What happened

Shares of Merck & Co. (NYSE:MRK) were trading 5.5% lower as of 12:46 p.m. ET on Monday. The decline came after Citi analyst Andrew Baum downgraded the stock from buy to neutral, and lowered his 12-month price target on it from $105 to $85.

So what

Should investors automatically accept what Wall Street analysts think about a given stock? No. However, it is wise to understand why analysts change their perspectives. In this case, Baum's downgrade decision was driven by a pair of significant disappointments that Merck reported in recent weeks.

On Nov. 18, Merck announced that it was pausing the development of its candidate dubbed MK-8507. The company also suspended dosing in a phase 2 study evaluating the investigational drug in combination with islatravir in treating HIV. This led to concerns that Merck could end up throwing in the towel on islatravir. 

A scientist looking through a microscope with another scientist in the background.

Image source: Getty Images.

And on Friday, Merck delivered an update regarding its COVID-19 pill, molnupiravir. The company and its partner, Ridgeback Biotherapeutics, reported that the antiviral drug reduced the risk of COVID-19 patients developing severe cases or requiring hospitalization by 30% -- lower than the nearly 50% reduction seen in interim results.

How much do these developments actually hurt Merck? It's important to note that the company says it remains confident in islatravir. However, the issues with MK-8507 could lower Merck's prospects in HIV. And while molnupiravir is still likely to win authorizations and approvals -- and make a lot of money -- its lower efficacy could hurt sales over the long term.

Also worth noting -- Baum's new price target for the big pharma stock is roughly 13% higher than the current share price. The analyst may not be as bullish about Merck as he has been, but he isn't bearish about it.

Now what

Investors will want to closely watch what happens with Merck's development of MK-8507 and any impact that has on islatravir. They'll also want to pay attention to the final clinical trial data for Pfizer's competing COVID-19 pill, Paxlovid. If Paxlovid is a lot more effective than molnupiravir, the sales prospects for Merck's COVID-19 treatment could be much lower than originally expected.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.