Merck / J&J Battle for Anti-Inflammatory Drug Rights Worth Billions

Includes: JNJ, MRK, SGP
by: YCharts

Lawyers for Merck (NYSE:MRK) and Johnson & Johnson (NYSE:JNJ) were set to begin a private arbitration hearing with billions of dollars at stake in late September, before three former federal judges in New York, to decide which company has the right to market Remicade, a hugely-profitable anti-inflammatory drug, in key foreign markets.

The decision, expected within 20 days after the arbitration ends, could either deliver a windfall to J&J, which already holds the domestic rights to Remicade; or, should Merck prevail, make Merck’s $49.6 billion takeover last year of Schering-Plough a rare home run in M&A.

Long ago, Merck surrendered its top status among pharmaceutical concerns, and drug patent expirations have been threatening to diminish Merck further. The acquisition of Schering-Plough (SGP) and its drug portfolio, completed last November, has helped Merck close the market capitalization gap with J&J.

MRK, JNJ Chart

And holding onto the Remicade rights Merck bought as part of Schering-Plough would further boost Merck’s value to investors. Remicade is used to treat rheumatoid arthritis and other inflammatory diseases linked to the immune system. Its sales exceed $6 billion and are growing. J&J had 2009 Remicade sales – it has U.S. rights – of $4.3 billion. And Merck and Schering-Plough’s sales of Remicade last year were $2.3 billion.

Merck sales had been mostly flat until the Schering-Plough deal.

MRK, JNJ Chart

And Merck was facing a so-called patent cliff, with the loss of patents covering several large drugs. Singulair, an asthma drug with 2009 sales of $4.7 billion, expires in 2012. And the combination of Cozaar and Hyzaar, used to treat hypertension, had 2009 sales of $3.7 billion and patents that expire this year. The looming patent expirations and also the Remicade arbitration have caused Merck to trade at a very low multiple of earnings.

MRK, JNJ Chart

The patent expirations made the Schering-Plough deal crucial to Merck and also makes keeping Remicade rights very important. Schering-Plough had a rights agreement with a company now owned by J&J, Centocor, and Centocor had the option to cancel the agreement if there was a change in control of Schering-Plough. To avoid that, Merck structured its takeover of Schering-Plough as a reverse merger, with Schering-Plough technically acquiring Merck, and then renaming the company Merck.

J&J didn’t buy the artifice and filed for arbitration to end the rights agreement. J&J also wants damages. So, should Merck lose, it could fall short of its 2010 financial targets. Merck, however, expects the Schering-Plough deal to be a success regardless, with $3.5 billion of cost cuts from the combined companies expected to fatten the bottom line. Without Remicade, though, it won’t be as spectacular a success.

Disclosure: No Positions