EFTA00598930.pdf

North America Equity Research J.P.Morgan 02 October 2015 MRK/BMY Restricted Keytruda Label as Expected; See Opdivo Maintaining Leadership Position - ALERT Today, the FDA approved Keytruda (PD-1) with a companion diagnostic Pharmaceuticals — Major & (PD-L1 IHC 22C3 pharmDx test) for second-line PD-L1+ lung cancer Specialty patients. The restricted label is generally in line with expectations and is Chris Schott, CFA AC likely to broaden over time as data from additional trials support (1-212)622-5676 Keytruda's efficacy in a larger patient population. Given that Opdivo is Bloomberg JPMA SCHOTT <GO, already approved in an all comer sq-NSCLC population and Keytruda has Aditl Singhania, PhD been granted a restricted label, we expect the uptake to be skewed towards (1-212)622-1267 the PD-L1+ non-sq patients. For, BMY, today's Keytruda label further reinforces our view that Opdivo will maintain a clear leadership position in Wendy L Lin the NSCLC marketplace. Overall, we continue to see Merck as a (1-212)622-5350 competitive I/O player with a lead in multiple tumors with large unmet need such as HNSCC and colorectal tumors harboring MMR mutations. Dana Flanders, CFA (1-212)622-1256 • Keytruda approved in 2L PD-L1+ NSCLC. The FDA approved M. Morgan Securities LLC Keytruda for use with a companion diagnostic in PD-L1+ second-line lung cancer patients who have been previously treated with BMY, BMY US Overweight chemotherapy. The approval was based on patients with PD-L1 Price: 660.05 expression in >50% of tumor cells, which showed an ORR of 41% and a 01 October 2015 16 month OS rate of 55-60%. Further, although the data are immature MRK. MRK US the survival benefit seen was similar to the OS rates for Opdivo in high Ovenveighl Price: 549.37 PD-L1 expressers. As a result we see a healthy uptake of Keytruda in 2L PD-L1+ patients. 01 October 2015 • We expect the label to expand over time. With KEYNOTE-010, a registrational 2L study expected to read out in the next several months and different frontline studies ongoing in PD-L1+/ all comer patients, we expect the initial label to broaden over time and gradually increase Keytruda's footprint in NSCLC. In addition, we are encouraged by our recent immunotherapy survey in which a majority of physicians considered PD-1/PD-L Is as interchangeable. That said, in the near term we expect today's narrow label and Opdivo's approval in sq-NSCLC/ NCCN recommendation in non-sq to largely restrict use in PD-L1+ non- sq patients. • Up next: Watching for range of near-term catalysts across Merck's diverse portfolio. In addition to watching the HCV triplet data (C- CREST) at AASLD and potential doublet launch later this year/early 2016. In the long term, we expect 2016-17 updates and data from assets such as second-generation I/O compounds (GITR), BACE-inhibitor (Alzheimer's) and anaceptrapib (CETP), none of which appear to be reflected in Merck's current share price. See page 2 for analyst certification and important disclosures. M. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the flail may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. t is being provided for the exclusive use of LAUREN ZAKARIAN-COGSWELL at JPMorgan Chase & Co. and clients of Morgan. EFTA00598930  Chris Schott. CFA 1-21216225676 North America Equity Research 02 October 2015 J.P.Morgan Analyst Certification: The research analyst(s) denoted by an "AC' on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an "AC" on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that (I) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. For all Korea-based research analysts listed on the front cover, they also certify, as per KOFIA requirements, that their analysis was made in good faith and that the views reflect their own opinion, without undue influence or intervention. Important Disclosures • Lead or Co-manager: I. Morgan acted as lead or co-manager in a public offering of equity andfor debt securities for Bristol-Myers Squibb Coin li any, Merck & Co., Inc. within the past 12 months. • Client: . Morgan currently has, or had within the past 12 months, the following company(ies) as clients: Bristol-Myers Squibb Company, Merck & Co., Inc.. • Client/Investment Banking: • Morgan currently has, or had within the past 12 months, the following company(ies) as investment banking clients: Bristol-Myers Squibb Company, Merck & Co., Inc.. • Client/Non-Investment Banking, Securities-Related:.. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-investment-banking, securities-related: Bristol-Myers Squibb Company, Merck & Co., Inc.. • Client/Non-Securities-Related:.. