Raising Fair Value on Merck After Strong Keytruda Data

At ASCO, Merck presented data from Keynote 042 (Keytruda monotherapy in PDL1 expressing patients at 1% or more in NSCLC) and 407 (Keytruda combination with chemotherapy in squamous NSCLC) showing that the drug reduced the risk of death versus placebo by 19% and 36%, respectively. We believe the data will drive Merck's market share in first-line NSCLC to 67% by 2022 and drive the total market for immuno-oncology drugs to $14 billion (up from our previous estimate of $10 billion) in this market segment. We expect increased market adoption following the efficacy data that should change the standard of care in most NSCLC settings.

We expect Merck will take more share from Bristol, Roche, and AstraZeneca based on cross-trial comparisons that support Keytruda over competitive drugs. However, we don't expect any major shifts in valuation for the competing firms, as the increased expectations for the overall market and strong data from competing drugs in other cancers mitigates the NSCLC market share shifts to Merck. We expect Roche's Tecentriq will likely gain the next largest amount in this market at 20%, (especially in the ALK and EGFR mutation segments where competitors lack data), followed by Bristol's Opdivo plus Yervoy at 11% (with strength in the TMB high/PDL1 low patient group).

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