According To Citi, Merck's Drug Pipeline Is Underappreciated

The company's drug pipeline, according to Citi, is underappreciated by the market, which is one of the reasons why Citi is bullish on Merck. 

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The pharmaceutical giant was upgraded by analyst Andrew Baum to a buy from a neutral rating. Furthermore, he raised his price target from $125 to $130, which implies a 14% upside from the closing price on Wednesday.

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In addition, the bank stated that Merck's recently acquired portfolio of ADCs, or antibody-drug conjugates, from Chinese company Kelun-Biotech complements Merck's oncology and hematology pipelines with "future-proofing". According to Citi, Merck is gaining exclusive rights and collaborating with other companies to develop ADCs for cancer treatments - and Citi thinks Merck could compete with its competitors in terms of ADC development.

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In a note he wrote on Thursday, Baum described Merck's TROP2 ADC as a significantly underappreciated competitor to AstraZeneca and Daiichi Sankyo's lung cancer drug, date-DXd. Baum's point was in reference to a drug already under development by AstraZeneca and Daiichi Sankyo.

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The Inflation Reduction Act, which has been enacted in the US since February, is expected to produce further upside for Merck shares on the back of an expected structural increase in borrowing costs. Citi believes that sotatercept, a treatment for pulmonary arterial hypertension under development by Merck, will be one of the major beneficiaries of the new law.

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As Baum pointed out, the ADC pipeline is positioned as one of Baum's strongest downside risks to his valuation, along with a potential slowdown in the company's animal health segment as well as a lower-than-anticipated value share capture by Keytruda, the company's cancer treatment drug. 

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A record amount of shares of the company soared 32% over the past year while the shares have risen only 2.5% over the past year, but have risen more than 1% in the past year.

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