>Merck KGaA (EUROPEAN STOCK)

■ Valuation upside; but too many near-term risks
While our 12 month price objective (Eur71) represents c15% upside from current levels, we do not expect this to be realised short term given upcoming events (Vecibix Phase III data and cladribine data exclusivity decision, discussed below) represent asymmetric downside risk, in our opinion. In addition, uncertainty on Erbitux EU approval in lung cancer is expected to remain as sentiment overhang. With higher, less risky returns available elsewhere in EU pharma (Bayer and Sanofi top picks), we maintain our Neutral rating.

■ Vectibix asymmetric risk to Erbitux forecasts
Detailed data from the PRIME study investigating Vectibix (Amgen, anti EGFR antibody) in 1st line colorectal cancer (mCRC) is expected at the ESMO conference on the 24th September. We see limited upside to Erbitux forecasts from competitive data, but potentially significant downside, dependent on strength of the Vectibix data. Importantly, in our opinion, Vectibix may be able to gain market share, even if efficacy is only broadly similar to Erbitux (base case expectation), given its lower dosing frequency and potentially better infusion site reaction profile.

■ Cladribine data exclusivity increasingly a focus
While we believe Phase III data for cladribine is impressive and potentially supportive of blockbuster sales potential, we remain cautious on cladribine’s patent estate and data exclusivity. Cladribine’s composition of matter patent has already expired and method of use patents in MS are valid until only c2013E (EU/US). We, therefore, believe that any data exclusivity granted is crucial to protecting cladribine from generic competition. In EU, we currently assume (in-line with company guidance) the product remains protected by 10 years new indication exclusivity. However, obtaining the latter is not a given and if not secured, it could severely restrict cladribine’s long-term commercial potential.

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