Merck & Co. (NYSE: MRK) is set to report earnings Monday, July 21, ahead of the opening bell. According to First Call, analysts are looking for a profit of 83 cents on revenue of $6.05 billion, an improvement over the 82 cents per share it reported in the same quarter last year, but a decline over the $6.1 billion in sales. Last quarter, the company beat per-share earnings estimates, but disappointed in sales.
Merck has suffered some bad news this quarter:
The biggest blow was no doubt the FDA rejection of Merck's new cholesterol drug, Cordaptive. With so many drugs coming off patent, the drug company was relying on Cordaptive to contribute as much as $2 billion a year in sales.
Also, prescriptions for Vytorin, co-marketed with Schering-Plough (NYSE: SGP), kept falling. While this was to be expected following the January released study suggesting Vytorin and Zetia may not work well as older generic statins, the impact could be larger than expected.
As for its cervical-cancer vaccine Gardasil, recently an analyst report from UBS questioned whether sales of the vaccine have met Wall Street estimates for the second quarter. UBS has proceeded to downgrade Merck to Neutral from Buy.
Then, only Thursday, Merck announced a program to resolve and fund the $4.85 billion settlement stemming from the Vioxx 50,000 lawsuits. More than 97 percent of eligible claimants now have initiated enrollment in the program and will start receiving checks beginning late next month. In a way, though, this is a good news/bad news sort of thing. Investors like it when outstanding issues are resolved.
After hitting a one-year high of $61.62 in December, the stock hit a one-year low of $34.49 in June. MRK opened this morning at $37.12. So far today the stock has hit a low of $36.60 and a high of $37.38. As of 1:05, MRK is trading at $37.38, up 42 cents(1.1%). The chart for MRK looks neutral and improving, while S&P gives the stock a neutral 3 Stars (out of 5) Hold rating.
For a bullish hedged play on this stock, I would consider an October bull-put credit spread below the $32.50 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 16.3% return in just three months as long as MRK is above $32.50 at October expiration. Merck would have to fall by more than 13% before we would start to lose money. Learn more about this type of trade here.
MRK hasn't been below $34.50 at all in the past year and has shown support around $37 recently. This trade could be risky if the company's earnings (due out 7/21) disappoint, but even if that happens, this position could be protected by the support the stock might find at its year low, which is just below $35.
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.
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.
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.
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.
There is a report out of Reuters that may get the drug sector up in a whirlwind if it comes to pass. The implications aren't just that Pfizer Inc. may want to try to counter Japanese drug maker Daiichi Sankyo's bid for a majority stake in India's largest generic drug maker Ranbaxy. Daaichi Sankyo has put in a bid of roughly $4.6 billion for that majority stake.
Pfizer is stuck along with Merck & Co. Inc. (NYSE: MRK) and other Big Pharma drug players between a rock and a hard place as it has a mountain of cash, makes money, but has a perceived weak drug pipeline. If you thought that Big Pharma drug companies were under fire because of generic drugs, the issues may get much more convoluted.
Ranbaxy is India's largest generic drug maker, and India also has some restrictions on foreign ownership of its key companies and infrastructure. Whether or not the Pfizer deal comes to pass, it is becoming more and more inevitable that the big drug companies are going to have to either make more biotech buyouts to purchase better drug pipelines or that generic makers will become targets as a way to fend off the generic pressure. No wonder the short selling is lower in major biotechs.
"You can invest for all the right reasons and still get the wrong result," notes long-standing turnaround stock expert George Putnam, referring to the poor performance of the pharmaceutical sector in recent years.
Here, in his industry-leading The Turnaround Letter, he offers a fascinating review of 10 leading drug stocks which he now believes offer a combination of growth potential at "pretty cheap" valuations. Here is his overview.
"In 2000 and 2001, when the Internet boom was becoming a bust, many smart investors turned away from technology stocks and put their money into drug stocks. How could you go wrong with the big pharmaceutical companies?
"Demand for their products was growing as the population aged. These companies had huge research and development programs that seemed to keep cranking out new blockbuster drugs. And most of them had great balance sheets, with many paying handsome dividends.
"Much of this reasoning has been borne out in the intervening years. Many large drug manufacturers have rung up substantial revenue gains over the last decade. So what's happened to the big drug stocks? With few exceptions they have gone sideways or down – in some cases down a lot.
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.
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 toThe 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.
The drug maker posted net income of $3.3 billion, or $1.52 per share, for the January-March period, up from $1.7 billion, or 78 cents a share, a year ago. Excluding one-time items, Merck earned 89 cents per share, beating by three cents the forecast of analysts surveyed by Thomson Financial.
Revenues totaled $5.82 billion, up 1% from $5.77 billion in the first three months of 2007, but below analysts' expectations of $6.11 billion. The company attributed the slow sales growth to the weak U.S. dollar.
Merck shares fell Monday 13 cents, to close at $39.63. Shares are down 23% in the past year.
Analysts surveyed by Thomson Financial expect Bank of America (NYSE: BAC) to post a smaller profit for the first quarter, while Merck & Co. (NYSE: MRK) is expected to report a modest profit gain. Both companies are scheduled to report results on Monday morning.
Bank of America is expected to earn 41 cents per share, which is down 65% from the same period in 2007 when it earned $1.17 per share, but up 87% from the previous quarter when it reported 5 cents per share. While the company was beating quarterly estimates before the credit crunch set in, in the third quarter of 2007 it missed the consensus estimate by 22.2%, and in the fourth quarter it fell short by 72.1%.
Charlotte, NC-based Bank of America is the second-largest bank in the U.S. by assets behind Citigroup (NYSE: C), and boasts the country's most extensive branch network. In the past year, its revenues were $119.2 billion and its net income totaled $14.9 billion. Its EPS growth forecast for the year is -0.9%, which is slightly better than the banking industry average. The consensus recommendation of analysts remains to hold BAC.
The stock has fallen 25.6% in the past year and trades at a P/E of 11.68. Shares closed Friday at $38.56.
Analysts surveyed by Thomson Financial expect Southwest Airlines Co. (NYSE: LUV) and Pfizer Inc. (NYSE: PFE) to post smaller profits in the first quarter. Both companies are scheduled to report results on Wednesday.
Southwest is expected to essentially break even as far as earnings are concerned, which is down from the same period in 2007 when it earned four cents per share. The company has beat quarterly estimates recently. It only just beat the consensus third-quarter 2007 estimate, but beat the fourth-quarter estimate by 21.2%.
Dallas-based Southwest's low-cost, no-frills approach has made it one of the leading U.S. airlines. In the past year, the company's revenues were $9.8 billion and its net income totaled $645 million. Its EPS growth forecast for the year is -28.7%, worse than the industry average but better than that of rival JetBlue Airways (NASDAQ: JBLU). The consensus recommendation of analysts remains to buy Southwest.
The stock has fallen 18.5% in the past year and trades at a P/E of 14.7. Shares closed Tuesday at $12.35.
Merck & Co. (NYSE: MRK) is set to report earnings Monday, July 21, ahead of the opening bell. According to First Call, analysts are looking for a profit of 83 cents on revenue of $6.05 billion, an improvement over the 82 cents per share it reported in the same quarter last year, but a decline over the $6.1 billion in sales. Last quarter, the company beat per-share earnings estimates, but disappointed in sales.
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Bank of America is expected to earn 41 cents per share, which is down 65% from the same period in 2007 when it earned $1.17 per share, but up 87% from the previous quarter when it reported 5 cents per share. While the company 
Analysts surveyed by Thomson Financial expect 
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