Drugmakers Merck & Co. and Johnson & Johnson agreed Friday to split billions of dollars in annual revenue to end a two-year drama of arbitration and verbal wrangling over the rights to two blockbuster biotech medicines.
Analysts have been predicting a settlement since the first act, when Merck in March 2009 said it would tie the knot with Schering-Plough Corp. in what it called a “reverse merger.”
That structure was essential: Schering-Plough had a prior distribution agreement with J&J to share billions in overseas sales of Remicade and successor drug Simponi, medicines for rheumatoid arthritis and other immune disorders.
J&J cried foul, calling the Merck-Schering combination a change in control that meant J&J could end the partnership and get all future revenue. The two sides traded legal filings and oral arguments before an arbitration panel last year, but kept the details back stage.
In the final act, Merck agreed to cede some of the revenue to J&J, removing risk that the arbitration case, started by J&J in April 2009, would end with Merck losing it all.
“Our math suggests (Johnson & Johnson) re-acquired 28 percent of the sales in dispute,” Citibank analyst Matthew J. Dodds wrote to investors, adding he thought J&J “would hold out for more.”
That appears to make the deal a small win for Kenneth Frazier, a longtime Merck executive who became CEO in January.
Merck shares jumped about 3 percent on word of the settlement, while J&J’s climbed by half that rate.
Merck had worked hard to enforce its view, even criticizing reporters who characterized the Schering-Plough deal, which boosted Merck back to the world’s No. 2 drugmaker by revenue, as an acquisition. After all, Merck paid $49.6 billion for Schering and the combined company retained Merck’s name, corporate headquarters, stock and top executives, and made Schering-Plough a subsidiary.
“Merck would have won in a courtroom and probably in arbitration, but, in the end, didn’t want to risk a loss that would have made the Schering acquisition look like a giant, total mistake. Better, at least politically, to give up a little than to risk it all,” said analyst Erik Gordon, a professor at University of Michigan’s Ross School of Business.
Under the settlement, Merck & Co. will pay J&J $500 million, and the companies will amend the previous distribution agreement.
Starting July 1, New Brunswick, N.J.-based J&J will receive exclusive marketing rights for the drugs in Canada, Central and South America, the Middle East, Africa and Asia Pacific territories. J&J keeps its rights to U.S. sales. It received about $4.8 billion in total revenue from the drugs last year.
Merck, based in Whitehouse Station, N.J., will retain rights through Europe and the emerging markets Russia and Turkey — areas that generated about 70 percent of the $2.8 billion it got last year in sales of the drugs.
Merck will split the profit from those territories with J&J 50-50. Merck had been getting 58 percent of that profit, but the split was set to shift to 50-50 by 2014.
Analysts had differing views of the outcome.
“Our net impression is that the decision is positive for both” companies, wrote Credit Suisse analyst Catherine Arnold.
But Jeffrey Holford of Jefferies & Co. concluded “the terms of the settlement are more onerous for Merck than anticipated.”
In midday trading, Merck shares climbed 92 cents, or 2.7 percent, to $34.78, while J&J shares were up 80 cents to $60.82.
The companies said the agreement is not expected to have a significant impact on earnings this year. Merck said it still expects 2011 adjusted earnings, which exclude the Johnson & Johnson payment and other one-time items, to range from $3.64 to $3.76 per share.
Analysts surveyed by FactSet expect, on average, earnings of $3.71 per share. Analysts typically exclude one-time items from their estimates.