Merck stock plunges after Citi downgrade due to ‘high probability’ HIV treatment will be discontinued

Shares of Merck & Co. Inc. sank on Monday, to counter gains in the healthcare sector and the broader stock market, after Citi Research pulled out of its bullish stance on the drugmaker, citing concerns about his treatment for HIV and COVID-19.

The MRK share,
fell 5.7% in afternoon trading to a two-month low. The stock is the biggest drop among the components of the Dow Jones Industrial Average DJIA,
which gained 305 points, or 0.9%, and the SPDR S&P Health Care Select Sector XLV exchange traded fund,
which rose 0.6%.

The stock has now fallen 17.6% since closing at a record high of $ 90.54 on November 4.

Andrew Baum of Citi downgraded his rating to neutral, having been buying for at least 2.5 years. He lowered that share price target to $ 85 from $ 105.

Baum said his “long-standing” bullish thesis on Merck was based on the “underappreciation” of the company’s drug pipeline, particularly its HIV treatment, islatravir, which he said would offset the pending loss of exclusivity of its successful anti-cancer treatment Ketruda. However, he no longer expects any income from islatravir.

“We place a high probability that [Merck] will discontinue development of islatravir within the next three months due to likely regulatory concerns, ”Baum wrote in a note to customers.

Baum said he had removed all estimates for islatravir from its financial models, following the company’s announcement earlier this month that a dose-dependent decrease in lymphocyte count had been observed. in a Phase 2 trial. He said this suggests that it is very likely that materially higher doses needed would result in “miscellaneous and unacceptable” adverse events.

On November 18, Merck said it had stopped dosing in the trial, and on November 23, the company announced a “temporary hiatus” in recruiting into the Phase 2 study.

Merck stock has lost 9.8% since November 18.

“We expect the waning outlook for islatravir to further accelerate Merck’s business development efforts,” Baum wrote. “We are opening up negative catalyst watch on the stock with today’s report.”

FactSet, MarketWatch

But the disappointment with islatravir isn’t Merck’s only problem.

Baum said the clinical profile of Merck’s antiviral for treating COVID-19, Lagevrio, continues to deteriorate, putting Lagevrio’s estimates for next year and beyond at “significant risk.” He said it was “obvious” to him from the start that Lagevrio would have a Drug Safety Risk Assessment and Mitigation (REMS) program required by the Food and Drug Administration because of the risk of birth defects.

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“Since that time, we have learned that the efficacy of Lagevrio is significantly lower than that reported by monoclonal drugs such as Ronapreve from Regeneron as well as Paxlovid from Pfizer (on an interim analysis),” Baum wrote.

He also believes that it is likely that resistance will emerge over time to the use of Lagevrio as monotherapy.

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

As a result, he said the FDA may end up limiting Lagevrio’s approval to only unvaccinated or immunocompromised patients.

Shares of Merck are down 4.3% year-to-date, while shares of Regeneron Pharmaceuticals Inc. REGN,
rose 36.1% and Pfizer Inc. PFE,
+ 1.11%
increased by 44.2%. Meanwhile, the SPDR healthcare ETF rose 17.0% this year and the Dow Jones gained 15.0%.

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