Analyst Grows Cautious On Merck's Keytruda After Company Withdraws European Application

Analysts at Barclays no longer hold a bullish view on

Merck & Co., Inc.MRK

due to a now diminished potential for its biggest value driver,

Keytruda. The firm's Geoff Meacham downgraded Merck's stock rating from Overweight to Equal Weight with a price target slashed from $72 to $62. Keytruda, Merck's therapy for the treatment of non-small cell lung cancer, was expected to benefit from stronger than expected growth and justify a higher multiple for Merck, the analyst wrote in the downgrade note. But a revision to this thesis is justified after Friday's withdrawal of the EU-KN-0216G filing in the front-line NSCLC on top of previously announced delays in the company's phase 3 KN-189 trial.

Of particular note, a revised outlook for lower Keytruda sales in no way implies that rivals will be leapfrogging Merck, the analyst wrote. But a more likely scenario involves Bristol-Myers Squibb Co BMY and Roche Holding Ltd. (ADR) RHHBY gaining front-line NSLCL data in late 2017 or early 2018 and "further weigh on sentiment" (see Meacham's track record here).

Meanwhile, some of Merck's other key products, including Januvia and Zepatier, continue to face headwinds, which add to a "more difficult" environment for Merck in the near term. As such, Merck may be in a position where it has to compete in bidding for growth assets to generate a revenue bridge.

Bottom line, the analyst is now modeling Keytruda 2018 sales to be $5.4 billion (versus prior estimate of $6.0 billion) and 2019 sales of $6.6 billion (versus prior estimate of $7.4 billion).

At time of publication, shares of Merck were down 4.6 percent at $55.56.

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