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Maybe a Merck Drug Swap With J&J Could Make Its Remicade Headache Go Away

Merck (MRK) could give Claritin and its other consumer brands to Johnson & Johnson (JNJ) in exchange for keeping some of its rights to Remicade, the $2.3 billion arthritis and psoriasis blockbuster that the two companies market jointly.

That's a speculative solution to the ongoing legal fight between Merck and J&J proposed by Tim Anderson, an analyst at Sanford Bernstein, in a recent note to investors.

The two companies are scheduled to enter arbitration in September. Anderson believes they'll settle before then. Merck will certainly be anxious to get a deal done on Remicade, as its merger with Schering-Plough was a bet-the-farm move dependent on not losing Remicade to J&J.

Back story: Merck and Schering went through a ridiculously complicated set of legal hoops to make it look like Schering was acquiring Merck and then changing its name to Merck. In fact, Merck acquired Schering, which is why Schering no longer exists. This kabuki show was necessary to convince J&J -- or at least J&J's lawyers -- that Schering had not undergone a "change of control." Such a change would have triggered a provision giving Remicade and its successor brand, Simponi, to J&J free of charge -- a loss of more than $2 billion in annual revenues. Anderson wrote:

... we believe the odds are high that they will end up settling ahead of arbitration, with MRK keeping most or all of Remicade/Simponi economics in international markets, in exchange for something of value to be given to JNJ such as consumer health assets.
Merck's consumer health unit earns $1.2 billion a year, of which $406 million is Claritin. One assumes that the international Remicade business is roughly equal to Merck's consumer brands business.

There's a slight problem with the Anderson solution. Remicade is growing nicely, adding $209 million in sales last year. But Claritin et al are basically stagnant, adding only $5 million in revenues.

Which makes me think that if J&J is in the mood to deal, the solution will be more complicated than a straight swap. And of course, J&J could just cross its fingers and hope that the abitrator gives it the entire jackpot.


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