Merck And Johnson & Johnson End Remicade Spat
5 CommentsBy Ed Silverman // April 15th, 2011 // 7:32 am
A high-stakes fight between Merck and Johnson & Johnson over the rights to a pair of lucrative arthritis meds - Remicade and Simponi - has finally been resolved. Under the deal, Merck will relinquish exclusive marketing rights to the drugs in various locales: Canada, Central and South America, the Middle East, Africa and the Asia Pacific region as of July 1.
But Merck will retain rights in Europe, Russia and Turkey, markets that represent about 70 percent of Merck’s 2010 revenue from the drugs of about $2.8 billion. And the profit split in these markets will be equally divided; before arbitration proceedings began, 58 percent of the profits went to Merck. Meanwhile, J&J will receive a one-time payment of $500 million this month (read the Merck statement and the J&J statement).
The fight over the rights to Remicade, which overall generated $7.3 billion in sales last year, and the newer Simponi follow-up began after Merck bought Schering-Plough, with which J&J had a co-marketing agreement. That’s because J&Jclaimed the takeover canceled their deal, citing a change-of-control provision. J&J subsequently filed for arbitration.
For its part, Merck claimed its takeover was really a reverse merger that was designed to avoid this conflict over the change-of-control language. Of course, as J&J has noted, the surviving entity has the Merck name on the front door, the Merck board is in control and operations are run from Merck headquarters in Whitehouse Station, New Jersey.
UPDATE: In an investor note, Deutsche Bank analyst Barbara Ryan wrote that the deal is reasonable and manageable - as far as Merck investors are concerned. She also addressed speculation that a resolution may have involved the sale of Merck’s over-the-counter business, which was acquired as part of the Schering-Plough deal. In her view, the commitment to this business is “not unequivocal” and Merck could divest this business in the near term, and subsequently increase
its share repurchase program.” The unit, which includes Dr. Scholl’s and Coppertone, could fetch $4 billion or more, based upon comparable assets, she writes.
pic thx to o5com on flickr
Condor
Well, this one points squarely to New Merck CEO Ken Frazier’s ability to make favorable deals from tough situations. Recall that he was the one who led the effort to put Vioxx liabilities to bed for less than $5 billion — a coup at the time. [To be fair though, those Vioxx outflows will continue to bleed -- on the order of tens of millions, per quarter -- for the next at least three years.]
As an encore to his Vioxx deal, today, he has been able to escape a potential $10 billion hit over the next three years, with only a half-billion dollar upfront payment (as opposed to as much as $3 billion), while relinquishing only a portion of the non-US sales on Remicade and Simponi. He is truly a master of the high-stakes deal.
Even so, J&J fares pretty well here, too — it gets more of all the European sales — 8 percent more, and it keeps for itself (no sharing with Merck) the United States (by far the biggest market), Canada, Central and South America, the Middle East, Africa and Asia Pacific territories. Wow.
All told, this is a real positive upside surprise for Merck’s battered common stock. I’d expect a $2 pop today. It was far from clear that Merck had a good argument on the contract — as the contract used a defined term “Change of Control” — but inadvertently did not capitalize the “change” in another place, thus leaving the language open to expert interpretation of what the parties might have intended, by not using the defined term.
That oversight (by legacy Schering-Plough legal people) foreshadowed a poor outcome for Merck — and Mr. Frazier has now deftly avoided the worst of it.
So ends the single largest overhang on Merck’s stock price. My hat’s genuinely off to Frazier — he’s the man! — again!
Paul
Good news
Salient point
Cigars all around Wall St because the uncertainty is over. Although, interestingly, JNJ seems to be up more, 1.25% vs .80% for MRK at the moment.
Perhaps Mr Weldon is more of a bargain than some might think.
Gil Roth
No truth to the rumor that, if Merck lost the arbitration hearing, they were going to be forced to take over J&J’s McNeil unit?
Gustavo Gutierrez
So much for the reverse merger. This obviously means hundreds of lay offs in countries in which Merck has no rights over Remicade. Like the emerging markets of Latin America, where labor is cheap and profits are big.