Jefferies Says Sell Merck, Buy Bristol-Myers Heading Into New Year
Shares of Merck (MRK) are sliding after Jefferies analyst Jeffrey Holford downgraded the stock to Underperform, a sell-equivalent rating, as he sees further pressure on its Keytruda drug in 2018 and sector fundamentals weakening in 2017 amid political overhangs and an adverse macro environment. Conversely, he upgraded Bristol-Myers Squibb (BMY) and Bayer (BAYRY) to Buy.
SELL MERCK: In a research note this morning, Jefferies' Holford downgraded Merck to Underperform from Hold, saying it "screens poorly" on many valuation metrics and that he expects further pressure on its critical Keytruda drug in 2018, driven by share losses in non-small cell lung cancer to Bristol-Meyers, AstraZeneca (AZN) and Roche (RHHBY). He also sees an increasing overhang from the Januvia/Janumet patent expiries as they loom closer. Additionally, Holford told investors that he sees the fundamentals in the Pharmaceutical sector weakening in 2017 amid political overhangs and an adverse macro environment. Potential dual eligible rebate reform is the most significant risk, he argued, adding that he expects more pressure from pharmacy benefit managers on U.S. pricing and foreign exchange rates to be a "material headwind" for most companies if the U.S. dollar continues to strengthen. Moreover, interest rate increases by the Fed may continue to unwind the search for yield trade that helped many names in 2016, contended Holford, who lowered his price target on Merck's shares to $48 from $59.
BUY BRISTOL-MYERS, BAYER: Holford also upgraded Bristol-Myers to Buy this morning, with a $69 price target, as he expects the company to share the CTLA-4 combo IO opportunity in non-small cell lung cancer with AstraZeneca, with key data from CM-568 and CM-227 securing its future in 2017. He was also bullish on Bayer, upgrading the stock to Buy as his pro forma model points to "significant valuation upside" post-close of Monsanto (MON). While the expected discounted rights issue may pressure Bayer's shares temporarily, the analyst believes it is highly anticipated within the share price and may offer a good opportunity to increase holdings.
TOP PICKS FOR 2017: Jefferies' Holford told investors that he continues to bias his stock selection toward the cheaper growth names. His top picks in Pharmaceuticals for 2017 are AbbVie (ABBV) and Eli Lilly (LLY) in the U.S., and AstraZeneca and Novartis (NVS) in Europe. Conversely, the analyst's least preferred names in Europe are Sanofi (SNY) and Novo Nordisk (NVO), and Pfizer (PFE), Johnson & Johnson (JNJ) and Merck in the U.S.
PRICE ACTION: In morning trading, shares of Merck have dropped about 1.5% to $61.53, while Bristol-Myers' stock has advanced over 1.5% to $59.53.
Disclosure: None
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