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Investors Bought This Pharma Stock Despite the Dow’s 164-Point Drop Today

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The Dow Jones Industrial Average lost roughly 164 points today, as investors prepare for a key inflation report Wednesday and for earnings season to kick off Thursday. Investors are also weighing renewed fears of lockdowns in China after the country has reported a resurgence of covid cases, particularly the Omicron subvariant, which has become the dominant form of covid in the U.S.

On Wednesday, investors will see the latest data from the Consumer Price Index (CPI), which tracks the prices of daily goods and services. Investors use the CPI as one measure of inflation. In May, the CPI increased 8.6% year over year, which was higher than investors had been expecting and called into question whether or not inflation had peaked.

Economists are projecting that new data may show the CPI rose close to 9% in June year over year, which may put the market on edge. Investors are hoping to see clear evidence that inflation has flatlined and will eventually start to head downward. While most of the Dow’s 30 stocks sunk on Monday, investors were buying this pharma stock.

A potential takeover draws interest

The New Jersey-based drugmaker Merck (NYSE: MRK) led the Dow today, with shares gaining 1.65% on a day when no other stock managed to rise more than 1%.

Investors seem to be bullish on reports that Merck may acquire the cancer treatment company Seagen (NASDAQ: SGEN). The Wall Street Journal recently reported that Merck is in advanced talks to acquire the biotech company in a deal that could be valued well north of $200 per share. A deal could come before the end of the month.

In a recent research note, Wells Fargo analyst Mohit Bansal said a deal could result in Seagen shareholders receiving between $200 to $220 per share, but would still make sense if it came in higher.

“Notably our analysis suggests even a $250/share price tag for SGEN could still make sense since it has the potential to unlock incremental terminal value for MRK,” Bansal wrote in a research note.

The one uncertainty in the deal, according to analysts, has to do with antitrust issues related to the consolidated amount of oncology assets that would potentially be under one umbrella. However, Bansal and his team noted that regulators focus antitrust issues on products and markets that compete with one another.

“By that logic, [Merck and Seagen] are not competitors. In addition, [Seagen] is not a major biopharma from FTC point of view, so it could also avoid scrutiny,” Bansal said.

Should you buy Merck on the takeover rumors?

While the deal might be beneficial for Merck, I don’t like buying stocks on takeover rumors, especially from the acquirer’s standpoint because acquirers typically end up paying a premium that can be hard to earn back, although this deal certainly looks to have favorable optics.

But there still is plenty of reason to buy Merck, which has absolutely crushed the market with its nearly 23% return this year.

Merck excels in oncology, the study of cancer, which is an extremely fast-growing market in pharma. The pharmaceutical company has also been very successful in other areas of healthcare such as with its HPV vaccine and in animal healthcare, another growing market opportunity. All of this has helped the company crush the inflationary pressure seen this year.

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