Jefferies' Huge Pharma Pair Trade: Bristol-Myers Upgraded To Buy, Merck Downgraded To Sell

Pharma sector fundamentals have been weakening against an adverse macro environment, Jefferies' Jeffrey Holford said in a report. He added that although 2017 offered some important R&D catalysts, pharma stocks may remain under pressure.

With some of the most anticipated studies failing in 2016, the year proved to be poor from an R&D perspective. Holford pointed out that the pharma sector could remain under pressure, despite there being some important R&D catalysts in 2017. He cited political overhang as one of the reasons, with the potential dual eligible rebate reform being “the most significant risk.”

Increased pressure from PBMs (pharmacy benefit manager) on U.S. pricing and currency headwinds could be additional pressures for most companies if the U.S. dollar continues to strengthen, Holford commented. “Whilst the sector looks relatively cheap vs. major markets, near term growth remains poor for many companies,” he said.

Bristol-Myers Squibb

The analyst upgraded Bristol-Myers Squibb Co BMY's rating from Hold to Buy, while raising the price target to $69. He expects the company to share the CTLA-4 (cytotoxic T-lymphocyte-associated protein 4) combo immuno-oncology opportunity in non-small cell lung cancer (NSCLC) with AstraZeneca plc (ADR) AZN.

Key data from CM-568 and CM-227 have provided support to Bristol-Myers Squibb’s prospects for 2017.

Merck

Holford downgraded the rating on Merck & Co., Inc. MRK from Hold to Underperform, while reducing the price target to $48. He expects a strong Keytruda performance in NSCLC in 2017, although the revenue and EPS estimates are below consensus expectations until 2020.

There could be further pressure on Keytruda in 2018 due to share losses in 1L NSCLC to Bristol-Myers Squibb, AstraZeneca and Roche as well as “an increasing overhang from the Januvia/Janumet patent expiries as they loom ever closer,” the analyst commented.

At Last Check

• Bristo-Myers shares were up 1.21 percent to $59.33 in Monday's pre-market session.
• Shares of Merck were down 1.2 percent at $61.69 in Monday's pre-market session.