Bloomberg News

Merck Options Are Most Bearish Since 2006 Before Earnings

July 29, 2011

(Updates with closing levels in third, fifth and 12th paragraphs.)

July 28 (Bloomberg) -- Seven months after Ken Frazier took over as chief executive officer at Merck & Co., options traders are the most bearish in more than four years as the second- biggest U.S. drugmaker faces generic competition to its top- selling asthma treatment, Singulair.

Ian Read, the Pfizer Inc. CEO who began his job a month before Frazier, has his New York-based company pursuing the sale or spinoff of at least two businesses as it faces patent losses on the cholesterol treatment Lipitor, the world’s best-selling drug, in November. No such plan has come from Frazier, who has only said he won’t rule out unit sales as he faces lost revenue next year from Singulair, with $5 billion in 2010 sales.

Merck, based in Whitehouse Station, New Jersey, reports earnings tomorrow. Its puts cost 42 percent more than calls, near the 49 percent level reached July 25. That figure was the most since October 2006, Bloomberg data show.

“He hasn’t put his stamp on the company yet and what he thinks the direction should be,” Trevor Polischuk, an analyst at OrbiMed Advisors LLC in New York, said in a telephone interview. “People are waiting to see what Ken Frazier views the future of Merck as.”

Merck shares have declined 3.1 percent this year while Pfizer’s shares jumped 11 percent. The Standard & Poor’s 500 Index advanced 3.4 percent while health-care stocks in the benchmark measure of U.S. shares climbed 8.7 percent.

Three Options

Merck has three opportunities to improve performance, Polischuk said. It could sell some divisions or older products as Pfizer is doing, it could acquire more companies, or it could focus on research over the long term and hope that its pipeline comes through despite recent stumbles, Polischuk said.

Frazier “just hasn’t tipped his hand yet on which it is going to be,” he said.

Steven Campanini, a spokesman for Merck, declined to comment.

Pfizer’s Read said on July 7 he is divesting animal health and nutrition units to buy back shares so the world’s biggest drugmaker could increase its focus on developing new treatments. The units may fetch $22 billion, according to Seamus Fernandez, an analyst at Leerink Swann & Co. Pfizer’s animal health unit had sales last year of $3.48 billion.

Singulair next year will follow Merck’s Cozaar and Hyzaar blood pressure medicines, which went off-patent in 2010, resulting in a 57 percent sales drop in the fourth quarter.

Drug Pipeline

This year, Merck has reported setbacks in its experimental drug pipeline. In January, it halted a trial of the bloodthinner vorapaxar, spurring a $1.7 billion writedown a month later. In March, the company walked away from a second blood thinner, betrixaban, and last month had a trial of its vaccine to prevent staph infections ended.

Implied volatility for three-month Merck options priced 10 percent below the level of the stock, a proxy for put costs, is 25.76. That’s 42 percent more than the 18.11 level for contracts 10 percent above the stock price, a measure for calls. For Pfizer, puts cost 28 percent more than calls, down from a four- year high of 38 percent on July 1. Pfizer has lost 6.7 percent following that peak.

“There’s a risk being priced into Merck via the options that’s somewhat unique,” Alec Levine, an equity derivatives strategist Newedge Group SA in New York, said in a telephone interview. “The skew is very steep,” he said of the difference between put and call prices.

Joan Campion, a spokeswoman for Pfizer, declined to comment.

R&D Focus

Frazier said in an interview when he was named CEO that he would focus on the company’s research and development program. In April, Merck said it plans to spend as much as $8.4 billion on research in 2011 to develop new drugs to replace those going off patent. Pfizer is cutting its research budget by a third to $6.5 billion to $7 billion over two years.

Still, “Ian Read of Pfizer has taken all the headlines” since then, Polischuk said.

The drugmaker will report earnings of 95 cents a share, excluding some items, when it releases second-quarter results tomorrow, according to the average estimate of 17 analysts surveyed by Bloomberg. Merck has beaten predictions for the past eight quarters, data compiled by Bloomberg show.

“Merck has been very determined to acquire new products and make joint ventures,” said Ira Loss, an analyst at Washington Analysis LLC who’s followed the health-care industry for more than three decades. “It’s just a question of how quickly they can recover the revenues from new product lines.”

--With assistance from Tom Randall, Victoria Taylor and Oliver Renick in New York and Drew Armstrong and Anna Edney in Washington. Editors: Joanna Ossinger, Nick Baker

To contact the reporters on this story: Jeff Kearns in New York at; Robert Langreth in New York at

To contact the editors responsible for this story: Nick Baker at; Reg Gale at

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