Monday, February 4, 2013

I Think Morgan Stanley's Rationale -- On IMPROVE-IT -- Is An Overreaction

A commenter named Sam just asked about the latest Morgan Stanley downgrade:

. . . .Thanks for the question. I think Morgan Stanley taking Merck from a "Equal Weight" to a "Underweight" (i.e., effectively a "Sell") is slightly overwrought.

I do agree with Morgan Stanley that there is a fairly small chance that IMPROVE-IT shows any benefit. But that is hardly going to be Earth-shattering news. There have been three other studies that point pretty plainly in that direction. But they were smaller -- not definitive. IMPROVE-IT is so large, it will be definitive.

Said another way, the entire thesis being tested in IMPROVE-IT is already pretty much Swiss cheese -- doubt-riddled.

The worldwide sales figures (2009 to 2012) for Vytorin and Zetia reflect this.

I think most of IMPROVE-IT as a null result is priced in to the MRK NYSE quote this morning.

Early last week, I said that $43 was about the low end of fair value for Merck. That was before we knew that Merck was pushing its next-gen osteoporosis candidate by a full year -- to 2014.

Now, I think the low end of fair vaule, after the earnings call for Merck, is probably $41.50 to $40.50, or so.

But -- to be clear -- I don't really buy the idea of a huge selloff -- if IMPROVE-IT comes out badly. I think that's pretty much priced in.

We shall see. . . .

We will keep you posted -- and thanks to Sam for the cogent question!


Sam said...

And thanks for the detailed response! :)

I don't run into many company specific blogs but since I'm interested in MRK, have bookmarked yours and will keep checking in.

Condor said...

Thanks, Sam --

There will always be a Welcome Mat out here, for you!