Merck’s Bold Move Against the Biden Administration, and the Big Bounce in Bank Stocks 6/6/23

0:01Right now on Fast, Merck versus the U.S. government. The drug giant suing Uncle Sam saying D.C. is planned to negotiate drug pricing through Medicare is unconstitutional. The details of the suit, the ripple effects from big pharma straight ahead. Plus, the banking bounced. The regionals rebounded today and surging over the last week. What is behind this turnaround and could now be the time to bet again on the banks? And later, a buzzkill for Boeing. Their dream liner nightmare continues. Homebuilders keep hammering home gains and pouring a tall, cold glass of profits in the wake of the Bud Light boycott.

0:31I'm Melissa Lee. This is Fast Monday. We're live at the Nasdaq MarketSite. On the desk tonight, Tim Seymour, Bono and Eisen, Guy Adami, and Mike Coe. We start off with a Merck meltdown. Shares dropping nearly 3 % today after the company sued the Biden administration over the Inflation Reduction Act. The legislation would give Medicare the ability to negotiate prescription drug prices down by as much as 60%. Merck calling the bargaining process a sham and, quote, tantamount to extortion. Among the drugs that could be impacted, diabetes drug Genuvia, which brought Merck nearly$3 billion in revenue last year and cancer treatment Keytruda with$21 billion in annual sales.

1:08So will other pharma companies follow Merck's lead? And what will this mean for the health care industry? Obviously, pricing has been a big overhang over the industry and what control the government has over this. Yeah. Will others follow in kind? I think absolutely they will. Is Merck on the moral high ground? I don't know. But on the legal high ground, probably yes. And when you call something a sham, and to your point, tantamount to extortion, I mean, they have pretty good lawyers. They chose those words carefully. The question is, how do you invest or trade the stocks? Now, I think a couple of things.

1:37Eli Lilly, by the way, is within a whisper of an all-time high. Merck has sold off from its all-time high, not that much. But I think there's been somewhat of a rotation out of the space. If you think, like I think, this will pass as well, valuations are so compelling, and at some point there'll be a rotation back to health care from high-flying tech, I think you own these stocks on these sell-offs. But isn't this political sort of, I don't know, is this a headwind? Tim. It's a headwind because it's uncertainty. We talk this all the time. This is just just just like it. And it's it feels like another one of those sectors we've just gotten done with the banks being under at least a different kind of a regulatory squeeze.

2:11This is a squeeze where there's unknown. Granted, we have until 2026 to see some of these rules come into stake. I don't think there's any question. Other drug companies come come in here. And I think it's at some point it'll be, I think, the entire group fighting together. But if you think about what's going on with Merck and you think about Keytruda and you think about some of the products that they have that, By the way, they just gave an update on Keytruda recently at a big industry conference where they talked about a product pipeline for mid to late cycle oncology, where there's a lot of exciting things that have caused a lot of folks to come out and re-rate.

2:43I mean, they have as much to lose by this as anybody. So if you think about the places and there's been pretty good dispersion between health care. Right. I mean, my Pfizer, not so much. But you look at a Merck, you look at a Lilly, you have companies that have really outperformed. And you've got an analyst community, I think a portfolio management community that have been easy to adopt some of these trends. And so I think it's early stages here. This isn't new news. We knew about this Inflation Protection Act hit against drug companies. They are hitting back. It's political and it remains so.

3:15Yeah. I mean, I don't know what else we really would have expected. I mean, this is really the lifeblood of the profitability of these companies. Essentially, before they convert to generics, they need to extract maximum value. So I'm not surprised to see them come out and fight vehemently. I think from a trading standpoint, and that's really why we're here, I mean, it may compel you to kind of look into, I mean, counterintuitively, more risky parts of the health care space, biotech, et cetera, that aren't necessarily subject to these type of regulations. So for me, I do think there will always be a demand for health care, particularly the defensive nature.

