Recently, Johnson & Johnson (JNJ) and Merck & Co., Inc. (MRK) agreed to settle the dispute regarding the ex-US distribution rights of Remicade (infliximab) and Simponi (golimumab). The drugs are approved for treating patients suffering from chronic inflammatory diseases such as rheumatoid arthritis.
Per the terms of the amended deal, from July 1, 2011, Johnson & Johnson will solely be responsible for marketing Remicade and Simponi in markets such as Canada, Central and South America, the Middle East, Africa and Asia Pacific. Currently, Merck is responsible for marketing the drugs in the above markets. The 2011 sales of the drugs in the markets will be recorded by Johnson & Johnson from July 1, 2011.
The amended deal allows Merck to retain sole marketing rights of the drugs in the European, Russian and Turkish markets. Approximately 70% of Merck’s 2010 revenue from the two drugs (amounting to approximately $2.8 billion) came from these markets. Moreover, the two companies will share equally the profits resulting from Merck’s exclusive distribution of Remicade and Simponi in the European, Russian and Turkish markets from July 1, 2011.
The profit on sales will be divided equally between the two companies from July 1, 2011 till October 1, 2024. Currently, the split is 58% and 42% in favor of Merck. The amendment to the deal will allow Johnson & Johnson to receive a one-time payment of $500 million in the second quarter of 2011. The amended deal is not expected to impact Johnson & Johnson’s 2011 earnings significantly.
We remind investors that Remicade and Simponi were added to Merck’s portfolio following its merger with Schering-Plough in 2009. Originally, Johnson & Johnson licensed ex-US rights of Remicade and Simponi rights to Schering-Plough. Both compounds were developed by Johnson & Johnson.
In May 2009, Johnson & Johnson announced an arbitration demand against Merck requesting a ruling regarding the ex-US rights of Remicade and Simponi. According to Johnson & Johnson, the merger between Merck and Schering-Plough triggered a change-of-control provision in the original agreement, resulting in its termination. Therefore, Johnson & Johnson asserted that full rights to both drugs should be returned to it.
We believe that the voluntary settlement between the two companies regarding the high-potential drugs is a positive for both and removes a major overhang on the stocks.
Neutral on Merck and Johnson & Johnson
We have a Neutral view on both Merck and Johnson & Johnson. This is supported by the Zacks #3 Rank (short-term Hold rating) carried by both companies.
Merck is currently facing issues such as patent expirations of key drugs, EU pricing pressure, US health care reform and pipeline setbacks. Some of the company’s recent launches should start contributing significantly to the top line in the forthcoming quarters.
Even though Johnson & Johnson is being adversely impacted by the series of over-the-counter product recalls, pricing austerity in the European Union and generic competition, we believe that Johnson and Johnson’s diversified business model, lack of cyclicality and strong financial position will help it in tough situations.
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MERCK & CO INC (MRK): Free Stock Analysis Report
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