Ahead Of Earnings: Why You Should Be Buying Merck And Selling Bristol-Myers

Pharmaceutical giants Bristol-Myers Squibb Co BMY and Merck & Co., Inc. MRK both release their second quarter earnings reports this week.

According to BMO Capital, investors should be buying Merck and selling Bristol-Myers ahead of earnings.

Despite Merck being on the verge of five years of delivering solid growth, BMO analyst Alex Arfaei believes that some of the company’s assets are still under-appreciated.

Cancer immunotherapy drug Keytruda is seeing a significant increase in use, from 20 percent reported use, up from around 3 percent use in April, and could see $12 billion in sales by 2026. BMO is forecasting Keytruda to deliver $3.7 billion in sales in 2017.

BMO maintains an Outperform rating on Merck but lowered its price target from $74 to $73 (see Arfaei's track record here).

While Arfaei is expecting a solid second quarter for Bristol-Myers Squibb, he expects uncertainty and headwinds ahead.

It appears that the increase in use of Keytruda is a positive for Merck and is directly impacting Bristol-Myers.

“Our surveyed oncologist reported using Keytruda in ~40% of 1L patients in July. We view this as a positive leading indicator for MRK and negative for BMY,” said Arfaei in a new analyst note.

Given the expectations for increased uncertainty, the analyst believes that a takeover/merger seems less likely, and if it does ultimately end up happening, the takeout premium appears to be lower.

BMO maintains an Underpeform rating on Bristol-Myers with a $47 price target.

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