3:48But I can understand, at least in the short or intermediate term, pushing out a bit on the risk curve while you avoid this situation altogether. You know, Mike, what's interesting about this whole IRA impact is that, you know, you know when these drugs will come under the effect of the IRA Genuvia. It'll be 2026, where it will be subject to, you know, potentially a 25 to 60 percent discount for Keytruda. That's going to be a little bit farther out in 2028. So, you know, if you're worried about a patent cliff, all of a sudden this is like an earlier, worse almost patent cliff because you're cutting short that lifespan of the drug where you can actually make money.

4:23Well, that's right. You get two cliffs essentially now for the price of one. And, you know, this is unfortunately from a legal perspective, there's also a little bit of a political battle going on here. Optically, this is a tough one, right, because high drug prices are unpopular and trying to reduce health care spending, particularly by the government, is probably a politically popular portion of the IRA, I would think. The thing is that when you take a look at Pfizer and Merck specifically, these are two names that are particularly cheap. A lot of bad news is already baked into them. We are seeing some other stocks like AstraZeneca today where we saw some actually bullish options activity, but bearish in these other two, as I was mentioning.

5:04I think this might actually be an OK time to dip your toe into some of these because there's already so much bad news baked in. Guy, how much, I mean, when you say there could be a rotation and how much is that influenced by your belief that this is going to be so far out or that it's already factored into the stocks? I think the rotation portion, I believe that some of the some of the indications, some of the metrics on these high flying tech names are levels we haven't seen in 30 years. I mean, we're two standard deviations away in terms of our size and stuff. So I think at a certain point, some of these high value, high growth names are going to break.

5:35I think a break in those stocks will get people back in energy, one, but health care as well, too. And I think it's just a matter of time at this point, given where things are. And these stocks, listen, if they've been under pressure, it's hard to say that with Eli Lilly at an all time high. and Merck within whisper of its all-time high. But valuations to me are still compelling, so I still think these stocks go higher. Well, rotation is the word for the markets right now, too. We could be opening the show talking about a lot of sectors that are either getting, and health care is a rotation out.

6:01Look, it's been a very defensive place. If you were talking to people six months ago, all they could tell you was to buy health care and maybe some energy again, places that seem defensive and counter-cyclical. So I think a lot of the move in health care right now, if you look at the IYH, is some of this is just a function of, look at the market we're in. Look at the move we've had. Look at the risk aggression, the risk on that's been going into mega cap tech. And I just, you know, I look at the IYH again and again, you know, a proxy, at least for the health care sector. And it doesn't mean that that's how you have to own it.

6:28And in fact, I'm long Mark, I'm long Pfizer, I'm long Lily. But it's traded basically in a 15 percent range for a year with a slightly upward upward, you know, kind of trajectory of a slope. And that's a function of the markets we're in. I don't think people run that far from some of the biggest balance sheets in the world, some of the some of the most cash generative companies in the world, even with some of this overhang. All right. Our next guest says Merck sued against the Biden administration could cause a narrative shift in pharma. Jared Holtz is a health care sector specialist with Mizuho Securities.

6:58He joins us here on set at the Nasdaq. Jared, great to have you with us. Thank you. What are your thoughts about whether or not this thing goes through? It's really, really tough to say. I don't really think anyone knows whether it's going to go through or not. But, you know, this is Merck being very aggressive. Obviously, they pulled no punches with the language that they drew up today. And, you know, I expect other companies to follow suit here. Specifically in the case of Merck, if you did sort of do the math and you assumed, let's say, a minimum discount, 25 percent discount to a Genuvia and to a Keytruda, what would that mean to Merck?

7:33I mean, it basically means that the R &D spending and maybe SG &A in terms of how they run the company, these are going to have to be cut. I mean, we saw Novartis curtail its pipeline a couple of weeks ago, basically blaming future drug price initiatives as a reason for pulling back. So I think R &D spending is going to be cut. You could see SG &A go lower, too. So the whole complexion of how these companies are run broadly, I think, could change dramatically, you know, given whether it's 25 percent cut, 30, 60 even. So we'll see. It sounds like then, you know, the longer term potential impact would be that the most innovative drugs will be developed in biotech as opposed to by big pharma.

