CEO Ken Frazier Cuts A Favorable Deal With J&J — Only $500 Million In Catch-Up Damages

Well, this one points squarely to New Merck CEO Ken Frazier’s ability to make favorable deals from tough situations. Recall that he was the one who led the effort to put Vioxx liabilities to bed for less than $5 billion — a coup at the time. [To be fair though, those Vioxx outflows will continue to bleed — on the order of tens of millions, per quarter — for the next at least three years.]

As an encore to his Vioxx deal, today, he has been able to escape a potential $10 billion hit over the next three years, with only a half-billion dollar upfront payment (as opposed to as much as $3 billion), while relinquishing only a portion of the non-US sales on Remicade and Simponi. He is truly a master of the high-stakes deal.

Even so, J&J fares pretty well here, too — it gets more of all the European sales — 8 percent more, and it keeps for itself (no sharing with Merck) the United States (by far the biggest market), Canada, Central and South America, the Middle East, Africa and Asia Pacific territories. Wow.

It was — to my experienced eye — far from clear that Merck had a good argument on the contract, itself — as the contract used a defined term “Change of Control” — but inadvertently did not capitalize the “change” in another place, thus leaving the language open to expert interpretation of what the parties might have intended, by not using the defined term.

That oversight (by legacy Schering-Plough legal people) foreshadowed a poor outcome for Merck — and Mr. Frazier has now deftly avoided the worst of it.

All told, this is a real positive upside surprise for Merck’s battered common stock. I’d expect a $2 pop today — by day’s end. Here is a bit of the AP story:

. . . .Merck & Co. will pay J&J $500 million, and the companies will divide distribution rights outside the United States for Remicade and successor drug Simponi, which treat chronic inflammatory diseases like rheumatoid arthritis.

Starting July 1, J&J receives exclusive marketing rights for the drugs in Canada, Central and South America, the Middle East, Africa and Asia Pacific territories. Merck will retain rights through Europe and the emerging markets Russia and Turkey. It will divide the profit from those territories with J&J.

J&J keeps its rights to distribute the drugs in the United States. . . .

Indeed. So ends the single largest overhang on Merck’s stock price. My hat’s genuinely off to the man — he’s simply done it — again!


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