Shares of Amgen (AMGN) - Get Amgen Inc. Report and Merck (MRCK) fell sharply Tuesday after Morgan Stanley downgraded the two pharma stocks to equal-weight from overweight and lowered their price targets.
Morgan Stanley backed away from the two stocks and said investors should hunt for upside elsewhere.
Shares of Amgen fell Tuesday 2.1% to $221.40 at last check. Merck shares fell 2.2% to $75.53.
Morgan Stanley analyst Matthew Harrison also lowered his price targets on both stocks. The price target for Amgen dropped to $251 a share from $280 a share, and Merck was lowered to $85 a share from $90 a share.
"Our new thesis is based on a more balanced risk/reward as investors focus on the mid-decade [loss of exclusivity] for Evenity, Xgena and Prolia offset by continued pipeline progress," Harrison wrote in a note to clients about Amgen.
Evenity and Prolia are Amgen's osteoporosis drugs.
For Merck, Harrison said he did not see "significant upside" as concerns over diversification remain.
"While we believe management can continue to drive Keytruda upside, investors are unlikely going to pay for that upside as they remain concerned about lack of LOE diversification," added Harrison.
Keytruda is among Merck's top selling cancer treatment drugs.
"Investors are not convinced that the current pipeline assets, including HIV drug islatravir and early oncology assets, are enough to offset the Keytruda cliff at the end of the decade, given pivotal data will not read out until 2024-25," Harrison wrote.
Harrison also said that Merck could "potentially be boosted" on positive Phase 3 trial data for its COVID-19 oral antiviral drug molnupiravir and its emergency use authorization.
"But we do not see significant upside without meaningful strategic action to address LOE concern," he added.