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How Merck and J&J Might Settle a $3B+ Dispute With a Consumer-Brands Swap

The biggest ongoing mystery in the pharmaceutical world right now is why there hasn't been a decision in the fight between Merck (MRK) and Johnson & Johnson (JNJ) over the rights to the arthritis/psoriasis drug Remicade, Merck's second-biggest revenue driver. A ruling from an arbitration judge is months overdue, leading some to suspect that the two companies are engaged in settlement talks that are prolonged due to some kind of asset swap.

In a note to investors, Bernstein Research analyst Tim Anderson recounted a recent meeting with Merck's CEO (emphasis added):

What could be taking so long? CEO Ken Frazier, who used to be MRK's general counsel, declined to provide any updates. A logical best-guess is that some form of complicated settlement may be in the works. One can envision this taking a variety of forms or involving a variety of different asset swaps.
The Merck-J&J dispute is complex, but basically boils down this way. Merck acquired Schering-Plough in 2009 in large part to acquire Remicade, a treatment for rheumatoid arthritis and other inflammatory conditions like Crohn's disease. Remicade earned $2.7 billion in sales last year. Yet the acquisition contained a risky bet on a technicality -- that the deal did not trigger an agreement that would revert all rights to Remicade back to J&J, which marketed the drug jointly with Schering. If Merck loses Remicade it could knock 10 to 15 percent off MRK's share price, according to Anderson.

Most people believe the two companies will come to terms. I've previously argued that, given all the available information on the deal, J&J ought to prevail because you have to tie yourself in knots to believe that Merck's takeover of Schering did not trigger the change-of-control provision in the Remicade agreement.

So what might these "asset swaps" be? Frazier said in January that he would consider selling Merck's consumer division, which has several well-known brands such as Coppertone but does not contribute significantly to Merck's revenues.

By a lucky coincidence for Merck, J&J's consumer division is currently a shambles due to more than a dozen recalls of Tylenol and other bathroom cabinet staples. J&J needs a functioning consumer goods division and it has more expertise in consumer goods than Merck. It's also in the market for a $10 billion property. The puzzle pieces seem to fit together nicely ...

Bonus points: If you noticed that Anderson also floated this theory a year ago.


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