8:13Well, that's basically what's happening now. So no major shift there. That's why I agree with some of the panelists earlier. I think you can probably own biotech here if you're worried about the complexion in pharma, because they're going to have to be there. They're desperate now. I think they could be more desperate to augment their commercial businesses, their pipelines with other assets. Where do they find them? Typically, small and mid-cap biotech. We're talking about Merck, but you mentioned other names that are specifically under some risk here. Can you talk about that? Yeah, I think AbbVie, Amgen, Pfizer.

8:42I mean, most of the companies at some point will be under a lot of risk with respect to drug pricing, whether it's 2026, 28, 29. Remember, the government is basically taking a new look every year and going to come out with 10 new drugs that they think they need to kind of mess with. So at some point, even Lilly with Manjaro and some of these other major brands, everyone's going to be hit. It's just a matter of when. Is it 26? Is it 30? We don't know. But that's kind of the game plan. Jared, I can understand both sides on this. And that question, it's a political issue. It's an emotional issue.

9:16We want these companies to spend, spend, spend to develop these therapies. And they're the best in the world. And coming out of COVID, we're all thankful for the money pharma has invested in their businesses. is when the government says, not only in addition to these laws and pricing and how they're going to negotiate, that you have to agree that these rules are fair. And this is where they're contesting this on a First Amendment right. Like, you're asking the drug companies to say, this is great. We think this is totally fair. We have no right to profitability. That's where this seems kind of absurd and where I think they have a lot of room to push back.

9:48I agree. I mean, I think our understanding is that the drug companies are meeting with the government fairly regularly, and they're trying to talk to CMS about how they can improve the IRA, what they can do to actually streamline this process and make the economics more viable. And so far, based on the language in the Merck document today, it doesn't seem like that much progress is being made. But certainly, I agree that I feel like when you look at these companies and what they're going through and all the pushback on pricing and it's affecting their ability to do business, something has to be done.

10:20So far, we've talked about drugs that are, you know, key to people's health, maintaining health. When you think about the new emerging class of weight loss drugs and when they eventually get insurance coverage, could these also be subject to this forced discount? Yeah. I mean, it really is just a matter of where does it end? Right. It will. They will be hit at some point that are seen as a holy grail for the pharmaceutical industry. The reason why Lilly has run up so much could be basically cut in half in terms of price on the market much earlier than patent expiration. Well, not so much earlier, but once they become large enough, the government looks at them and they fall into some criteria of being material enough from a revenue standpoint.

11:03And yes, but, you know, we're in basically we're in the first year of these launches. So they've got another nine, call it, before there's real intervention here. So we got time for Lilly. OK, Jared, great to see you. Thanks for coming by. Always nice to see you here in person. Jared Holtz, Mike, how your thoughts? Yeah, I mean, when I take a look at a name like Pfizer, which is it's kind of interesting, you know, this is valued within spitting distance, give or take of where the company was seven years ago. We had that huge run up related to the pandemic and the vaccines. Obviously, a lot of that is is coming back out of it now.

11:38But, you know, call it a$230 billion enterprise value. This is a company that's probably going to make$330,$3.5 a share in the next 18 months or so. You know, that's not exceptionally expensive. So I think there are some places you can be in it. And, of course, these companies will aggressively, I think, try to pursue a product that they can extract some value out of. I mean, on first read, it really just looks like a lot of this is being painted with very broad brushstrokes. And I think that's what we're all speaking to here. You know, the other question that I have is really how this is going to impact M &A activity going forward.

12:11You have the government kind of stepping in. Are they also going to put the clamps down on companies merging or acquiring one another? They have in other industries already. You would expect it to happen here as well. But it's essentially are you are you pinning these companies into a corner where there's really no viable option? By the way, this is all these are headlines that haven't even gone. We are not into the presidential political cycle here, really, where this is where you usually hear the beatdown. So it's a little concerning. But I think we're going to get back to a place where in markets that are fearful of recession and macro, health care and some of the predictability on at least these companies that have pipelines that we can model out the next three to five years is going to make a lot of these companies very attractive.

12:52All right. We got another bullish development for regional banks. The KRE ETF jumping more than 5 percent, closing above its 50-day moving average for the third day in a row. It is now 25 percent from its intraday lows hit just a month ago. Every one of the 140 plus stocks in the ETF up today. The biggest winners, cloud-based Live Oak, BankShares and First Foundation up almost 11 percent. Home Street up 10 percent. Have we seen the worst guy? I think they're more headline risk for sure. But in the absence of news, I mean, this thing's going to grind higher because valuation is going to be compelling for people.

