BMO Capital Upgrades Merck (MRK) to Outperform, $72 PT
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BMO Capital upgraded Merck (NYSE: MRK) from Market Perform to Outperform with a price target of $72.00 after Bristol announced that its CheckMate-026 study in first line NSCLC did not meet its primary PFS endpoint.
Analyst Alex Arfaei commented, "This is an extraordinarily fortunate outcome for Merck’s Keytruda and we argue it has seismic commercial market share implications given that we expect NSCLC to be the largest IO indication. We now argue that Keytruda will likely dominate first line (1L) NSCLC, where patients are healthier, are treated more aggressively, and the duration of treatment is long. We believe that Keytruda will now be used exclusively in patients with at least 50% PD-L1 expression (i.e., ~25% of the market), and we now also expect some off-label use in patients above 10% PD-L1 expression given that there is no other PD-1 alternative in 1L. Next key event is Merck’s KN-042 trial, which has 1L patients with at least 1% PD-L1, and when that study reads out in February 2018, it should broaden Keytruda’s label. The most important difference with KN-042 and Bristol’s CM-026 trial is that the primary endpoint for KN-042 is OS (NOT PFS), where there is better data. Thus, we believe KN-042 has a higher chance of success. Given Keytruda’s good clinical benefit illustrated so far (i.e., positive OS in KN-024), we expect long duration of therapy in 1L. Keyturda’s dosing advantage vs. Opdivo will be the icing on the cake as patient numbers increase. We have increased our Keytruda NSCLC forecast from $1.7Bn in 2017 to $2.3Bn, and from $4Bn in 2020 to $6.4Bn. We now forecast peak Keytruda forecasts of $12Bn by 2026, up from $9Bn. As a result, we now forecast that Merck will grow revenue by a CAGR of 5% and EPS by at least 14% from 2016 to 2020."
Shares of Merck closed at $57.84 yesterday.
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