Last week’s news from Bristol-Myers Squibb Co. (NYSE: BMY) about Opdivo in first line non-small cell lung cancer missing its primary endpoint absolutely crushed its shares. It is just usual to see a stock of this size drop about 16% in a single trading day. Now Credit Suisse sees the Bristol-Myers Squibb gap with Merck & Co. Inc. (NYSE: MRK) getting even worse.

Credit Suisse downgraded Bristol-Myers Squibb to Neutral from Outperform and it raised Merck’s rating to Outperform from Neutral.

The firm admitted not being fans of reacting to news, but it noted that the developments were just too significant and surprising to ignore. Credit Suisse remains bullish on the I-O market overall and still has robust I-O franchise estimates for Bristol-Myers.

Credit Suisse’s report said:

Given how leveraged Bristol-Myers is to I-O, however, even these rather bullish estimates still give us a DCF valuation of $61, making it very difficult for us to continue recommending the stock at this time. Our new blended target price is $63, which is a 75%/25% blend of DCF and relative valuation, with our relative based on 24.0x our new 2017 EPS of $2.90. Conversations with investors lead us to wonder if Bristol-Myers may be a more attractive takeout target now, but we think potential buyers would want to wait and see how Bristol-Myers’ position in I-O gets sorted out before considering stepping in.

Merck shares were raised to Outperform and the price target was raised to $73. The report further said of Friday’s big disappointment:

We had high expectations for the study not just meeting its primary endpoint but potentially other important secondary endpoints. The results dramatically impact the way we see the immuno-oncology (I-O) market evolving, especially for the 2016 to 2018 timeframe, with lingering impacts likely to be felt beyond then.

Further commentary on Merck was as follows:

Friday’s developments help answer one of the main concerns we had on MRK as we struggled to see where they would find near to mid-term growth in the face of patent loss for Vytorin/Zetia, biosimilar competition for Remicade and increasing competition for Januvia/Janumet. Our Merck sales estimates increase by $1.6 to $2.4 billion for the next few years and our EPS estimates move to $4.06 to $5.00 from $3.70 to $4.45, suggesting a 2015-2019 EPS CAGR of 8.6%. Our DCF for Merck increases to $72. Our blended target price of 75% DCF/25% relative, with the relative based off of 18.0x our new 2017 EPS of $4.06, is $73. … Keytruda will be a dominant player in monotherapy and Merck has quietly been developing a broad range of combination approaches as well.

Where this report gets interesting, on top of Bristol-Meyers and Merck, is that Credit Suisse sees an opportunity for Roche and AstraZeneca PLC (NYSE: AZN). The report is noted as being if their combination trials show efficacy. They said:

We see some enhanced risk for AstraZeneca’s MYSTIC trial with lower chances of a positive all comers PFS readout, pushing more reliance onto OS which could delay a significant de-risking of the pipeline out to 2018. In contrast we feel expectations for Roche’s IMpower 150 Tecentiq/Avastin/chemo combination study in 1L NSCLC, due in the first half of 2017, are low, suggesting limited downside on any delay. Roche remains our preferred EU name in I-O. I-O assets account for 9% of our NPV for AstraZeneca and 8% Roche, with the potential to add another 15% and 13% respectively on full pipeline success with Roche trading on a discount to NPV and AstraZeneca at a premium.

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Shares of Bristol-Myers Squibb were last seen trading down an additional 4.9% at $60.11 in mid-Monday trading. Its 52-week range is $51.82 to $77.12. Bristol-Myers was down 15.99% to $63.28 on Friday.

Merck, a Dow Jones Industrial Average member, was last seen down almost 2% at $62.61. Its gain on Friday was 10.4% to $63.83.

AstraZeneca shares were last seen up 0.5% at $34.46, versus a 52-week range of $26.97 to $35.04.

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