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The Ratings Game: Merck stock dives after Citi downgrades on ‘high probability’ that HIV treatment will be abandoned

Shares of Merck & Co. Inc. sank Monday, to buck the gains in the health care sector and the broader stock market, after Citi Research backed away from its bullish stance on the drug maker, citing concerns over its HIV and COVID-19 treatments.

The stock

fell 5.7% in afternoon trading toward a two-month low. The stock is the biggest decliner among the components of the Dow Jones Industrial Average
which ran up 305 points, or 0.9%, and of the SPDR S&P Health Care Select Sector exchange-traded fund
which rallied 0.6%.

The stock has now tumbled 17.6% since closing at a record $90.54 on Nov. 4.

Citi’s Andrew Baum cut his rating to neutral, after being at buy for at least the past 2 1/2 years. He cut this stock price target to $85 from $105.

Baum said his “long-standing” bullish thesis on Merck was based on the “under-appreciation” of the company’s drug pipeline, especially its HIV treatment islatravir, which he expected would offset the coming loss of exclusivity of its blockbuster cancer treatment Ketruda. However, he no longer expects any revenue from islatravir.

“We place a high probability that [Merck] will abandon islatravir development in the next three months given likely high regulatory concerns,” Baum wrote in a note to clients.

Baum said he removed all estimates for islatravir from his financial models, following the company’s announcement earlier this month that a dose-dependent decrease in lymphocyte counts was observed in a Phase 2 trial. He said that suggests its very likely that materially higher doses required would lead to “diverse and unacceptable” adverse events.

On Nov. 18, Merck said it stopped dosing in the trial, and on Nov. 23, the company announced a “temporary pause” in enrollment in the Phase 2 study.

Merck’s stock has shed 9.8% since Nov. 18.

“We expect the diminishing outlook for islatravir to further expedite Merck’s business development efforts,” Baum wrote. “We open a negative catalyst watch on the stock along with today’s report.”

FactSet, MarketWatch

But disappointment over islatravir isn’t Merck’s only problem.

Baum said the clinical profile of Merck’s antiviral to treat COVID-19, Lagevrio, continues to deteriorate, putting estimates for Lagevrio for next year and beyond at “material risk.” He said it was “obvious” to him from inception that Lagevrio would have a risk evaluation and mitigation strategy (REMS) drug safety program required by the Food and Drug Administration because of risk of birth defects.

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“Since that time, we have learnt that Lagevrio’s efficacy is materially lower than that reported by either monoclonals such as Regeneron’s Ronapreve as well as Pfizer’s Paxlovid (on an interim analysis),” Baum wrote.

He also believes it is likely that resistance will emerge over time to monotherapy Lagevrio usage.

“We expect the FDA to recommend monoclonal antibodies to be preferred therapy in immunocompromised patients in order to reduce the risk of resistance,” Baum wrote.

As a result, he said the FDA could end up limiting Lagevrio approval to only non-vaccinated or immunocompromised patients.”

Merck’s stock has lost 4.3% year to date, while shares of Regeneron Pharmaceuticals Inc.

have climbed 36.1% and of Pfizer Inc.

have hiked up 44.2%. Meanwhile, the SPDR health care ETF has advanced 17.0% this year and the Dow has gained 15.0%.

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