Merck (NYSE: MRK) shares are falling today after an analyst at UBS downgraded the stock to "Neutral" from "Buy," saying that the earnings prospects for the stock don't offer much upside. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on MRK.

After hitting a one-year high of $61.62 in December, the stock hit a one-year low of $34.49 last month. This morning, MRK opened at $37.59. So far today the stock has hit a low of $36.38 and a high of $37.99. As of 1:40, MRK is trading at $36.37, down $2.07 (-5.4%). The chart for MRK looks bullish and improving, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.

For a bearish hedged play on this stock, I would consider an October bear-call credit spread above the $45 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 4.2% return in three and a half months as long as MRK is below $45 at October expiration. MRK would have to rise by more than 23% before we would start to lose money. Learn more about this type of trade here.

MRK hasn't been above $45 since February and has shown resistance around $38 recently. This trade could be risky if the company's earnings (due out in late-July) are a positive surprise, but even if that happens, this position could be protected by resistance MRK might find at its 50 day moving average, which is currently around $38 and falling.

Brent Archer is an options analyst and writer at Investors Observer.

DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in MRK.

MOST NOTEWORTHY: Merck, On2 Technologies and Zions Bancorp were today's noteworthy downgrades:

• UBS downgraded Merck & Co Inc (NYSE: MRK) to Neutral from Buy citing slowing Gardasil trends and vaccine supply issues.
• Merriman cut On2 Technologies Inc (AMEX: ONT) to Neutral from Buy to reflect the reduced visibility into financials and management changes.
• Baird downgraded shares of Zions Bancorporation (NASDAQ: ZION) to Neutral from Outperform to reflect deteriorating credit quality and growing capital concerns. The firm lowered their target price to $32 from $43.

OTHER DOWNGRADES:

• AstraZeneca Plc (NYSE: AZN) was downgraded to Hold from Buy at Deutsche Bank.
• JP Morgan lowered Marshall & Ilsley Corporation (NYSE: MI) to Underweight from Neutral.
• Acme Packet Inc (NASDAQ: APKT) was downgraded to Neutral from Buy at Piper.

Before the bell: Futures mixed as oil drops, ahead of earnings season kickoff

According to the New York Post Friday, Merrill Lynch (NYSE: MER) is in talks to sell its 20% stake in Bloomberg L.P. back to New York City Mayor Michael Bloomberg. The post cited anonymous sources. But Merrill will likely not end its cash raising efforts there and could also try to sell its 49% stake in investment manager BlackRock (NYSE: BLK). Selling different assets, could bring some $50 billion to cash-strapped Merrill.

APP Pharmaceuticals (NASDAQ: APPX) shares are up nearly 32% to $23.50 in premarket trading after Germany's health-care giant Fresenius said it's going to buy it for up to $4.6 billion, or $29 a share, depending if certain financial targets are met. This marks Fresenius attempt to enter the U.S. market.

Apple Inc. (NASDAQ: AAPL) is set to launch its next generation iPhone Friday. The 3G, or third-generation, phone will be cheaper and faster than its predecessor and could expand Apple's reach to many more countries that rely on that technology. Apple has set a target to sell 10 million iPhones in 2008, and already sold 1.79 million in the first quarter. Analysts have so far kept their target on Apple, such as Lehman reiterating its Overweight on the stock.

Deutsche Bank downgraded AstraZeneca (NYSE:AZN) to "hold" from "buy", according to MarketWatch.

Lehman Brothers reiterated its "overweight" rating on Apple (NASDAQ:AAPL) ahead of the 3G iPhone going on sale, according to the AP.

UBS downgraded Merck (NYSE:MRK) from "buy" to "neutral", according to Briefing.com. The news service also reports that Piper Jaffray upgraded Broadcom (NASDAQ:BRCM) to "buy" from "neutral."

Douglas A. McIntyre is an editor at 247wallst.com.

Merck & Co (NYSE: MRK) shares are falling today after the company reported that FDA approval its new cholesterol drug will likely be delayed until 2013. The FDA first rejected regulatory approval of the drug in April, and requested more information from company studies. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on MRK.

