Merck Stock Price Forecast - Insights From Insider Trading
November 02, 2022 | InsiderSentiment.com Team
The pharma giant Merck & Co, Inc has made itself the darling of every portfolio in which it appears recently, with the company's stock price up nearly 25% in last year's difficult environment. Within the last 5 years Merck's stock price is up close to 90% and is trading at $100, rising to this level without any real bumps along the way. By comparison, the VanEck Pharmaceutical ETF containing Merck peers Johnson & Johnson, Abbvie, Pfizer, and others is only up 21% over the last 5 years. Merck's top selling skin-cancer drug Keytruda has pushed the stock up to all time highs. But past success does not always translate into future success, and the tides of reversals could arrive in a striking fashion. This begs the question, in terms of forecasting the future price action of the stock, what insights can we glean from Merck's insider activity?
In addition to longer term success, Merck has performed well recently too. The stock is up over 13% in the last month after the company beat third quarter revenue expectations by nearly $1 billion. Certainly not bad news for shareholders, news which could perhaps only be topped by say, a record number of Americans being diagnosed with skin cancer next year.
Personnel adjustments could change Merck's prospects for the worse, however. The longtime chairman, Ken Frazier, recently announced he will be stepping down as the chair of the board of directors as the role will be taken over by chief executive Rob Davis. Mr. Frazier can take much credit for having steered the Merck ship to riches as he is stepping down from a position he has held since 2011. He has been with the company since 1992.
As general counsel, Mr. Frazier navigated Merck through the backlash and lawsuits resulting from its "painkiller" Vioxx. Recalled in September 2004 after being linked to as many as 55,000 heart attack deaths, Merck settled a class action lawsuit for $4.85 billion in 2007. If that wasn't bad enough, researcher Ron Unz writing for The American Conservative estimated that the drug could have actually caused as many as 500,000 deaths when accounting for the prolonged elevation in elderly mortality starting in 1999, the year Vioxx was let loose on the public, and a corresponding "completely unexpected decline" in that rate in 2005 following its recall.* This is amidst evidence that Merck was aware during its development that the drug increased the risk of heart attacks. Astonishingly, Merck's stock price nearly doubled during this period between September 2004 to January 2008 following the finalized settlement.
Mr. Frazier's stupefying knack for creating immense shareholder wealth through such a period where a reasonable observer might expect mass resignations, jail time, or bankruptcy should be seen as nothing short of astounding. He will surely be welcomed and treasured in whatever venture he decides to partake in following his departure.
As it is a near certainty that Mr. Frazier will be handing the baton off to a colleague that is less skilled than he (it would be hard to find a single man or woman on the planet matching his aptitude), we should examine Mr. Frazier's public order book to try and glean how much confidence he may have in his successor and in which direction he expects the stock price to go in the subsequent months and years. Large sales of Merck stock could indicate Mr. Frazier does not expect the stock to continue its impressive rise under the new leadership.
Let's now take a look at the insider trading activity of Merck insiders, including Mr. Frazier.
Examining the insider purchases and sales over the last year, we see sales very recently, as well as other sales approximately a year ago. Notably, we do not see any purchases, though this is not necessarily unusual. In general, insider sales outnumber purchases at a ratio close to 3 to 1.
(Note, the above graph is taken from insidersentiment.com. Active subscribers can generate the above graph quickly and easily for any public company. We've used this feature to perform similar investigations about other companies recently, such as Snap Inc. and Boeing.)
We note that the trades that do appear on this page are large in magnitude. On one trading day last November, over 600,000 shares (worth around $50 million) were sold, and this was followed by an approximately 14% drop in the stock price over the subsequent month. Within the past week, Merck insiders sold over 1 million shares and then 300,000 shares on consecutive trading days. Let's now look at these trades more closely.
On October 28th and 31st of this year, we see large sales by several executives, including General Counsel Jennifer Zachary, Controller Rita Karachun, President of Merck Manufacturing Division Sanat Chattopadhyay, President of Merck Animal Health Richard DeLuca, and Mr. Frazier. All of these transactions involve the exercising of call options followed by the immediate sale of those options. Many of these options are highly valuable contracts, possessing long durations. Some of Ms. Zachary's options that were exercised did not expire until 2031.
By exercising these options and immediately selling the stock received, Mr. Frazier promptly received proceeds of over $12 million. He then made very similar trades on November 1st and 2nd, pocketing close to $26 million from the exercise and sale. In total, Mr. Frazier sold over 1.4 million shares combined on these four trading days, worth approximately $140 million. As a comparison, before exercising the first options on October 28th, Mr. Frazier was only in possession of just over 700,000 shares.
With so few insider trades in Merck's recent history to compare with and the large magnitude with which several highly informed insiders have sold within the past week, we believe Merck insiders are sending a strong signal that they do not have much faith in Mr. Davis to succeed Mr. Frazier and want to cash out while the going is still good. Insider watchers take note.
* Author's note: I was not able to verify the movements in the US mortality rate in 1999 and 2005 that Mr. Unz refers to. I was able to verify the initial death rate increase, as the crude death rate in the US in 1999 was 1.4% higher than 1998 (877.0 deaths per 100,000 vs 864.7). The 2004 crude death rate was 3% lower than that of 2003, but Vioxx was being prescribed until September 2004, so we need to compare the death rate in 2005 to that of 2004. The 2005 crude death rate was 1.2% higher than that of 2004, not lower. Further, the number of deaths in October 2004, the first full month after the total cessation of the drug, was 7.5% higher than in September 2004. But deaths typically increase from September to October, and a very similar increase also occurred in 2003. This suggests the recall is not reflected in the monthly death totals either.
Still, 55,000 deaths from 139,000 heart attacks is an astonishing figure. In the same Senate testimony, FDA whistleblower David Graham cites another estimate by Dr. Eric Topol that Vioxx caused 160,000 strokes and heart attacks.
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Authors’ disclosure: This article expresses the authors’ opinions. None of the authors have any business relationship with the company whose stock is mentioned in this article. None of the authors have any stock or derivative position in the company mentioned in this article, nor any plan to open such a position within 72 hours. The article does not constitute any recommendation or advice as to whether any investment is suitable for any particular investor. Consult with your licensed financial advisor before making any investment decision.