Investors may not be fully pricing in Merck's strong treatment pipeline, according to UBS.
The bank upgraded the biopharmaceuticals stock to buy from neutral. Its $122 price target, raised from $117, implies a roughly 21% upside.
Analyst Trung Huynh expects "underappreciated pipeline readouts" will be the primary contributor to multiple expansion for the company. By 2030, he forecasts a pipeline of $15.5 billion for the company.
"The launch of sotatercept in late-line PAH in March '24 is important, but this is largely priced in. In contrast we think a potential readout in CADENCE (PCD: Oct 2024) in PH caused by heart failure is overlooked. This is a more prevalent population than PAH, and without any available treatments," the analyst wrote.
Huynh also noted that investors continue to underestimate the value of two key Merck treatments: Keytruda, used in cancer immunotherapy, and Gardasil, a vaccine targeting HPV.
"We believe consensus continues to underestimate Keytruda revenues as it moves higher up the treatment algorithm, and Gardasil's growth in China," he said.
In the near term going into 2024, he believes Merck's performance will continue to depend heavily on Keytruda. The treatment's catalyst path looks "robust" over the next year, with Huynh forecasting peak sales of $36 billion.
The analyst added that these two treatments and other underappreciated catalysts have all contributed to Merck's above-peer growth profile.
"With the current macro environment uncertain, we believe Pharma stocks with high near-term growth and relatively lower downside risk should outperform lower-growth peers," Huynh said. "Merck encompasses these attributes with solid growth (2022-27E EPS 4.8% vs. peers' 2.6%), driven by Keytruda and Gardasil entering a consistent growth phase and largely unaffected by IRA Medicare price negotiation until 2028."
The upgrade comes after the U.S. Food and Drug Administration approved the use of Keytruda for treatment with "platinum-containing chemotherapy as neoadjuvant treatment" on Monday. The company is also slated to report third-quarter results next week.
Shares of Merck have slid 9.5% since the start of the year.
— CNBC's Michael Bloom contributed to this report.
