Will Johnson & Johnson Disrupt SchMerck?

Aside from the generation of wildly differing opinions as to whether mega-mergers are a good idea and the spurring of frenzied speculation about who’s next on the block, one of the most intriguing aspects of Merck & Co’s reverse merger into Schering-Plough is the fact that a third party, Johnson & Johnson, could yet have a major part to play in determining whether this combination is successful, and if successful, at what price.With J&J holding the bulk of commercial rights to two of Schering’s most valuable products, arthritis antibody-based drugs Remicade and golimumab, two important questions are now being asked: will J&J decide to trump Merck’s offer and bid for Schering outright, or will J&J seek to claw back rights to these key products by suggesting that the Merck-Schering merger represents a change of control at Schering, despite elaborate claims to the contrary from the two nearly wedded partners? Whilst the answer to the first question is “probably not”, there is a real possibility the second scenario could yet play out.

Centocor deal

One of the key reasons that J&J is likely to be seriously considering taking back the entire rights to Remicade and golimumab is the fact that the Schering deal for these products was struck with Centocor in 1998, prior to J&J’s acquisition of Centocor in 1999.

At the time Centocor would not have had the capacity to commercialise either product outside the US, hence the deal was signed, giving Schering development and commercialisation rights outside the US and Japan.

In fact, the deal was a steal for Schering, even considering it was struck over ten years ago. For rights to Remicade, which was in phase III trials in 1998, and an option to license other anti-TNF antibodies such as golimumab, Schering paid Centocor just $20m upfront, a further $30m in milestones, plus royalties estimated at 29% of sales. Upon exercising its option to golimumab in 2005, Schering paid an additional $124m, still a snip when compared to current valuations for the product.

The main point here is that the Schering deal for these two products was a Centocor deal, not a J&J deal. Given J&J’s global reach it is unlikely that an international partner would have been sought for such big products, had J&J held the rights to these products from the outset.

Massive value to J&J and Schering

Remicade and golimumab are easily J&J’s most valuable products, according to EvaluatePharma’s NPV Analyzer.

With annual sales of around $3bn in the US, plus the royalties from Schering, Remicade is valued at a whopping $17.5bn. Golimumab, which has been filed with the FDA and in Europe, has forecast US sales of $1.72bn in 2014 and is valued at $10.3bn.

Meanwhile, both products are massive for Schering. Remicade is the group’s most valuable product at $4.58bn, and golimumab is the third most valuable pipeline product at $1.19bn.

Change of control dispute

With so much riding on the future rights to these products the rationale for Merck and Schering constructing such an elaborate reverse merger deal, claiming that Schering is the surviving entity and therefore that no change of control has happened, is clear.

Most change of control clauses refer to the company’s shareholders holding less than 50% of any new entity, and/or the company’s representatives on the new board of directors being less than half.

If the SchMerck deal goes ahead, the new company will still be called Merck, Merck’s shareholders will control 68% of the group’s shares and the board will be made up of all 14 members of Merck’s board and just 3 directors from Schering.

To all intents and purposes, Merck will have acquired Schering and Schering no longer holds much sway in the new company.

However, Merck and Schering are claiming that both issues of shareholder ownership and board structure were not included in the original deal with Centocor, which was more focused on the fact that Schering continues as a surviving entity.

As such, Merck and Schering believe they can get away without triggering a change of control. Whether J&J will accept this argument depends on the fine print of the Centocor deal, whilst it is hard to see how claims that no change of control has occurred would stand up for very long in a court of law.

Will J&J swoop on Schering?

As to the first question of whether Johnson & Johnson (JNJ) will decide to make a higher bid for Schering-Plough (SGP), as suggested by some analysts, this is far less certain.

Having created a largely successful, diversified business model, the envy of many of its big pharma peers, an acquisition of Schering would mark a major change of strategic direction for J&J.

Although Merck’s (MRK) bid for Schering is the first mega-merger it has attempted, Merck’s patent cliff is much more significant than J&J’s and the clash with J&J’s existing structure would seem too great to overcome.

According to merger documents filed with the SEC, J&J has 20 days in which to respond to the SchMerck deal and claim the reverse merger does represent a change of control and therefore should permit J&J the option to take back the rights to Remicade and golimumab.

As such, the ball is firmly in J&J’s court and its decision within the next few weeks could make or break SchMerck.

Disclosure: no positions

Comments

[satyr:]

Unfortunately for JNJ, the agreement that Centocor struck with SGP does is worded such that the deal with MRK will not trigger a change in the rights to Remicade. Given the timing and relative leverage of each party when the original Remicade deal was struck, it's not much of a surprise. Even without reading the "fine print", you can rest assured that the team of lawyers at SGP and MRK have already done so. This does not mean that JNJ will not attempt to unravel the deal in some way. But, I believe it is more likely that they will make an offer for SGP than go to the courts. I put the odds at 65/35 they make a bid for SGP some time next week. If that happens, SGP will go to the highest bidder at somewhere between $33 and $39.

Mar 12 11:16 AM