Merck & Co., the second-biggest U.S. drugmaker, will split sales for the arthritis drug Remicade with Johnson & Johnson (JNJ), ending an arbitration dispute that helped drive Merck shares down over the past year.
Merck will keep exclusive marketing rights in 70 percent of the areas where it now sells the drug while raising J&J’s share of profit from those sales to 50 percent, the companies said in a joint statement today. The agreement, which also covers the arthritis medicine Simponi, calls for Merck to make a one-time payment of $500 million to New Brunswick, New Jersey-based J&J.
Remicade had $7.32 billion in combined sales last year, making it the second-biggest product for Merck and the top- selling drug for J&J. Merck, based in Whitehouse Station, New Jersey, gained a claim on the drugs through its 2009 purchase of Schering-Plough Corp. for $49 billion. While Merck may have won a better deal in court, the pact removes uncertainty that unnerved the market, said Jeffrey Holford, a Jefferies International analyst based in London.
“The overhang is now out of the way and investors may look forward to some potentially more positive catalysts in the near term,” including U.S. approval of Merck’s hepatitis-C drug boceprevir, Holford said in a note to clients today.
Merck rose 65 cents, or 1.9 percent, to $34.51 at 4 p.m. in New York Stock Exchange composite trading. Before today, the shares had fallen 6.5 percent in the past 12 months. Johnson & Johnson, the world’s second-biggest seller of health products, rose 54 cents, or less than 1 percent, to $60.56.
Merck will relinquish exclusive marketing rights to the drugs in Canada, Central and South America, the Middle East, Africa and the Asia-Pacific area starting July 1, while keeping rights in Europe, Russia and Turkey. Remicade and Simponi generated $2.8 billion for Merck last year, the companies said.
The deal doesn’t affect the U.S., where J&J has exclusive rights to the two products, said Bill Price, a J&J spokesman, in an e-mail today.
In areas where Merck is keeping rights, J&J will get an equal share of profits starting July 1, up from the 42 percent it now receives, according to the statement. The deal runs through 2024, the companies said.
“The settlement is good for J&J -- they would have come out with nothing in a courtroom,” said Erik Gordon, a business professor at the University of Michigan in Ann Arbor who follows the biomedical industry. For Merck, “it blows away a cloud that had been hanging over their head,” he said in an e-mail.
Merck repeated its forecast of $3.64 to $3.76 a share in adjusted earnings for 2011. Counting the payment to J&J as well as the tax effects of the settlement and other items, Merck expects unadjusted profit of $1.89 to $2.17 a share.
J&J, in a separate statement, said the deal’s impact on earnings this year is “not expected to be significant.” In January, J&J projected 2011 adjusted earnings of $4.80 to $4.90 a share.
“Resolution of the J&J arbitration dispute may be what’s needed to unlock shareholder value,” said Seamus Fernandez, an analyst at Leerink Swann & Co. in a note to clients on Feb. 7. Losing Remicade entirely would have reduced Merck’s annual earnings by 20 cents a share to 30 cents a share beginning in 2012, he said.
J&J had argued that Merck’s 2009 acquisition violated a provision in its agreement with Schering-Plough. J&J and Schering-Plough shared sales of Remicade under an agreement giving J&J full control if Schering-Plough was sold. Merck said its acquisition was structured in a way that sidestepped that clause by listing Schering-Plough as the official purchaser in a reverse merger.
“Many market commentators have either been assuming that Merck would outright win this arbitration (reflected by consensus estimates) or make a minor settlement,” Holford, the Jefferies analyst, said in his note.
Pfizer Inc. (PFE), based in New York, is the biggest seller of medical products by annual sales.
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