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-securities-related: Bristol-Myers Squibb Company, Merck & Co., Inc.. • Investment Banking (past 12 months): M. Morgan received in the past 12 months compensation from investment banking Bristol- Myers Squibb Company, Merck & Co., Inc.. • Investment Banking (next 3 months): . Morgan expects to receive, or intends to seek, compensation for investment banking services in the next three months from Bristol-M rs Squibb Company, Merck & Co., Inc.. • Non-Investment Banking Compensation: Morgan has received compensation in the past 12 months for products or services other than investment banking from Bristol-Myers Squibb Company, Merck & Co., Inc.. Company-Specific Disclosures: Important disclosures, including price charts and credit o pinion histo tables, are available for compendium reports and all Morgan-covered companies by visiting calling 1-800-477-0406, or e-mailing with your request. Morgan's Strategy, Technical, and Quantitative Research teams ma Morgan. For important disclosures for these companies. please call 1-800-477- 0406 or e-mail Bristol-Myers Squibb Company (BMY MAY US) Price Chart Date Rating Share Price Price Target (S) (S) 12e 24-Jun-08 N 20.23 106 OW352 OW 570 06-Jan-09 N 23.23 23.00 19-Oct-09 N 22.97 25.00 N 620 IN1-OWI600 OW Ma 05-Jan-10 N 25.23 26.00 INrN NEW I RIR MI NSW N666I INIOWS54 OW OW S 18-Oct-10 N 27-Jan-11 N 25-Mar-11 N 27.33 25.79 26.43 27.00 31.00 32.00 Ptidoi$) n 26-Sep-11 N 30.94 33.00 04-Jun-12 N 33.33 35.00 25-Jul-12 N 34.73 38.00 03-Jun-13 N 47.59 48.00 24 25-Jul-13 N 43.93 50.00 16-Sep-13 OW 45.14 52.00 23-Oct-13 OW 48.96 54.00 Oct Apr Oct Apr Oct Ap Oct 19-Deo-13 OW 52.59 60.00 Os 08 09 11 12 14 15 10-Oct-14 OW 49.50 63.00 Source' Bernornborg and IlIongsn once dins 4u*ttd for 'lock spins arO clniclords. 03-Nov-14 OW 58.19 66.00 Break a, coreetne Jon 24. 200t r Jan CO. 20,4 20-Jan-15 OW 62.31 70.00 2 This document is being provided for the exclusive use of LAUREN ZAKARIAN-COGSWELL at JPMorgan Chase & Co. and clients of M. Morgan. EFTA00598931  Chris Schott. CFA (1-21216225676 North America Equity Research 02 October 2015 J.P.Morgan 05-Mar-15 Ov7 65.67 75.00 30-Sep-15 Ovi 59.20 78.00 Merck 8 Co.. inc. (MRK. MRK US) Price Chart Date Rating Share Price Price Target ($) (S) 108 - 24-Jun-08 OW 37.03 06-Jan-09 OW 30.53 3&00 90 - 04-Nov-09 OW 30.67 40.00 OW $44 05 Jan 10 OW 37.16 44.00 72 - 13-Jan-11 OW 34.23 42.00 oi ow ma OW $40 0I OW $44 02-May-11 OW 35.95 44.00 Prico(S) 54 - 30-Jul-12 OW 45.10 52.00 03-Jun-13 OW 48.45 54.00 38 30-Jul-13 OW 48.05 52.00 01-Oct-13 OW 48.37 53.00 02-Dec-13 OW 50.18 55.00 18 - 05-Feb-14 OW 53.77 60.00 06-May-14 OW 57.11 64.00 0 I I 1 I 10-Oct-14 OW 59.21 66.00 Oct Apr Oct Air Oct Apr oo 08 09 it 12 14 15 20-Jan-15 OW 63.03 68.00 21-Sep-15 OW 52.13 65.00 Sotto*: Oloomberg ar411.. klorssw. Woodata adiusterl for stook splits and enemas. Break In coveratteJue 242008- act 06. 2009 30-Sep-15 OW 49.39 66.00 The chart(s) show M. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire M. Morgan ratings or designations: OW Overweight, Ni• Neutral, UW Underweight, NR •• Not Rated Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe: Morgan uses the following rating system: Overweight (Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe] Not Rated (NR): M. Morgan has removed the rating and, if applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a recommendation or a rating. In our Asia (ex-Australia) and U.K. small- and mid-cap equity research, each stock's expected total return is compared to the expected total return of a benchmark country market index, not to those analysts' coverage universe. If it does not appear in the Iraimportant Disclosures section of this report, the certifying analyst's coverage universe can be found on Morgan's research website, Coverage Universe: Schott, Christopher: AbbVie (ABBV), Allergan plc (AGN), Bristol-Myers Squibb Company (BMY), Coheres (CHRS), Eli Lilly & Company (LLY), Endo International PLC (ENDP), Impax Laboratories (IPXL), Kythera Biopharmaceuticals (KYTH), Mallinckrodt (MNK), Merck & Co., Inc. (MRK), Mylan Inc. (MYL), Perrigo Company (PRGO), Pfizer Inc. (PFE), Sagent Pharmaceuticals (SGNT), Teva Pharmaceuticals (TEVA), Valeant Pharmaceuticals (VRX), Zoetis (ZTS) M. Morgan Equity Research Ratings Distribution, as of September 30, 2015 Overweight Neutral Underweight (buy) (hold) (sell) M. Morgan Global Equity Research Coverage 45% 43% 12% IB clients* 52% 49% 35% JPMS Equity Research Coverage 45% 47% 8% IB clients* 69% 66% 54% *Percentage of investment banking clients in each rating category. For purposes only of FINKANYSE ratings distribution rules, our Overweight rating falls into a buy rating category: our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table above. 3 This document is being provided for the exclusive use of LAUREN ZAKARIAN-COGSWELL at JPMorgan Chase & Co. and clients of M. Morgan. EFTA00598932  Chns Schott. 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