Every once in a while a ballplayer gets hot. Most readers regardless of what sport they might have played and regardless of the level reached can identify with that feeling.
When you're hot, you can't wait for game day. Heck, you can't even wait for practice. Well, it's Friday, and the health care sector is leading the S&P 500 -- and big pharma is leading health care.
Merck MRK is outperforming the rest of big pharma. Merck is hot. Red hot.
A Very Busy Week
Let's review the week from the perspective of this Dow Jones Industrial Average drug name.
Earlier this week (Tuesday), the FDA accepted Merck's marketing application for its Ebola vaccine (V920) under Priority Review. The action date for that one is March 14, 2020.
Later that day, the FDA, the Therapeutics Goods Administration (Australia) and Health Canada all granted accelerated approval for the combination of Merck's Keytruda drug with Eisai's ESALY Lenvima for the treatment of advanced endometrial carcinoma under a number of conditions whose cancer has progressed following other systemic therapy, but are not considered candidates for surgery or radiation.
Flash forward. Friday morning. Two more at bats. First, the European Medicines Agency's advisory group has adopted a positive opinion that recommends approval of combining Merck's Bavencio with Pfizer's PFE Inlyta for first line treatment of advanced renal cell carcinoma. Expectations are that it will take 60 days to get a final decision from the European Commission. That's late November.
Lastly, the FDA approved Merck's supplemental marketing applications for both Pifeltro and Delstrigo to include adult patients with the HIV-1 infection who are virologically suppressed, on a stable antiretroviral regimen, and have no history of treatment failure, or known resistance to either of these drugs. Both of these products were first approved more than a year ago.
This may be a tough segment to read through. I tried to simplify the material as much as I could without diluting the importance of the information. That said, it's not too hard to see why investment dollars have been finding Merck Friday morning, or for that matter... this week.
Merck is expected to report third-quarter results in late October. The current wall Street consensus view is for EPS of $1.23 on revenue of $11.59 billion. If realized, that would be good for earnings growth of 3.4% on revenue growth of 7.3%.
Bear in mind that according to FactSet, for the third quarter in aggregate, S&P 500 earnings are expected to post at -3.2%, and even broken down by sector, health care earnings are projected at +2.2%. For the full year, Merck is expected to post 13% earnings growth on 8.6% revenue growth.
Interestingly, what we immediately see in the chart above is an ascending triangle pattern that succeeded in producing volatility, but failed as this is a pattern that most traders (including this one) see as bullish. Yet, the shares found support at the 200-day simple moving average and appear on the strength of this recent news to be making another run at an $87 pivot.
If this pivot is taken, I can see these shares rising above $100. However, as my original setup failed me, I have brought my target price in to $97. My panic point of $75 is unchanged.
Trade Idea (minimal lots)
I am already long this name. However, if I were not, but was interested in getting involved in a risk-averse way I could:
-- Purchase one Nov. 1st MRK $87 call (value: $1.42),
and finance this purchase through the...
-- Sale of one Nov. 1 MRK $83 put (value: $1.39).
Net Debit: $0.03
Note: The trader will have almost completely paid for the right to purchase 100 shares of MRK at $87 upon expiration, by opening him or herself up to having to either purchase 100 shares of MRK at $83 or buy back the put upon expiration.