April 15, 2011 / 11:23 AM / in 7 years

UPDATE 4-Merck keeps key arthritis drug rights in J&J pact

* Drugmakers announce deal on Remicade, Simponi rights

* Merck cedes rights in other countries

* Dispute stemmed from Merck merger with Schering-Plough

* Merck shares rise 2.6 pct, J&J up 1.1 pct (Rewrites first paragraph, adds portfolio manager comment, background)

By Lewis Krauskopf

NEW YORK, April 15 (Reuters) - U.S. drugmaker Merck & Co (MRK.N) will hang on to the bulk of international sales from two lucrative arthritis medicines after resolving a high-stakes fight with Johnson & Johnson (JNJ.N) stemming from Merck’s merger with Schering-Plough.

While ceding some rights and making other concessions, Merck retains crucial rights to the drugs Remicade and Simponi in Europe and other territories that represent 70 percent of the $2.8 billion in sales that were in dispute.

Merck shares rose 2.6 percent after the companies announced their agreement on Friday, nearly two years after J&J started arbitration proceedings. A decision on the dispute had been expected at any time.

J&J shares rose 1.1 percent, as analysts said the deal was also positive, though more moderately, for the diversified healthcare manufacturer.

The agreement lifted a cloud over Merck that had made investors wary of buying the stock because they feared the company potentially could lose the whole franchise.

“Remicade and Simponi are some of the key pieces to the portfolio,” Morningstar analyst Damien Conover said. “For them to retain rights in the more significant markets is a pretty critical win for Merck.”

The agreement also should serve to deflect criticism over Merck’s rationale for its $41 billion Schering-Plough merger. The deal had come under some questioning after a highly touted experimental blood-clot drug gained in the merger suffered a clinical setback.

Merck had structured the Schering-Plough transaction in an apparent bid to retain the arthritis drug rights by avoiding a change in control, so Friday’s agreement appeared to validate its strategy.

“It eliminates the legal overhang, the uncertainty. It will get investors to focus back on the companies themselves,” said Scott Richter, a portfolio manager for Fifth Third Asset Management, who said he would be more likely to buy both companies’ shares, particularly Merck‘s, following the agreement.

MERCK HANGS ON TO EUROPE

The dispute had centered on rights to the drugs outside of the United States, which had been held by Schering-Plough. J&J holds U.S. rights to the medicines.

Under the J&J agreement, Merck will relinquish exclusive marketing rights to J&J in territories including Canada, Central and South America, the Middle East, Africa and Asia Pacific effective July 1.

But Merck will retain rights throughout Europe, Russia and Turkey. Those territories represent about 70 percent of Merck’s 2010 revenue from the drugs, which totaled about $2.8 billion.

The companies also agreed to divide profit evenly from Merck’s distribution of the drugs beginning July 1. The arrangement previously had been 58 percent for Merck and 42 percent for J&J, with the split to become equal in 2014.

J&J will also receive a one-time payment of $500 million this month under the agreement.

J&J started arbitration proceedings over the marketing agreement in May 2009 after Merck and Schering announced their merger. An arbitration panel had been weighing the dispute, but the agreement pre-empted the panel’s decision.

Merck and Schering-Plough had structured their deal as a reverse merger, under which the smaller Schering technically acquired Merck. This deal structure seemed designed to avoid triggering a change of control that would send Schering’s rights on the medicines to J&J.

By all outward appearances, however, it was a traditional acquisition by the larger company. The combined entity retained the Merck name and stock symbol, and is run out of Merck’s corporate headquarters, while Schering-Plough’s chief executive, Fred Hassan, left after the deal.

“The whole structure of the deal a couple of years ago in my mind was sneaky,” Fifth Third’s Richter said. “I would give Merck some credit for good gamesmanship in light of structuring the deal the way they did and then taking it to this sort of settlement.”

With the agreement, Merck said it still expects earnings this year in a range of $3.64 to $3.76 per share, excluding special items.

J&J said the new agreement would have added nearly $500 million in sales last year, but that the impact of the agreement on 2011 earnings is not expected to be significant.

Merck shares rose 89 cents to $34.75 in morning trading on the New York Stock Exchange. J&J shares rose 64 cents to $60.66. (Reporting by Lewis Krauskopf, editing by Gerald E. McCormick, Dave Zimmerman)

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