After hitting a one-year high of $61.62 in December, the stock hit a one-year low of $34.49 earlier last month. This morning, MRK opened at $35.40. So far today the stock has hit a low of $35.00 and a high of $35.83. As of 12:25, MRK is trading at $35.03, down 57 cents (-1.6%). The chart for MRK looks bearish and steady, while S&P gives the stock a neutral 3 Stars (out of 5) Hold rating.

For a bearish hedged play on this stock, I would consider an October bear-call credit spread above the $42.50 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make an 8.7% return in four months as long as MRK is below $42.50 at October expiration. Merck would have to rise by more than 21% before we would start to lose money.

MRK hasn't been above $42.50 since March and has shown resistance around $39 recently. This trade could be risky if the company's earnings (due out in mid-July) are a positive surprise, but even if that happens, this position could be protected by resistance MRK might find at its 50 day moving average, which is currently around $38 and falling.

Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent neither owns nor controls positions in MRK.

Before the bell: Futures higher as oil bursts through $135

It seems that the BCE (NYSE: BCE) buyout plan, has hit yet another bump on the road, only this one could not be as easy to overcome. A Quebec appeals court reversed a lower court and rejected the $33 billion buyout plan accepting the claim of a group of bondholders that the deal is unfair to them. BCE shares are plunging nearly 15% in premarket trading.

Earnings today are due from Barnes & Noble (NYSE: BKS) -- just after the company said it was interested in buying Borders (NYSE: BGP) -- and Gap (NYSE: GPS) -- a day after the clothing retailer announced an expansion in Russia.

Suntech Power Holdings Co. (NYSE: STP) shares are jumping over 7.5% in premarket trading after the solar energy company reported that first-quarter earnings more than doubled on 76% higher revenue. Earnings reached $55.8 million, or 33 cents an American depositary share and revenue reached $434.5. Analysts estimated 28 cents for the quarter.

Almost everyone these days has encountered cancer in one way or another. While the rate of cancer incidence has stabilized to declined since the early 1990s and, with newer and better treatments as well as early detection, cancer death rates have also declined, the war on cancer is still far from won.

It is no surprise, then, that a few days ago, IMS Health (NYSE: RX) -- a provider of market intelligence to the pharmaceutical and healthcare industries -- said that cancer drugs sales will nearly double by the year 2012. Assuming a compound growth rate of 12-15% a year, sales will grow from $48 billion in 2008 to $80 billion by 2012.

The main contributors to growth, according to the study, are an increasing number of patients on chemotherapy, not just in major markets but in emerging markets, too, as well as longer treatment periods for growing numbers of patients. Also fueling growth are the increased use of targeted therapeutic agents, along with first-time innovations coming to the market. Expensive new biotechnology drugs, and the increasing use of combination therapies that contribute to the exploding cost of treatment will also fuel cancer drugs sales growth.

The overall pharmaceutical market grew at a 6.4% pace in 2007, meaning that with its double-digit growth rate, the cancer drug market -- today contributing 17% to global pharmaceutical sales -- will only represent a greater proportion and emphasis. Of course, there will be factors moderating growth, such as drugs losing exclusivity and financial constraints of payers.

Cancer-fighting drugs can reach the market twice as fast as the average medicine, and companies can charge as much as $50,000 for a single course of treatment. It is no surprise then that with more and more drugs coming off patent many pharma companies are turning their attention to cancer. But can it save them?

MAJOR PAPERS:

• In a move to help turnaround its troubled business, General Electric Company (NYSE: GE) will sell or divest its appliance division, and could expect to receive between $5B and $8B for the unit, according to the Wall Street Journal. Potential buyers appliance makers BSH Bosch & Siemens Hausger of Germany and Haier Group of China, as well as private equity firms and Controladora Mabe, GE's partner in Mexico.
• The Wall Street Journal also reported that Comcast Corporation (NASDAQ: CMCSA) will acquire Plaxo, a networking Web site, in an effort to increase its range of services. Terms of the deal were not disclosed.
• To help improve its Ask.com search engine, the Wall Street Journal reported that IAC/InterActiveCorp (NASDAQ: IACI) will buy the Lexico Publishing Group, which owns Dictionary.com, Thesaurus.com and Reference.com.

