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DBL%20Hendrix%20small.png College chemistry, 1983

Derek Lowe The 2002 Model

Dbl%20new%20portrait%20B%26W.png After 10 years of blogging. . .

Derek Lowe, an Arkansan by birth, got his BA from Hendrix College and his PhD in organic chemistry from Duke before spending time in Germany on a Humboldt Fellowship on his post-doc. He's worked for several major pharmaceutical companies since 1989 on drug discovery projects against schizophrenia, Alzheimer's, diabetes, osteoporosis and other diseases. To contact Derek email him directly: Twitter: Dereklowe

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April 18, 2011

Merck and J&J Finally Come to Terms

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Posted by Derek

So the long-delayed settlement between Merck and J&J has finally been announced. The drawn-out process had everyone speculating that some sort of deal was in the works, and so it's proved:

Under the resolution, Merck must relinquish its rights to sell Remicade in Canada, Central and South America, the Middle East, Africa and the Asia Pacific effective July 1. The lost territories represent about 30 percent of Merck’s 2010 Remicade revenues.

Merck retains the ability to sell the arthritis medicine across Europe, Russia and Turkey, where it generated 70 percent of its 2010 Remicade revenue. Beginning in July, however, Merck will begin sharing its profits equally with Johnson & Johnson. . .

In a research note, Tim Anderson, an analyst with Bernstein Research, pointed out that while Merck is retaining most of its ex-U.S. franchise, it is giving up the product in markets where the growth rate has been — and is likely to remain — higher.

Merck's stock went up a bit on the news, probably from relief that the whole issue has finally been worked out. But this really can't be seen as a plus for Merck - back when they acquired Schering-Plough, those Remicade revenues were supposed to be a good part of the package. Thus all that SP-buys-Merck charade, all of which looks pretty ridiculous now.

So was I off base in my prediction that Merck would come out the loser? Matthew Herper has a more positive view of the outcome than I do. At any rate, finally resolving the whole dispute is worth quite a bit to both companies. But what did all this accomplish, in the end, except giving the lawyers something to do?

Comments (11) + TrackBacks (0) | Category: Business and Markets


1. Anonymous on April 18, 2011 10:40 PM writes...

Derek, you're right. In the end, only 500 mil changes hands. BFD (Big friggin deal). Just another behind the scenes questionable activity designed for profit.

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2. Anonymous on April 18, 2011 10:58 PM writes...

And another round of layoffs are coming again...nothing is getting done it seems.

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3. anchor on April 19, 2011 5:58 AM writes...

#2 - my understanding was that the "lull" in layoff @ Merck during the recent past was dependent on the Remicade suit outcome. So, do you think that the layoffs are still on, given the "favorable" outcome?

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4. Matthew Herper on April 19, 2011 6:22 AM writes...

To be clear, I'm positive in a "that could have been worse" perspective. From investors' point of view, this has been hanging over the stock because of the fear that Merck would lose more than it did. Now, at least it's over -- which is why the stock went up. A little.

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5. Hap on April 19, 2011 8:38 AM writes...

What about the revenue from the follow-on drug?

Considering how much they paid and the charades they engaged in to get the revenue from Remicade and its follow-on, I don't think this is really what Merck investors were hoping for. It's better than it could have been, but a billion here, and a billion there, and you're talking real money, as has been said before.

Of course, to pay for this misadventure, Merck'll have to cut more jobs (well, at least other than those of the responsible parties, of course). Who says incompetence doesn't pay?

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6. watcher on April 19, 2011 9:09 AM writes...

Right now, with the bigger issues facing Pharma and the economy as a whole, this is just a side-show.

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7. Hap on April 19, 2011 9:36 AM writes...

But isn't this part of why Pharma is facing its issues? The lack of productivity makes the level of R+D unsustainable, but spending (lots of) money on charades that probably wouldn't fool an investor in dehydrated water can't be helping, and since it's even less productive than R+D (in generating revenue for companies - for their lawyers and for the people managing the deals, it works quite nicely), it's probably more harmful. Oh, and it's helping to make R+D even less productive, thus exacerbating the problems it (allegedly) solves, kind of like drinking because you're unhappy. Making dumb decisions because you don't know what else to do is suicidal, whatever your business.

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8. watcher on April 19, 2011 10:17 AM writes...

Hap, Just the point. The debate over how to split the profit between SP (ala papa Merck) and J&J is simply an example of bigger problems, based on the renewed greed of Wall Street. Look at recent announcements in year to year quarterly profits, say Citibank, which showed a lower year to year quarterly return in large part due to increased compensation expenses. YES, COMPENSATION EXPENSES!!!!! In other words, back to bigger, obscene bonuses, even when the business continues to suck. The public, the stockholders take the hit, again and again.

The legal-drug pushers are no different in the global sense. Despite attempts to project an image of higher calling, greater cause (treating the sick & ill, providing discounted drugs to those who can't otherwise afford them, etc) Big Pharma, Biotech are now of the same ilk.

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9. J&Jer on April 19, 2011 12:22 PM writes...

This may turn out to be good news for J&J's discovery pipeline. Their drug discovery's budget is a fixed percentage of the income from sales in its pharmaceuticals group. I don't know if the $500 million cash from Merck would go into that pot, but the slightly increased revenue from Remicade should at least ease the pressure that resulted from recent patent expirations (risperdal, topamax, etc).

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10. CMCguy on April 19, 2011 4:12 PM writes...

Now that this issue is settled can we expect to see a press release stating in spite of previous reports the Merck take over of SP was not a reserve merger? It was a bit of a legalistic charade which everyone recognized so suggest would be revisionist history in the right direction.

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11. Anon on April 19, 2011 7:07 PM writes...

Here's a theory: the merger is about taxes, or the avoidance thereof. Merck (and Pfizer among others) generates a bunch of cash outside the US. They must leave the cash outside the US (and away from shareholders) unless they want to pay the full US tax rate on it. But if they use the cash to purchase SP they avoid the tax and have a way to "invest" the cash.

Given the tax savings the deal could destroy considerable value and still be an obvious win for shareholders.

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