Shares of AstraZeneca (AZN) are dropping sharply after the company said its MYSTIC trial failed to show its two-drug combination extended progression-free survival compared with standard-of-care chemotherapy for lung cancer patients. Leerink analyst Seamus Fernandez downgraded the stock to Market Perform following the news, while noting that this could have a negative read-through for Bristol-Myers (BMY), which is testing a similar combination.

MYSTIC TRIAL: AstraZeneca has announced progression-free survival, or PFS, results for the Phase III MYSTIC trial, which is testing Imfinzi monotherapy or Imfinzi in combination with tremelimumab versus platinum-based standard-of-care chemotherapy in previously-untreated patients with metastatic first line non-small cell lung cancer. The combination did not meet the primary endpoint of improving PFS compared to standard-of-care in patients whose tumors express PD-L1 on 25% or more of their cancer cells.

MOVING TO THE SIDELINES: Following the news, Leerink's Fernandez downgraded AstraZeneca to Market Perform from Outperform and lowered his price target on the shares to $31 from $36, citing the company's "continued reliance on externalization profits and deteriorating earnings quality." The analyst also pointed out that he is surprised that AstraZeneca did not have a major cost restructuring plan in place following the MYSTIC trial failure. Further, selling off 50% of the Lynparza opportunity raises near-term concerns about the sustainability of the company's cash flow, Fernandez contended.

READ-THROUGH FOR BRISTOL-MYERS: Leerink's Fernandez argued in a separate note that the MYSTIC trial failure is an obvious negative read-through for Bristol-Myers' combo of Opdivo + Yervoy in the ongoing CheckMate-227 trial. He pointed out that while there are several key differences in trial design between MYSTIC and CM-227, they are unlikely to result in meaningfully different outcomes. Also commenting on AstraZeneca's news, Goldman analyst Jami Rubin said Bristol-Myers could test the $50 level. Confidence gets hit for Bristol's PD-L1+CTLA4 thesis in first line non-small cell lung cancer and for its own registration phase 3 trial, CM-227, with a potential interim readout not expected till later in the year, he added. The analyst told investors that he does not have any contribution from first line non-small cell lung cancer in his estimates, while noting that Bristol's assets and trial are very different from MYSTIC.

POSITIVE FOR MERCK: On the other hand, Goldman's Rubin expects Merck (MRK) to trade up approximately $5 based on sentiment following AstraZeneca's MYSTIC failure as it partially de-risks longer-term estimates for Keytruda. Merck's drug has already been approved for the same population. The analyst raised his price target on Merck's shares to $74 from $70. Nonetheless, Rubin cautioned that long-term estimates could be at risk if other competitor trials are successful. The analyst reiterated a Neutral rating on Merck's stock.

RESULTS: This morning, AstraZeneca reported second quarter core earnings per share of 87c and revenue of $5.05B, with consensus at 80c and $5.07B, respectively. The company also reiterated its 2017 outlook and announced that AstraZeneca and Merck have entered a global strategic oncology collaboration to co-develop and co-commercialize AstraZeneca's LYNPARZA for multiple cancer types. Bristol-Myers also announced second quarter results this morning. The company reported adjusted earnings per share of 74c and revenue of $5.1B, with consensus at consensus 74c and $5.09B, respectively. Bristol also raised its 2017 earnings per share view to $2.90-$3.00 from $2.85-$3.00. CEO

DEPARTURE RUMORS: Earlier this month, a media report said that AstraZeneca CEO Pascal Soriot would be moving to Teva Pharmaceuticals (TEVA). According to a more recent report, Soriot sent an internal memo this week to his employees saying that he intends to attend September's European Society for Medical Oncology annual meeting in Madrid.

PRICE ACTION: In morning trading, shares of AstraZeneca have dropped over 15% to $28.72, while Bristol's stock has slipped almost 5% to $53.23. Meanwhile, Merck is up over 3% to $63.75.