Merck’s $330 Million Writeoff Of Legacy Schering-Plough Saphris® (Asenapine) Assets: Predicted By “Salmon” & Me — In 2010


Since early 2009, my erstwhile, but lately translucent compatriot called “Salmon” and I had predicted either that (1) asenapine would not win FDA apprval, or (2) whenever it did, it would never become a blockbuster antipsychotic drug — even though then-CEO (at legacy Schering-Plough) Fast Fred Hassan was touting it as one of his five stars for the future. [Right along, Sycrest® was being sold in the EU — in small quantity — as the brand name for asenapine, in the euro zone.]

And so, now Merck is required to charge off yet more of the $41 billion it paid for Mr. Hassan’s pig in a poke pipeline. That is unfortunate — and could have been mostly avoided with more unbiased diligence reviews — and corresponding merger price reduction demands, from the Merck negotiating team. And as we all now know, Fred Hassan would have had no choice but to agree, because over 60 percent of his company’s profitability was dependent on Vytorin® — which was looking like a very expensive placebo, by then (and I would argue — even now). From Merck’s SEC Form 10-Q, just filed Thursday (at pages 20 and 36), then:

. . . .During the second quarter and first six months of 2013, the Company recorded an intangible asset impairment charge of $330 million within Materials and production costs related to Saphris/Sycrest. During the second quarter, the Company reduced cash flow projections for Saphris/Sycrest as a result of reduced expectations in international markets and in the United States. These revisions to cash flows indicated that the Saphris/Sycrest intangible asset value was not recoverable on an undiscounted cash flows basis. Utilizing market participant assumptions, and considering several different scenarios, the Company concluded that its best estimate of the current fair value of the intangible asset related to Saphris/Sycrest was approximately $170 million, which resulted in the recognition of an impairment charge. . . .

In 2009, the FDA approved Saphris (asenapine), an antipsychotic indicated for the treatment of schizophrenia and bipolar I disorder in adults. In 2010, asenapine, sold under the brand name Sycrest, received marketing approval in the European Union (“EU”) for the treatment of bipolar I disorder in adults. In 2010, Merck and H. Lundbeck A/S (“Lundbeck”) announced a worldwide commercialization agreement for Sycrest sublingual tablets (5 mg, 10 mg). Under the terms of the agreement, Lundbeck paid a fee and makes product supply payments in exchange for exclusive commercial rights to Sycrest in all markets outside the United States, China and Japan. Merck’s sales of Saphris were $42 million and $43 million in the second quarter of 2013 and 2012, respectively, and were $73 million and $83 million in the first six months of 2013 and 2012, respectively. During the second quarter, the Company reduced cash flow projections for Saphris/Sycrest as a result of reduced expectations in international markets and in the United States. These revisions to cash flows indicated that the Saphris/Sycrest intangible asset value was not recoverable on an undiscounted cash flows basis. Utilizing market participant assumptions, and considering several different scenarios, the Company concluded that its best estimate of the current fair value of the intangible asset related to Saphris/Sycrest was approximately $170 million, which resulted in the recognition of an impairment charge of $330 million during the second quarter and first six months of 2013, which is reflected within Materials and production costs. . . .

That means it was on the books at $500 million prior to the $330 million writedown.



And yes, at the end of the day, $330 million in impairments are scarcely material to Merck. But the idea that Saphris was supposed to be a $2 billion or $3 billion juggernaut for New Merck, on an annual basis. . . well, that delta — of around $1.7 to $2.7 billion in annual sales? That is — and was — material. From the negotiating team at Merck, then: “thanks yet again, Fast Fred!”



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