Johnson and Johnson’s Form 10-Q: Updates on Remicade/Simponi Rights Arbitration

Johnson & Johnson just filed its SEC Form 10-Q, at 5:11 PM EDT, tonight — and we learn that Schering-Plough has filed a formal denial of J&J’s claims. We also learn that the parties are selecting the arbitrators. In this context, given the mechanics of Appendix K to the original Centocor agreement, we may fairly safely infer that each side has already chosen an arbitrator, and that those two arbitrators are now seaching for the “neutral” — the arbitrator not affiliated with either side. I’ll explain why, after the pull-quote.

At pages 34 and 35 of its Form 10-Q, J&J provides this update, on the reversion of Remicade and Simponi rights, worldwide — now being arbitrated with Schering-Plough. Significantly, this is more detail than either Schering-Plough, or Merck provided, in the Forms 10-Q of each company:

. . . .In May 2009, Centocor Ortho Biotech Inc. (COBI) commenced an arbitration proceeding before the American Arbitration Association against Schering-Plough Corporation and its subsidiary Schering-Plough (Ireland) Company (collectively, Schering-Plough). COBI and Schering-Plough are parties to a series of agreements (the Distribution Agreements) that grant Schering-Plough the exclusive right to distribute the drugs REMICADE® and SIMPONI™ worldwide, except within the United States, Japan, Taiwan, Indonesia, and the People’s Republic of China (including Hong Kong) (the “Territory”). COBI distributes REMICADE® within the United States and also plans to distribute SIMPONI™, the next-generation treatment, domestically. In the arbitration, COBI seeks a declaration that the agreement and plan of merger between Merck & Co., Inc. (Merck) and Schering-Plough constitutes a change of control under the terms of the Distribution Agreements that permits COBI to terminate the Agreements. The termination of the Distribution Agreements would return to COBI the right to distribute REMICADE® and SIMPONI™ within the Territory. Schering-Plough has filed a response to COBI’s arbitration demand that denies both that it has undergone a change of control and that it will undergo a change of control upon the completion of the merger with Merck. The parties are in the process of selecting the arbitrator who will preside over the arbitration proceeding. . . .

As the bolded portion indicates, the process of selecting the three arbitrators is ongoing. Timelines from the agreement, and the governing rules — in a moment. The relevant rule provides:

. . . .R-12. Direct Appointment by a Party

(a) If the agreement of the parties names an arbitrator or specifies a method of appointing an arbitrator, that designation or method shall be followed. The notice of appointment, with the name and address of the arbitrator, shall be filed with the AAA by the appointing party. Upon the request of any appointing party, the AAA shall submit a list of members of the National Roster from which the party may, if it so desires, make the appointment.

(b) Where the parties have agreed that each party is to name one arbitrator, the arbitrators so named must meet the standards of Section R-17 with respect to impartiality and independence unless the parties have specifically agreed pursuant to Section R-17(a) that the party-appointed arbitrators are to be non-neutral and need not meet those standards.

(c) If the agreement specifies a period of time within which an arbitrator shall be appointed and any party fails to make the appointment within that period, the AAA shall make the appointment.

(d) If no period of time is specified in the agreement, the AAA shall notify the party to make the appointment. If within 15 days after such notice has been sent, an arbitrator has not been appointed by a party, the AAA shall make the appointment. . . .

Assuming that J&J’s Form 10-Q disclosure was carefully vetted, and thus taking it as accurate, we may infer, from the reference to a singular “arbitrator” being selected, in the blue bolded sentences above, that the “neutral” is going to sit alone, when hearing the arbitration. That makes the selection of this person a particularly weighty matter — perhaps a $3 billion to $5 billion matter. This could take a while — as each side’s arbitrator interviews and searches for a truw neutral. We shall see.

FDA Sees Elevated Cancer Risk in Juvenile Arthritis Drugs — Incuding Remicade and Simponi

This news has been a while in the making, but it will affect the worldwide Schering-Plough franchises in Remicade and Simponi, without regard to the ultimate outcome of the pending J&J arbitration:

. . . .The Food and Drug Administration warned Tuesday that several of the leading biologic medications used to treat rheumatoid arthritis can increase the risk of cancer when used by children and adolescents. The drugs, which belong to a class called TNF-blockers, include the following: Remicade and Simponi, marketed by Johnson & Johnson and [short-term?] partner Schering-Plough. . . .

Stay-tuned, but recall that I have earlier suggested the arbitrators will likely allow in extrinsic evidence of what a “small c” change of control might mean — to experienced practicioners, in this securities law/distribution agreement context.

And, that would be very bad news for the Merck and Schering-Plough lawyers. The arguable gaffe in Section 8.2(c), then:

. . . .from such notification, to notify in writing the party subject to the change of Control of the termination of the Agreement taking effect immediately. . . .

We’ll keep an eye on it, here.