Merck / J&J Rheumatoid Arthritis Drug Arbitration Delayed: What's at Stake?

Includes: JNJ, MRK
by: Pharmalot

The closely watched dispute between Merck (NYSE:MRK) and Johnson & Johnson (NYSE:JNJ) 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 Thursday 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 (SGP) 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, it's run by Merck executives, it's 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 sometime 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.