WEB SITES:

• Citing the New England Journal of Medicine, Bloomberg reported that migraine headache medicines, including Merck & Co Inc's (NYSE: MRK) Maxalt and GlaxoSmithKline Plc's (NYSE: GSK) Imitrex caused potentially fatal reactions in at least 11 people. The Journal said people using "triptans," an older class of migraine drugs, could develop serotonin syndrome, which may cause fever, shock, vomiting and rapid heartbeat.

Well, one step at a time, Merck & Co. (NYSE: MRK) is trying to get past the Vioxx saga. Back in 2004, after over 20 million Americans had used the painkiller drug, Merck pulled it from the market following a study that found that Vioxx doubled the risk of heart attack and stroke in patients who took it for at least 18 months.

Immediately, Merck was hit with nearly 27,000 lawsuits. In November 2006, the company agreed to a $4.85 billion settlement. Merck now says that about 94% of the plaintiffs have chosen to participate in the settlement. I'm not sure the Garza family could have chosen to be part of the settlement or not (as the case was decided before the settlement was agreed), but if they family could, they might be sorry today they didn't do so.

A Texas appeals court overturned a multimillion-dollar verdict against Merck Wednesday. In April 2006, a jury awarded 71-year-old Leonel Garza's widow $32 million (which were later cut to about $7.75 million). The reason cited by the court was that Garza's family failed to provide evidence that Garza's long-standing heart disease could not have been the cause of his fatal heart attack in 2001.

Merck & Co. (NYSE: MRK) said it will eliminate 1,200 U.S. sales jobs, about 15% of the drugmaker's sales force. This comes after last week the FDA rejected its experimental cholesterol pill Cordaptive.

The third-largest U.S. drugmaker has cut 8,100 jobs globally since the beginning of its restructuring plan, Plan to Win, in late 2005. But as Cordaptive, which was supposed to offset some of the losses Merck is expecting from generics coming into the market, fell through, the cost cutting side of the plan took on an added urgency.

Cordaptive and generics aren't Merck's only problem. The FDA also recently suggested its other cholesterol pills, Zetia and Vytorin, aren't any better than an older, cheaper treatment. Merck said it expects to lose as much as 61% of sales for these drugs.

So none of this comes as no surprise really; not in light of Merck's problems, and not in light of the industry's. Other drugmakers, including Pfizer Inc. (NYSE: PFE), Bristol-Myers Squibb Co. (NYSE: BMY), Wyeth (NYSE: WYE) and Johnson & Johnson (NYSE: JNJ) have announced job cuts as they face more competition from generic substitutions. Merck is also planning some plant closures.

Merck's shares lost nearly 33% of their value year-to-date, as it was partly down with the overall market and partly due to the string of bad news that seemed to have hit most hard recently. It is trading not far from its 52-week low.

While Merck is saying it will still fight the FDA decision on Cordaptive and try to convince doctors about Vytorin, the actions it is taking seem reactive, not proactive. Without much to offer in its arsenal of upcoming possibilities, Merck, at least for now, seems to have lost the potential for meaningful growth.

Stock futures were lower early Tuesday morning as oil prices remained high offsetting any recent optimism about the economy in light of Monday's surprise expansion in the service sector. Several companies are also reporting earnings today and will be in focus.

U.S. stocks dropped on Monday after Microsoft withdrew its takeover bid for Yahoo and as commodity prices once again spiked. The Dow industrials lost 88 points, or 0.68%, the Nasdaq Composite fell 12 points, or 0.52%, and the S&P 500 lost 6 points, or 0.45%.

Without much economic news today, no doubt investors will have no choice but to focus on the high oil prices. After setting a record close Monday and hitting a new trading high of $120.93 a barrel Tuesday, crude retreated to $119.88, down 9 cents from Monday's close. It is interesting that just as hopes were growing the slowdown of the US economy may not be as deep and long as originally thought, crude prices surge again, concerning investors about inflation and profits once again.

