From the headlines, it’s easy to be apprehensive about pharmaceutical giant Merck (NYSE:MRK). Although the broader healthcare ecosystem tends to be defensive in nature, it has suffered tremendously under the policies of President Donald Trump. While many other sectors have rebounded since the White House’s sweeping global tariffs on April 2, the pharmaceutical space continues to struggle.
As a Barron’s report pointed out, the tariffs and subsequent retaliatory responses represent just one of the many challenges impacting Merck and several of its peers. Recently, the Trump administration announced an initiative to lower drug prices — a positive for patients but a hit to the bottom line for drug manufacturers. In addition, layoffs at health agencies (including the Food and Drug Administration) may have a negative effect on the pharmaceutical sector.
To be fair, Merck represents one of the stalwarts of healthcare, historically making it one of the more reliable names in the equities arena. However, MRK stock has been a poor performer this year, losing almost 25% of value since the January opener. Over the past 52 weeks, the security is down nearly 43%.
The culprit? Per Barron’s, Merck must figure out a way to cover the revenue loss it will likely incur once exclusivity for its cancer drug Keytruda expires in 2026. Investors sense impending doom and have rushed for the exits. Common wisdom suggests, then, that the retail folks should also heed the warning before circumstances worsen.
While this viewpoint has merit, from a contrarian perspective, the bad news may have already been baked in. With MRK stock now trading at a much more attractive price, it may be time to consider going long the embattled security.
As useful as fundamental analysis may be in laying out the context of a particular company, every investor eventually asks a quantitative question: is now a good time to buy the stock? It’s here where we have to set aside the opinion cycle and get down to the demand landscape.
As a blue-chip giant, Merck benefits from an upward bias. For example, the chance that a one-week long position will be profitable in MRK stock is roughly 52%. That’s not much of an advantage but theoretically, over the long run, investors should be able to win more than they lose when betting on MRK.
Still, this standard distribution does not apply to all sentiment regimes. In other words, some sentiment cycles may feature probabilities that deviate significantly from the baseline. But identifying these regimes is difficult unless you are applying appropriate frameworks.
Often, financial publications will attempt to identify patterns in price charts, such as “head and shoulders” or “bullish pennants.” While occasionally insightful, the issue comes down to a lack of falsifiability. Instead, a superior approach is to consider demand, which is a discrete, binary construct.
Right now, MRK stock is riding a “2-8” sequence: two weeks of upside mixed with eight weeks of downside, with a net negative trajectory across the period. This sequence has only materialized 14 times in the past decade and in 64.29% of cases, the subsequent week saw share price appreciation. Further, the median return clocks in at 2.1%, while the median loss (under the negative pathway) lands at 2%.
Should the bulls gain control of the market, MRK stock could gain another 2% (on top of the 2.1% median return) over the next three weeks. If so, investors may anticipate a price target of around $78 by the options chain expiring June 6. On the other hand, the downside risk would be around $73 by then.
For those who believe in the long-term narrative of Merck, buying the security outright is the most straightforward approach. Sure, the company may be losing exclusivity of a key drug. However, with a 43% discount in the share price, the value proposition may be too compelling for some to ignore.
Another approach is to consider options. One idea that sticks out in my opinion is the 75/77 bull call spread expiring June 6. This transaction involves buying the $75 call and simultaneously selling the $77 call, for a net debit paid of $103. Should MRK stock rise through the short strike price at expiration, the maximum reward is $97, a payout of over 94%.
What’s attractive about this particular trade is that, as mentioned earlier, MRK has a quantitative pathway toward the $78 level. So, a $77 short strike price provides a realistic target. Plus, the payouts for call spreads with a $78 short strike price aren’t that much higher than what the 75/77 spread offers.
