Does Sanofi-Aventis ALREADY “Effectively Control” Merial Schering-Plough’s Intervet?

Even though the final clause of of the below Section 10.4 — at subsection 10.4.3 — specifically disclaims control, there is a reasonable case to be made that Sanofi-Aventis tonight, through crafty negative covenantry, possesses at least a “veto right” — as to most important business matters concerning the Intervet franchises, businesses that are (at least nominally) still now owned by Schering-Plough (and to be owned by New Merck, if the reverse merger is consummated). Surprisingly, this veto, or negative control, in favor of Sanofi, now exists over a series of businesses worth, by some accounts, over $9 billion. Any sale, divestiture, or other rearranging of any asset or liability that comprises more than one-half of one percent, in most cases, or one percent (in some other cases) is a “trip-wire” — creating default remedies in favor of Sanofi-Aventis. The tightness of the guardrails is actually rather astonishing. These clauses are common in multinational M&A settings, but usually provide much wider dollar discretion to a target of Intervet’s size, scope and scale. Fascinating.

Take a look — again, a link to the full “call option” agreement is here, at the SEC’s EDGAR window:

. . . .10.4 Conduct of the Intervet/Schering-Plough Entities

10.4.1 Except (i) to the extent required by applicable Law or the regulations or requirements of any stock exchange or regulatory organization applicable to Sellers, Sellers’ Subsidiaries and the Intervet Schering-Plough (“I/SP”) Entities and their Subsidiaries, (ii) as otherwise permitted or contemplated by this Agreement or the Related Agreements, (iii) as set forth in Schedule 10.4, or (iv) as consented to in writing by Sanofi-Aventis (which consent shall not be unreasonably withheld, conditioned or delayed), during the period from the date hereof until the earlier of (A) the Closing Date or (B) the termination of this Agreement in accordance with Article 14 hereof, Sellers shall, and shall cause each of their Subsidiaries (including the I/SP Entities and their Subsidiaries) to, conduct the businesses and operations of the I/SP Business in all material respects in the Ordinary Course, and to the extent consistent therewith, Sellers shall, and shall cause each of their Subsidiaries (including the I/SP Entities and their Subsidiaries) to, use their respective reasonable efforts to (1) preserve the I/SP Entities’ and their respective Subsidiaries’ existing assets and properties, (2) preserve the I/SP Business’ business organization intact and maintain the I/SP Business’ existing relations and goodwill with customers, suppliers, distributors, creditors and lessors, and (3) comply in all material respects with Laws applicable to the I/SP Business.

10.4.2 Without limiting the generality of the foregoing, except (w) to the extent required by applicable Law or the regulations or requirements of any stock exchange or regulatory organization applicable to Sellers, Sellers’ Subsidiaries and the I/SP Entities, (x) as otherwise permitted or contemplated by this Agreement or the Related Agreements, (y) as set forth in Schedule 10.4, or (z) as consented to in writing by Sanofi-Aventis (which consent shall not be unreasonably withheld, conditioned or delayed), during the period from the date hereof to the Closing Date, Sellers shall cause each of the I/SP Entities and their Subsidiaries not to:

(i) modify or amend in any material respect any of the organizational documents of any of the I/SP Entities or their Subsidiaries;

(ii) issue, sell or otherwise transfer any Equity Securities of any of the I/SP Entities or any of their Subsidiaries (other than issuances, sales or other transfers to the I/SP Entities or any wholly-owned Subsidiary of an I/SP Entity);

(iii) split, combine, redeem or reclassify any Equity Securities of any of the I/SP Entities;

(iv) permit any of the I/SP Entities or any of their respective Subsidiaries to incur or suffer to exist any Indebtedness in excess of $50 million in the aggregate except (x) for working capital borrowings incurred in the Ordinary Course, or (y) as listed in Schedule 10.4.2(iv);

