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Hawk’s Nest

Option Traders Score Huge with Massive Merck Rally

by | Dec 26, 2022

Merck (MRK) a featured write-up on 8/15/22 has seen shares rally to record highs in a straight-line higher since September and the November $90 calls featured that were bought for $6M where valued over $15M at expiration. This fit right into our core trades as large positioning 2-3 months out with clear catalysts in a fundamental favorite.

Here was the featured write-up:

“Merck (MRK) on 8/11 with a massive buy of 15,000 November $90 calls for over $6M and followed some mixed flow including 5000 November $85 puts bought on 7/28. MRK also has 18,000 October $90 calls in open interest from large buys in March and June as well as 8500 January $85 calls bought last October. MRK recently dipped and rebounded off trend support and well above its rising 200-MA. On a longer timeframe shares are forming a multi-week consolidation with a likely upside push to $100 this year. MRK is a global health care company that delivers innovative health solutions through its prescription medicines, vaccines, biologic therapies and animal health products. MRK’s Pharma segment has turned in an Oncology juggernaut with the success of Keytruda while Gardasil and Januvia are its other top contributors. MRK spun-out its Organon business sin June for women’s health, biosimilars and established brands. MRK is reportedly in advanced talks to buy Seagen for about $40B. MRK has a $225B market cap and trades 12.15X Earnings, 3.95X Sales and 29.7X FCF with a 3% dividend yield and after a few strong years of revenue growth sees flat to lower in 2023 with minimal EPS growth of 1.6%. MRK also has momentum with LAGEVRIO, which is helping to in fighting against COVID-19. On MRK’s 2Q call management noted that business development remains a priority for the company and they are focused on finding the best science and innovation to drive long term growth and they have the balance sheet strength to pursue anything, with the mix of cash, debt and equity being deal specific. In regards to a deal for SGEN, if confirmed, positives of a potential deal could include providing MRK with $5bn+ in revenue in 2026+ (MRK’s largest drug Keytruda goes off patent in 2028), leveraging MRK’s existing commercial infrastructure in cancer (i.e., potential cost synergies), and offering an antibody-drug conjugate platform with which to develop additional cancer drugs to drive future pipeline opportunities. In April, Merck hosted a Cardiovascular Day to layout the potential of its cardiometabolic portfolio (8 approvals by 2030 to drive >$10B in peak revenue by mid-2030). MRK likely needs  large scale M&A is needed to address Keytruda concentration risk. Analysts have an average target of $100 and short interest minimal at 0.8% of the float. Barclays raised its target to $101 following another beat and raise quarter.”