Despite today's major markets showing a drop, this would really look like another mixed day on fairly light trading volume as profits fight economic numbers. Oil fell more than $3.00 per barrel and consumer confidence came in at a 5-Year low. Foreclosures also have risen by more than 100% with what now appears to be 1 home per 194 that are in foreclosure. All this is one day ahead of the FOMC meeting with the decision to raise rates, and one day after Warren Buffett called a recession already here. Below are the unofficial closing prices for major US index averages:

• DJIA 12,836.01 (-35.74; -0.28%)
  
• S&P500 1,391.24 (-5.13; -0.37%)
  
• NASDAQ 2,426.10 (+1.70; +0.07%)
  
• 10-YR TBond 3.825% (-0.01%)
• 52-WEEK LOWS
• Top Analyst Calls

Biogen Idec Inc. (NASDAQ: BIIB) and Genentech, Inc. (NYSE: DNA) both saw shares flounder with shares down 4.8% at $61.53 and down 6.4% at $68.47 respectively late in the day. This morning the companies announced that Rituxan was a total bust in treating lupus.

Abbott Laboratories (NYSE: ABT) shares are trading higher after the Food and Drug Administration denied regulatory approval for Merck & Co.'s (NYSE: MRK) cholesterol drug Cordaptive. The Merck drug would have directly competed with ABT's own cholesterol drug. If you think that the stock won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on ABT.

After hitting a one-year low of $49.58 in July, the stock hit a one-year high of $61.09 in January. ABT opened this morning at $53.32. So far today the stock has hit a low of $52.97 and a high of $53.73. As of 12:10, ABT is trading at $53.24, up $1.63 (3.2%). The chart for ABT looks bearish and steady, while S&P gives the stock a positive 4 STARS (out of 5) buy rating.

For a bullish hedged play on this stock, I would consider a June bull-put credit spread below the $50 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 13.6% return in just seven weeks as long as ABT is above $50 at June expiration. Abbott would have to fall by more than 6% before we would start to lose money. Learn more about this type of trade here.

Merck (NYSE: MRK) was counting on its new cholesterol drug to help its revenue in the years ahead. It won't work out. The drug, Cordaptive, was turned down by the FDA.

According to The Wall Street Journal, "Merck was counting on Cordaptive to bring in as much as $2 billion a year in sales." The news is likely to hurt the company's stock, which trades at $41.44, well below its 52-week high of $61.62.

Merck's revenue last year was just over $24 billion, so the rejection will hurt, and perhaps hurt a great deal.

Merck is one of a handful of Big Pharma companies that have a number of important drugs coming "off patent." That means that cheap generics will flood the market and margins on the original drugs will disappear. Creating a "blockbuster" drug can take years of R&D, so Merck is left with relatively high costs against falling revenue.

The best way to look at Merck, and the shares of companies like it, is to watch for approval of drugs that are likely to bring in billions of dollars. Without those Merck and its peers will have falling share prices for years to come.

Douglas A. McIntyre is an editor at 247wallst.com and the author of Ten Stocks Under $10.

Before the bell: Street awaits Fed (V, DB, GM)

Merck & Co. (NYSE: MRK) shares are dropping over 8% in premarket trading after it said its cholesterol pill Cordaptive failed to win approval from the U.S. Food and Drug Administration, less than a week after it was recommended for marketing in the European Union. While Merck intends to submit more data to the FDA, it is unclear it will succeed given even some European doctors said more research is needed on one of the drug's main components safety.

Who said higher oil prices aren't good? If you ask Royal Dutch Shell (NYSE: RDS.A) and BP (NYSE: BP), high oil prices are fantastic as the two oil giants beat forecasts when posting quarterly earnings Tuesday, reporting that net income, excluding unrealized gains from changes in inventory values, rose 12% to a record $7.8 billion and 48% to $6.6 billion respectively. Shell shares are climbing 5.7% in premarket trading and BP's over 4.8% as it seems investors think oil above $100 a barrel is here to stay.

Archer Daniels Midland Co. (NYSE: ADM), the world's largest grain processor, said third-quarter profit rose 42% to $517 million or 80 cents per share, topping analyst estimates of 69 cents per share, as it traded more grains and crushed more soybeans. Sales climbed 64% to $18.7 billion. Seems that being in agriculture lately is a positive and ADM shares are rising 3.75% in premarket trading.