After the FDA granted priority review status to Merck's (MRK) Keytruda drug, a number of analysts expressed optimism about the company's outlook in notes to investors today. Morgan Stanley, Piper Jaffray and Guggenheim all upgraded the drug maker's shares to buy or equivalent ratings, citing the company's improved outlook following the FDA's decision.

EVENT: The FDA agreed to review on an expedited basis Merck's Keytruda in combination with chemotherapy as a first-line treatment for non-small cell lung cancer, or NSCLC, the company announced Tuesday night. The agency said it would seek to make a decision on the drug on May 10, 2017, according to Merck. Keytruda is an immunology drug that works by preventing cancer cells from taking control of a portion of disease fighting T-cells.

ANALYST REACTION: In the wake of the FDA's decision, investors' views of Merck's position in immuno-oncology are poised to improve, wrote Morgan Stanley analyst David Risinger, who upgraded the stock to Overweight from Equal Weight. Moreover, the company's growth is poised to accelerate as its leadership position in immuno-oncology, or IO, strengthens, the analyst stated. In addition to the FDA's decision announced this week, two other recent developments have made Risinger more bullish about Merck's outlook in IO. Specifically, the analyst cited the company's January 9 announcement that Keytruda in combination with Incyte's (INCY) IDO inhibitor would be moved into Phase 3 trials involving patients with multiple tumors. Also, on November 28, the drug maker announced that the FDA granted priority review status for Keytruda as a treatment for cancer patients with tumors that have microsatellite instability, Risinger noted, adding that such tumors could be present in 5% of all cancer cases. Predicting that Keytruda and chemotherapy would be approved as a first-line treatment for "nearly all" NSLC cases by May 10, the analyst expects Merck to have a head start of a least several months in the indication versus its competitors . He predicted that Merck's revenue and earnings growth would accelerate in 2018 as Keytruda generates higher revenue and generic drugs become less of a headwind for the company. Risinger raised his price target on the shares to $71 from $65. The FDA will probably approve Keytruda and chemotherapy as a treatment for some NSCLC patients by May 10, predicted Piper Jaffray analyst Richard Purkiss As a result, Merck will have an early lead in the indication, harming the outlook of other immuno-oncology drug makers, including Bristol-Myers (BMY) and AstraZeneca (AZN), Purkiss believes. Although Purkiss warned that the outlook for NSCLC treatments beyond 2017 remain cloudy due to upcoming Phase 3 studies, he upgraded Merck to Overweight from Neutral, raised his earnings estimates for Merck by 12%-18% and increased his price target on the shares to $72 from $63.

WHAT'S NOTABLE: Merck was also upgraded to Buy from Neutral by Guggenheim's Charles Butler this morning. He set a $70 price target on the shares.

ANOTHER TO WATCH: Roche (RHHBY) has also developed an immuno-oncology drug that can be used as a treatment for NSCLC.

PRICE ACTION: In late morning trading, Merck rose another 2% to $63. The stock had advanced nearly 3% yesterday on the heels of the Keytruda announcement. Meanwhile, Bristol-Myers, which slid yesterday, is down another 1%, AstraZeneca slipped fractionally and Roche dropped 0.7%.