13:25And I think they're going to say, you know, I don't want to get ahead of something. And with each passing day, I think people become more emboldened. And what I found really interesting, and this probably makes a lot of sense, is KRE for sure. But look what it did to the small caps in the form of the IWM, which is heavily bank weighted. So I think people are looking at small caps and saying maybe the worst is over in terms of the economy. But I think it's somewhat misguided because so much of this is on the back of banks, which is just a catch-up trade on valuation, in my opinion. Well, one of the things that I think means you have more room for this trade to go higher, in addition to the things you just said, Guy, which are dead on, is that Fed fund futures are back above where they were pre-SVB.

14:01There's some sense here that the Fed now has, you know, that the world has gone back. We know that headlines are coming. I agree with that also. I mean, there's no question more banks are going down. We've just also learned in the last three months that how quickly you can actually run from a bank. But the valuations went to recession, credit recession levels at 0.9 times price to tangible book. So there is value when you own an ETF. You have diversification. And it was probably the right sequencing, even just in terms of time. There's no reason to buy that trade right away. But I think they do go higher.

14:31I mean, once upon a time, like a month ago, Mike, the concern was increased capital requirements. We just had that article in the Wall Street Journal saying, you know, 20 percent higher capital requirements for banks that are even smaller than the current requirements. So 100 billion dollars in assets or more. And that didn't really dent this rally today. So can we say, you know what? Not bad. Maybe things are OK now. Well, I mean, we're sort of painting all of them with the same brush when we make a comment like that. I mean, there are some winners and losers. There are some regional bank participants that actually have seen net deposit inflows that don't have a lot of duration, that don't really have a whole lot to worry about on their balance sheets, have mostly insured deposits.

15:12And we're at, what, the same level for KRE that we were close to 10 years ago. So, I mean, it's a bump off the bottom, but we're still very close to it, let's be honest. So, I mean, I think it would be OK to dip your toe in here. But I think that the concerns that we have about real estate and commercial real estate in particular, I still think that there's probably going to be more shoes to drop there. Yeah, Mike, you mentioned a good point about commercial real estate. Now, I can't say whether or not the worst is behind us. What I think we can safely say is that these stocks were priced as if the worst scenario was already priced in.

15:47And that's where the real trading opportunity comes in. But to Mike's point, I still do think there is some contagion risk within that commercial real estate space. And that might likely be the next shoot and drop. Coming up, Coinbase crush shares tumbling for a second straight day as it becomes the latest SEC target. What regulators are saying and how the options fits are handling it next. Plus, investors cheersing. That's terrible. Over Molson Coors today, as Budweiser's fame seems to be turning into the TAP's gains. What analysts expect out of this one when Fast Money returns?

16:23Welcome back to Fast Money. Coinbase shares plunging today after the SEC sued the crypto exchange, alleging its prime brokerage exchange and staking programs violate existing securities laws. Coinbase held 9 % in yesterday's session after the SEC lodged similar complaints about Binance. Coin's response is basically, there are no rules here. So what do you expect us to do, Guy? These things seem untouchable with this SEC campaign. And they continue to be untouchable for sure. Now, this stock will probably bounce at some point over the next couple of weeks and you get excited. The worst is over.

16:55I don't think the worst is over. And Jim Chanos has been talking about this for years, seemingly. I think he's been short the stock. If I'm wrong, I stand corrected. But rightly so if he is. And there's more downside in these names. Now, what it means for Bitcoin, I'm not so sure. But I'll tell you, Bitcoin hasn't traded particularly well over the last couple of weeks either. Yeah. Tim, what do you think? Well, there's still not really any clear legal path for these companies to register these things as securities. And that's part of the issue here. I do think also Coinbase has had this hanging over them for some time.

