March 09, 2009: 01:23 PM ET
Johnson & Johnson (JNJ) could throw a wrench in Merck & Co.'s (MRK) plans to buy Schering-Plough Corp. (SGP) for $41 billion, potentially making the acquistion less lucrative or even disrupting it completely.
The potential discord centers on the blockbuster anti-inflammatory drug Remicade, which J&J and Schering-Plough co-market. J&J handles U.S. marketing, and Schering sells it outside the U.S. The agreement, which dates to the 1990s, also covers a new drug, golimumab, expected to go on sale later this year.
As part of the partnership, J&J has the opportunity to acquire full rights to the drugs if Schering-Plough were to be taken over, a so-called "change-in- control" provision, according to analysts.
Remicade generated $2.1 billion in sales for Schering-Plough last year, making it an attractive part of the acquisition for Merck, which has seen slowdowns in sales growth for its top products recently. J&J recorded $3.7 billion in Remicade sales.
Merck, of Whitehouse Station, N.J., and Kenilworth, N.J.-based Schering- Plough, however, are trying to sidestep the J&J rights and allow Merck to inherit Schering's rights to the drugs following the acquisition.
They have structured the $41 billion cash-and-stock takeover as a "reverse merger," under which Schering-Plough would technically be the surviving corporation, even though it would have Merck's name and be controlled by Merck shareholders and management. The merged entity would have a board of directors that consists of about 15 Merck directors and three Schering directors - but technically it would be Schering's board making these changes.
By taking these steps, Merck executives say the acquisition of Schering-Plough won't trigger the change-of-control provision in the J&J/Schering marketing agreement for Remicade and golimumab.
"Under the expressed terms of the distribution agreement, this change of control provision focuses on whether there has been a change in the surviving public company," Merck General Counsel Bruce Kuhlik told analysts on a conference call. "It doesn't refer to a stock ownership or anything of the sort."
Of course, J&J might feel differently, though a spokesman for the New Brunswick, N.J., company declined to comment on the matter Monday.
If J&J claims the change-of-control provision is triggered, the dispute would go to mandatory arbitration, Kuhlik said.
Merck and Schering-Plough executives tried not to take a combative stance, saying they planned to work with J&J on the matter. Schering-Plough Chief Executive Officer Fred Hassan said he had a phone conversation with J&J CEO William Weldon Monday morning, which he said was cordial.
But Kuhlik also said Merck will defend its rights, if necessary.
Also, Merck executives played down the importance of holding onto Remicade and golimumab. CEO Richard Clark said "this is a strategic bid for the future and it's not based on one or two products." Chief Financial Officer Peter Kellogg said Merck's post-acquisition earnings forecast would still hold up regardless of how the J&J/Schering matter plays out. Merck predicts high single-digit average annual earnings growth from 2009-13, excluding restructuring costs and other items.
Sanford Bernstein analyst Tim Anderson said one possible outcome is "horse trading" that results in Merck retaining rights to Remicade and golimumab. He also raised possibility of J&J making a rival bid for Schering, saying the companies would make a good fit.
Schering-Plough isn't the only party to Monday's deal that has a relationship with J&J. Merck has a joint venture with J&J to market non-prescription medicines such as Pepcid.