(v) enter into any Contract that would prohibit any of the I/SP Entities or any of its Subsidiaries, after the Closing, from competing in any line of business or with any Person in any geographic area, except for such prohibitions that would not, individually or in the aggregate, reasonably be expected to be materially adverse to the I/SP Business;

(vi) other than acquisitions (a) listed in Schedule 10.4.2(vi) or (b) not in excess of $10 million individually or $20 million in the aggregate, permit any of the I/SP Entities or any of their respective Subsidiaries to acquire any business by merger, consolidation or otherwise;

(vii) divest, sell or otherwise dispose of, or encumber any material asset of the I/SP Entities or their Subsidiaries outside of the Ordinary Course (other than as permitted by subsection (ii) above) except (a) as listed in Schedule 10.4.2(vii), (b) for transactions involving assets of the I/SP Entities or their Subsidiaries having a value no greater than $20 million in the aggregate for all such transfers, or (c) in connection with any waiver, release, assignment, settlement, compromise of litigation otherwise permitted under this Agreement;

(viii) permit any of the I/SP Entities or any of their respective Subsidiaries to adopt a plan or agreement of complete or partial liquidation, dissolution, or recapitalization;

(ix) permit any of the I/SP Entities or any of their respective Subsidiaries to enter into or adopt any Plan, or amend any I/SP Entities Plan other than in the Ordinary Course consistent with past practice;

(x) increase the rate of compensation, commission, bonus, or other direct or indirect remuneration payable, or agree to pay, conditionally or otherwise, any bonus, incentive, retention, change in control payment or other compensation, retirement, welfare, fringe or severance benefit or vacation pay, to or in respect of any employee, officer or director of any of the I/SP Entities or any of their respective Subsidiaries, except (a) in the Ordinary Course or (b) to the extent required by any Plan disclosed in Schedule 8.17.1;

(xi) materially delay or accelerate the payment of any account payable or other Liability of the I/SP Business other than in the Ordinary Course, materially delay or accelerate the collection of any account receivable or other amount owed to the I/SP Entities and their Subsidiaries relating to the I/SP Business other than in the Ordinary Course, or directly or indirectly encourage or require agents, distributors or other purchasers of products from the I/SP Business to purchase or commit to purchase such products in volumes or in accordance with an order or delivery schedule other than in the Ordinary Course;

(xii) make, incur or authorize any individual capital expenditures or commitment for capital expenditures in connection with the I/SP Business in excess of $20 million individually or $100 million in the aggregate;

(xiii) pay any dividend (including interim dividends or other similar forms of distribution), other than dividends or distributions that would be reflected in the calculation of the I/SP Value (as defined in the Call Option Agreement) pursuant to the Call Option Agreement;

(xiv) enter into new agreements, or modify any existing agreements, between Schering-Plough or its Affiliates, on the one hand, and the I/SP Entities or its Subsidiaries, on the other hand, that would continue to be effective following the Closing unless such agreements are substantially on an arm’s-length basis, other than customary agreements and intracompany arrangements for items such as cash management, tax sharing, data sharing and other similar ordinary course purposes with Schering-Plough or its Affiliates; or

(xv) authorize, agree, resolve or consent to any of the foregoing.

10.4.3 Nothing contained in this Agreement shall give to Sanofi-Aventis, directly or indirectly, rights to control or direct the operations of any of the I/SP Entities, their respective Subsidiaries prior to the Closing. Prior to the Closing, each of the I/SP Entities and their Subsidiaries, as applicable, shall exercise, consistent with the terms and conditions of this Agreement, complete control and supervision of its operations. Notwithstanding anything to the contrary in this Agreement, no consent of Sanofi-Aventis shall be required with respect to any matter set forth in this Section 10.4 or elsewhere in this Agreement to the extent that the requirement of such consent would violate or conflict with applicable Law. . . .

Whew. That’s quite a bit of de facto veto power, or negative control, of a series of businesses worth, by some accounts, over $9 billion. And $50 million or $100 million is a trip-wire threshold amount? Yikes. Sanofi is effectively now running this Intervet show.

