AbbVie, Novo get Berenberg boost while Lilly, Merck face downgrades

Berenberg has re-rated major pharmaceutical companies, upgrading AbbVie to "buy" for its successful post-Humira transition, strong R&D returns, and pipeline momentum, and Novo Nordisk to "buy" as its preferred obesity play, citing reset expectations, Wegovy's expanded indications, and a promising pipeline with attractive valuation. Conversely, Eli Lilly was downgraded to "hold" due to a plateauing obesity market, high valuation (2026 P/E of 24.8x), and modest oral GLP-1 data, while Merck & Co was cut to "hold" over long-term sales uncertainty surrounding Keytruda's 2028 patent expiry and concerns about R&D investment falling below its cost of capital. This reflects Berenberg's diverging outlooks based on growth visibility, pipeline strength, and valuation.

Analysis

Berenberg's latest research note signals a significant divergence in the outlook for major pharmaceutical firms, driven by assessments of post-patent cliff strategies, pipeline momentum, and relative valuations. AbbVie received a 'buy' upgrade, with its price target increased to $270, reflecting confidence in its transition away from Humira, led by the strong performance of Skyrizi and Rinvoq. The firm's ability to generate R&D returns above its cost of capital and a projected $47 billion in unallocated cash through 2029 underpins this positive view. Similarly, Novo Nordisk was upgraded to 'buy' and positioned as the preferred obesity play over Eli Lilly, citing reset expectations after a significant share price decline, expanding indications for Wegovy, and a promising pipeline with assets like CagriSema, for which Berenberg forecasts sales 25% above consensus by 2030. Novo's valuation at a 14.5x 2026 P/E is seen as an attractive entry point. Conversely, Eli Lilly was downgraded to 'hold' due to its premium valuation (24.8x 2026 P/E) and signs that the obesity market's upgrade cycle is plateauing, leaving limited upside. Despite Zepbound's strong position, pressure from Wegovy's broader label and less-than-stellar Phase 3 data for its oral GLP-1, orforglipron, temper the outlook. Merck & Co. was also downgraded to 'hold' over persistent uncertainty regarding its long-term growth profile following the 2028 patent expiry of Keytruda. Analysts noted that Merck's R&D returns are projected to fall below its cost of capital and that the firm's $32 billion in available funds for acquisitions needs to be deployed more aggressively to address the looming revenue gap.

Key Decisions for Investors

• Investors may view the upgrades of AbbVie and Novo Nordisk as a signal to favor companies with proven post-patent execution and attractive relative valuations within the obesity market.
• For Eli Lilly, the downgrade suggests that its premium valuation may already price in future growth, warranting a review of position sizes given the limited upside potential and increased competitive pressure highlighted by the analysis.
• The downgrade of Merck underscores the critical need to monitor its capital allocation and M&A strategy, as its current valuation discount reflects market anxiety over the company's ability to replace revenue post-Keytruda's patent cliff in 2028.
• The contrasting ratings present a potential pairs trade framework, going long on AbbVie or Novo Nordisk while considering an underweight position or short on Eli Lilly to capitalize on the identified divergence in valuation and growth visibility.