Shares of Merck (MRK) are on the rise after the company announced the Food and Drug Administration has accepted for priority review its application for its immunotherapy drug Keytruda with chemotherapy as an initial treatment for advanced lung cancer. Conversely, Bristol-Myers (BMY), who is developing a competing immuno-oncology therapy, is sliding following the news.

APPLICATION ACCEPTED: Last night, Merck announced that the FDA has accepted for review the supplemental Biologics License Application for Keytruda, the company's anti-PD-1 therapy, plus chemotherapy for the first-line treatment of patients with metastatic or advanced non-squamous non-small cell lung cancer, or NSCLC, regardless of PD-L1 expression and with no EGFR or ALK genomic tumor aberrations. This is the first application for regulatory approval of Keytruda in combination with another treatment. The FDA granted Priority Review with a PDUFA, or target action, date of May 10, 2017.

LUNG OPPORTUNITY: In a research note following the filing acceptance news, Leerink analyst Seamus Fernandez told investors that Merck's announcement comes as a "significant surprise," potentially positioning the company's Keytruda to be the first IO agent to be used broadly in non-squamous NSCLC regardless of PD-L1 status. Moreover, the analyst pointed out that if Merck's combo receives accelerated approval by its PDUFA, it likely would give the company "another leg-up" in the first-line NSCLC race over AstraZeneca (AZN) and Bristol-Myers' IO+IO combos and Roche's (RHHBY) IO+chemo combo. Leerink has a Market Perform rating on Merck shares. In a research note of his own, Jefferies analyst Jeffrey Holford noted that Merck's filing for Keytruda plus chemo in first-line NSCLC is a "positive surprise" that could disrupt market share dynamics in the near-term, particularly for Bristol-Myers. Nonetheless, the analyst argued that the filing does not "materially change" the company's long-term outlook, adding that the approval is "high risk due to several weaknesses" in the study, as well as its prior failure to gain a Compendia Listing. He reiterated an Underperform rating on Merck's shares.

ADVANTAGE SHORT-LIVED: Commenting on Merck's announcement, Goldman Sachs analyst Jami Rubin said that if the company's chemo combo sBLA is approved, she would expect a "rapid uptake" for Keytruda in the first-line setting given there will be no requirement for PD-L1 testing. However, the analyst noted that she expects its competitive advantage to be "short-lived." Therefore, while Merck may benefit in the near-term in 2017, Rubin said she is making no change to her 2018 estimates given imminent competition from potentially three other players, with IO-IO and IO-chemo combos. Moreover, the analyst said she is also making no changes to her estimates for Bristol-Myers, highlighting that if the latter's accelerated filing strategy is successful, Merck's short-lived benefit may be mitigated even further. Her peer at Deutsche Bank voiced a similar opinion. While analyst Gregg Gilbert acknowledged that an approval would further enhance Keytruda momentum later this year, he noted that the durability of that momentum could be shaped in part by several NSCLC data read-outs from various companies in the coming year.

PRICE ACTION: In late morning trading, shares of Merck have gained nearly 5% to $62.80, while Bristol-Myers' stock has dropped almost 3% to $58.28.