17:25So, you know, once we understand more about the extent of the penalties, it actually may be some sense of, OK, you know, unless there's a defiance and a sense of, no, we're not going down this road. I wouldn't be messing with the SEC here. I also think that, as we've said many times, this industry should want more regulation. It should embrace it. And I think that's something that we are starting to get a little bit more behind. But the pathway to making this clear cut as to how they should treat the underlying is not clearer today than it was yesterday. Yeah. I mean, what is shocking is that the SEC is basically saying you've been operating like this since 2019 or something.

18:03It's been years that they've been operating like this and nothing has been done until today. And so in the meantime, all these people, if it were truly dangerous for all these years, they let investors go ahead and do that. And if it's not, then they've just been punishing this company that's been operating like that for years for no reason. Yeah, exactly. You want more regulation. You don't want more litigation, right? The path to how you're supposed to operate is supposed to be extremely clear. And it's still unclear. Is it SEC? Is it CFTC? Is it futures contracts? Are they, you know, are they SEC regulated tokens or whatnot?

18:39I mean, to me, it's just my mind spins trying to wrap my head around what the legal precedent is for them to even operate. What I will say is I'm much more comfortable with a Coinbase than I am Binance. And let's parse into this. Essentially, the Binance situation is saying that funds are being misappropriated or being coupled, co-mingled. That's that's a completely separate issue. And I don't think Coinbase should be trading off in tandem to that. This is, as Guy and Tim both said, this has kind of been an overhang for the stock for some time. I think that's somewhat priced in. But I just do want to delineate those two separate things between Binance and Coinbase.

19:14What was surprising to me was that hood was higher today in spite of this. Or do you think maybe hood benefits because Coinbase is in trouble? I don't know. I couldn't figure out how to read it. Dan talked about Robinhood a couple of months ago and what time's escaping me. But, you know, in terms of their balance sheet, they're actually not in bad shape. So this stock, we talked about it a month or so ago. Trading the stock from the long side seemingly made sense. And I do think, to a certain extent, they're probably a beneficiary from all of this. Well, options traders flooding into Coinbase today.

19:41So, Mike, what were they betting? Yeah, so this was actually the busiest financial stock option. It was the sixth busiest single stock option overall. And we did see puts significantly up-pacing calls. Now, what was interesting here was that the two busiest contracts were the 50 strike puts and the 40 strike puts, both of those expiring at the end of this week. But where I saw some of the bigger prints, people were actually selling those 50 strike puts and then buying the 40s on a ratio. But they were net collecting premium. I think the idea here is that they think, OK, this has been a known overhang.

20:15Now it's out there. Maybe the stock will stabilize in this$50 to$48 range between now and the end of the week. But to Guy's point, in the longer run, we did see some downside puts trading, but much further out in time. So it seems like people are trying to collect some premium, digging the news out. But they do see potential overhang in the months ahead. Great. For more options action, tune in to the full show. That is Friday, 530 p.m. Eastern time. There is a lot more fast money to come. Here's what's coming up next. Raise a glass to gains. Shares of Molson Coors bubbling higher as controversy brews at one of its chief rivals.

20:50How the Budweiser backlash is fueling the move next. Plus, a cautious call. One analyst dialing into AT &T. But it's far from a full bar backing. The cellular stance ahead. You're watching Fast Money, live from the NASDAQ market site in Times Square. We're back right after this.

21:17Welcome back to Fast Money. shares of Molson Coors, a producer of Miller and Coors Light, popping higher today after an upgrade at Bank of America. The firm saying the beer maker is the biggest beneficiary of the Bud Light boycott and that the boost in sales will likely last through the July 4th holiday. Stock is up more than 26 percent since the controversy took hold and is lasting much longer than what many analysts had expected. Tim, just the other day, your final trade was Budweiser. Yeah. The Brazilian beer company that really bothers people. So I do that. I think some of this is overdone.

21:48I think, first of all, there are trends in beer and there's been consolidation that have been troubling for the entire industry. And there have been those that have held up better. And you look at a constellation and what they've been able to do with their Modelo brand and whatnot. I think this is an opportunity for Budweiser longer term. And I honestly, I'm an investor and this is what I care about. And I think it's absurd, by the way, to not be able to invest in a company based upon, again, the reasons people may or may not be boycotting. Because, you know, these are the kinds of things you hear from people.