Merck And Johnson & Johnson Arbitration Is Delayed
3 CommentsBy Ed Silverman // October 14th, 2010 // 10:05 am
The closely watched dispute between Merck and Johnson & Johnson over a pair of register-ringing rheumatoid arthritis drugs has been delayed. A widely anticipated decision was expected later this month, but in a filing this morning with the US Securities and Exchange Commission, Merck disclosed that a decision about Remicade and Simponi will not be sometime next year.
Here’s the background: Schering-Plough had distribution rights to both drugs outside the US and some Asian markets, but those now belong to Merck through its acquisition of the drugmaker last year. J&J has argued the deal triggered a change of control clause allowing it to terminate the arrangement. But Merck insists Schering-Plough was the surviving entity because a reverse merger took place. [The company is still called Merck, its run by Merck executives, its headquarterd where Merck has always been headquartered and former Schering-Plough ceo Fred Hassan floated away in a golden parachute.]
What’s at stake? Merck reported $669 million in second-quarter sales from Remicade, making the med one of the drugmaker’s biggest products. And Wall Street expects the Simponi follow-on to become an even bigger seller. JNJ, meanwhile, receives a portion of the profit, ranging from 40 percent this year to 45 percent in 2012 to 50 percent in 2014 and thereafter.
What might the delay mean? Larry Biegelsen, a Wells Fargo Securities analyst, opines that a settlement is the most likely outcome either some time this year or next. “With the hearing now completed, we believe both J&J and Merck are probably better positioned to negotiate settlement terms based on information presented during the hearing and interaction with the three-member arbitration panel,” he writes in an investor note.
“…A settlement could involve J&J receiving a higher percentage of the Remicade/Simponi profit (outside the US), while an arbitration win for J&J” could boost its earnings by anywhere from four to seven percent, if J&J chooses to sell the drugs itself. Of course, that would not bode well for Merck, which has more to lose.
maria phatom
yikes!
Condor
Okay — great stuff, here Ed! — let’s get a little more granular, about what this means to Merck, then:
First, if the Wells Fargo analyst is right, then we ought to at least double the DOWNSIDE to Merck, at the EPS line, on a percentage basis, thus:
If a win is worth a 4 to 7 percent of J&J EPS upside (i.e., no more 60 percent distributor’s margin paid to Merck outside the US) — then the downside impact, to Merck’s EPS (of losing that distributor’s margin, on perhaps a $4 billion twin-franchise in 2011 and beyond) would likely be similar, as a percentage. True, Merck could reduce expenses (i.e., mostly fire European and rest of world arthritis salespeople), and J&J would need to add them (or cut a deal with a Euro-zone major pharma player, to distribute the pair of blockbusters), but I think an at least 10 percent EPS hit is possible, in 2011 — if Merck loses.
It was earlier estimated that Merck would lose five percent of its stock price, if Merck lost the arbitration. While I think that prediction is overly rosy, even that is no small number. I suspect a loss would gouge out more like 15 percent of Merck’s stock price — as the 60 percent payout it currently sees on Remicade®/Simponi® is clearly much higher than Merck’s overall average margin of call it 28 percent, on the merged operations’ products.
In short, buckle up — as even a negotiated settlement will very-likely bode ill, for Merck’s 2011 revenue (and beyond, its EPS).
Namaste
Ed Juline
What has become of Pepcid Complete? I can’t find it at CVS, Rite Aid, Costco or any other place.