BREAKING: Schering-Plough Just Disclosed the Full “Merial-Sanofi-Intervet Call” Agreement

It was just uploaded to the SEC, via a prospectus-supplement exhibit.

This is a complicated deal. I’ll have more, after I digest it:

. . . .Subject to and upon the terms and conditions described in this Agreement, Schering-Plough offers herein to Sanofi-Aventis an option, and Sanofi-Aventis accepts such option (without undertaking to exercise it), to, following the completion of the Merger and the acquisition by Sanofi-Aventis of the Merial Equity Interests pursuant to the Share Purchase Agreement, cause the I/SP Entities, which would, at the Closing, collectively conduct all of the I/SP Business, to be combined with Merial (by way of contribution) upon the terms and conditions described in this Agreement, as a result of which Sanofi-Aventis and Schering-Plough would each, directly or indirectly, hold 50% of the equity interests in such combined company. . . .

And here is the main share purchase agreement, just filed, as well. I’ll offer analysis, after I read it — in the morning — tomorrow. Check that — done — see above.

From the “Sublime — to Ridiculous” Dept.: Why It’s Always a Good Idea to Proof Press Releases. . . .

Seeking Alpha, a great resource site, has dutifully lifted the first version of Schering-Plough’s asenapine press release, of last afternoon, to source this (below). The problem is that Schering-Plough’s original press release used a would-be “New-Joisey“-homonym in place of the intended word — “use” (erroneously substituting “youth“, instead).

With the error, the sentence is wholly-unintelligible. There was no vote for approvability, of that sort, yesterday. So, I guess it is usually wise to really proof corporate press releases — especially on one of Schering-Plough’s “Five Star” candidates, now pending-action, at FDA:

. . . .in favor of Saphris (asenapine) sublingual tablets as effective and safe for the acute treatment of manic or mixed episodes associated with bipolar I disorder in adults and in favor of youth USE(!) in acute treatment of schizophrenia in adults. . . .

That was the Seeing Alpha quote, as corrected, here. It seems “the lights are all on“, in Kenilworth, but “no one’s home“(!). I actually thought the pronunciation of “youth“, as a New Joisey near-homonym for “use” was more of a “Sout-Philly” thing. As I say — trivial, but telling, nonetheless.

Asenapine Chronicles: WSJ Finally Discovers the Full FDA Background Materials. . . .

Well, better late than never, I guess. Jennifer Corbett Dooren, for The Wall Street Journal, has apparently found the 1,067 page PDF we’ve been blogging about for the last few days:

. . . .An FDA memo released in advance of the meeting said the data in support of Saphris’ short-term efficacy, or effectiveness, in treating schizophrenia “are not overwhelming for this drug. . . .”

[And earlier, she wrote:]

If approved, Saphris would compete with other top-selling antipsychotic drugs like AstraZeneca’s Seroquel . . . and Eli Lilly’s top-selling drug Zyprexa. . . .

If nothing else, one would get the sense from The Wall Street Journal article that this is a market already crowded with best-selling, entrenched franchise names. And that — coupled with the lukewarm-at-best official PDAC remarks — may explain why Schering-Plough’s stock actually fell into negative territory (even though it had gapped higher, at the NYSE open), after the PDAC vote news was released. For the last three NYSE Schering-Plough trading sessions, more than double the usual daily volume has crossed the tape. The smart money may be moving — and moving, away (SGP topped the WSJ’s “selling on strength” list, yesterday). We shall see. Overnight, Reuters quoted a BMO Capital analyst, thus:

. . . .BMO Capital Markets analyst Robert Hazlett boosted his sales estimates for the drug following the panel’s positive vote, saying he expects Saphris to earn $25 million in 2009, $125 million in 2010 and $200 million in 2011. . . .

Only $200 million by the end of 2011. That would confirm my “already-crowded space” theory, on the drug.

Now, I guess, it is in the hands of the full Commission.