Why 3 Analysts Upgraded Merck Simultaneously

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It may seem hard to believe that a Big Pharma drug stock might be a favorite for the year ahead when the attacks against drug pricing and competition do not seem to be going away. Somehow, Merck & Co. Inc. (NYSE: MRK) has managed to find itself as a top pick for pharmaceutical and biohealth analysts. After all, what does it tell you when there were three analyst upgrades within 24 hours?

The markets were facing selling pressure by and large on Thursday, but Merck buyers did not bother caring about that. One driving force is that Merck is valued at about 16 times earnings, so some investors feel there may be a cushion under the stock, even if price-bashing by Trump and other politicians will not go away.

What matters here from the investment angle is that a trifecta of analyst upgrades is not normal when it is not after a drug approval or earnings. The prior day’s 5% gain in Merck shares was after the FDA told Merck that it was granting an expedited review and would let the company know by May 10 whether it would approve Merck’s Keytruda combination therapy.

Investors should consider that Keytruda has been a potential driver since October of 2016 and that Merck also trades at a premium, even if some pundits now have increased their targets.

The three upgrades from analysts on Thursday were seen as follows:

  • Guggenheim raised Merck to Buy from Neutral, and the firm issued a $70 target price. It also called Merck its best new idea.
  • Piper Jaffray raised Merck to Overweight from Equal Weight, raising its price target to $72 from $63.
  • Morgan Stanley raised Merck’s rating to Overweight from Equal Weight as well, and it raised its target price to $71 from $65.

One of the common driving forces here is that Merck’s potential IO/chemotherapy combination approval slates for the second quarter comes with a shot that it could effectively win the entire non-squamous non-small cell lung cancer (NSCLC) market.

24/7 Wall St. tries to look at analyst calls on both sides of the coin. That means finding reports which are less optimistic or which offer some balance to the other side.

On January 11, Jefferies maintained its Underperform rating and its $48 price target. Its view is that Merck’s surprise filing for Keytruda plus chemo does not materially change its long-term outlook, although the firm did say that this could disrupt market share dynamics in the near term (at the risk of Bristol-Myers Squibb). Jefferies even cited the approval as high risk due to several weaknesses in the study and due to its prior failure to gain a Compendia Listing.

A report from Leerink on January 10 only had a Market Perform rating on Merck. Still, the view was that Keytruda could be the first IO agent to be used broadly in non-squamous NSCLC regardless of PDL1 status. Leerink even noted that the Keytruda and chemotherapy combination could address approximately 70% of NSCLC patients if approved.

24/7 Wall St. recently addressed Merck’s Bull/Bear Outlook for 2017, calling for an implied 17.5% total return possibility in 2017. That is of course a blend of all the bullish and bearish views rather than an absolute forecast, and we would point out that its return was about 20% in 2016.

Merck shares were last seen trading up 1.8% at $62.73 in midday trading. Its 52-week range is $47.97 to $65.46. Merck’s consensus analyst price target from Thomson Reuters is now $68.21, up from the $67.28 target that was used for the upside calculation for the year ahead.