Citi is bullish on Merck , saying that the company’s drug pipeline is underappreciated by the market. Analyst Andrew Baum upgraded the pharmaceutical giant to buy from neutral. He also hiked his price target to $130, which implies 14% upside from Wednesday’s close price. The bank said Merck’s newly acquired portfolio of ADC , or antibody drug conjugate, from China-based Kelun-Biotech helps the company in “future-proofing” its oncology and hematology pipeline. The exclusive license and collaboration agreement for ADC development helps Merck in developing more cancer treatment drugs — and Citi thinks it could rival its competitors’ offerings. “Merck’s TROP2 ADC is a materially under-appreciated competitor to AZN/DS dato-DXd,” Baum wrote in a Thursday note, referring to AstraZeneca and Daiichi Sankyo’s lung cancer drug currently in development. Baum added that “the clinical data from early Chinese trials [of TROP2 ADC] looks broadly comparable or even superior to dato- DXd and superior to Gilead’s Trodelvy.” Citi anticipates further upside for Merck shares from the Inflation Reduction Act. The firm believes sotatercept, Merck’s pulmonary arterial hypertension treatment currently in late-stage development, “is the single largest beneficiary of the recently enacted IRA in the US.” To be sure, Baum noted a key downside risk to his valuation is if the ADC pipeline disappoints. Further risks include lower-than-anticipated value share capture by the company’s Melanoma treatment drug Keytruda, and a slowdown in its animal health business. Shares of the drug company were up more than 1% before the bell. Shares have risen just 2.5% in 2023, but have soared 32% over the past 12 months MRK 1Y mountain Merck & Co stock —CNBC’s Michael Bloom contributed to this report.