a first-line treatment for metastatic nonsquamous non-small cell lung cancer. The application was based on findings from KEYNOTE-021, Cohort G. Merck said it is confident in the clinical data from this “rigorously conducted trial,” which demonstrated significant improvements in overall response rate and progression-free survival for the Keytruda combination regimen compared to chemotherapy alone. BUY BRISTOL-MYERS: In a research note to investors this morning, SunTrust’s Boris upgraded Bristol-Myers to Buy from Hold and raised his price target on the shares to $75 from $55, saying Merck’s KN-189 data delay to 2019 and withdrawal of its EU first-line NSCLC filing improves Bristol’s competitive position. Boris noted he models an additional $2B in 2021 revenue as a result, adding that he has increased confidence in the Opdivo + Yervoy arm of the Checkmate-227 trial expected in 2018 to generate overall survival benefits. Additionally, the analyst told investors that he views Bristol-Myers as an attractive strategic asset that could make sense to get a potential bid from Pfizer (PFE). However, such a scenario depends on macro factors such as tax reform and/or repatriation and “binary events” in the marketplace, including the read-out from the company’s 227 trial. MERCK DOWNGRADES: Following the Keytruda news, Barclays analyst Geoff Meacham downgraded Merck to Equal Weight from Overweight based on diminished upside potential from Keytruda, which is the company’s biggest value driver. With the formal withdrawal of the EU filing in front-line NSCLC and delays to the Phase 3 KN-189 trial from adding overall survival as a co-primary endpoint, the analyst argued that he sees less upside potential for Keytruda sales in lung cancer. While he does not think this means I/O rivals will “leapfrog” Merck, Meacham pointed out that both Bristol-Myers and Roche (RHHBY) could have front-line NSCLC data in late 2017/early 2018 that could further weigh on sentiment. He was not the only analyst cutting Merck’s rating this morning. Morgan Stanley analyst David Risinger also downgraded the stock to Equal Weight from Overweight on similar reasons. The analyst noted that the negative Keytruda updates caused him to lower projections, while adding that Keytruda’s lung cancer readout delay limits sales and exposes Merck to competitive threats. Meanwhile, SunTrust analyst John Boris downgraded Merck to Hold from Buy and lowered his price target on the shares to $54 from $73 to reflect lower Keytruda sales. The analyst also argued that Merck’s HCV/HIV and Zostavax vaccine franchises face significant competitive headwinds, anticipating an added headwind to the bottom line as the company is unable to reduce its R&D or SG&A expenses to preserve its immuno-oncology position. PRICE ACTION: In morning trading, shares of Bristol-Myers have gained over 2% to $61.16, while Merck’s stock has dropped almost 5% to $55.41.