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Drug-Industry Shakeout Hits Small Firms Hard
 
 
  Another Wave of Acquisitions Is Likely as Companies Worry About Their Drug Pipelines and Health-Care Change
 
Wall St Jnl March 10 2009_By AVERY JOHNSON and RON WINSLOW
 
Drug makers have begun a frenzied consolidation drive that is redrawing the industry landscape.
 
Merck & Co.'s $41.1 billion agreement to acquire Schering-Plough Corp., announced Monday, follows Pfizer Inc.'s $68 billion January takeover deal for Wyeth.. Roche Holding AG's seven-month pursuit of Genentech Inc. was also nearing an agreement Monday, according to people familiar with the situation.
 
The push to consolidate is being driven by the knowledge that the big companies' pipelines aren't producing enough new moneymakers to keep growth going when major products lose patent protection over the next couple of years. As a result, the drug giants are looking to consolidations that will cut costs by combining research and sales efforts and eliminating other overlaps.
 
What will be left is an industry dominated by behemoths, raising questions about the fates of smaller drug companies, as well as the countless small biotechs hungry for suitors. Even though their labs aren't what they used to be, the major pharmaceutical companies have product lineups that still command fat margins, giving most of them the cash to pursue deals.
 
"There are too many companies chasing smaller revenue opportunities, so there's got to be a shakeout," says analyst Tim Anderson at Sanford C. Bernstein & Co. "If you've got cash and the value of the companies you want to buy is lower, it's the perfect setup."
 
Johnson & Johnson seems most likely to be involved in the next wave of consolidation in the drug industry, analysts say.
 
There could also be pressure tied to moves in Washington, where health-care reform could eat into margins. Bigger drug companies might be in a better position to bundle their products and negotiate with the government, analysts say.
 
The wreckage on Wall Street is also a factor: The health-care sector is traditionally viewed as a relatively safe bet, making it easier for drug companies to get financing than other industries.
 
But megadeals haven't cured industry problems in the past. Pfizer paid $116 billion for Warner-Lambert in 2000 and an additional $54 billion for Pharmacia in 2003, yet still needed to acquire Wyeth this year to help replenish an anemic pipeline.
 
As the dust settles, Eli Lilly & Co., Bristol-Myers Squibb Co., AstraZeneca PLC, Sanofi-Aventis SA and Johnson & Johnson seem most likely to be involved in the next wave of consolidation, analysts say. Factors including existing partnerships, the timing of patent expirations and how well drug makers can absorb multiple acquisitions could affect who will be a buyer and who will be a seller.
 
"Bristol and Lilly stand out in terms of size versus the rest of the industry," says Les Funtleyder, an industry analyst at Miller Tabak. "They'll have to do something, because it's a consolidating industry."
 
Lilly, based in Indianapolis with a market capitalization of $32 billion, will lose patent protection on its bestselling antipsychotic Zyprexa in 2011. It just bought ImClone for $6.5 billion. Mr. Anderson suggests it could merge with Bristol-Myers, whose chief executive, James Cornelius, came from Lilly.
 
Lilly, which has strong ties to Indiana and an undesirable series of patent losses coming up, would be more likely to buy than sell. "There's no way Lilly's a takeout," says Mr. Anderson.
 
Mark Taylor, a Lilly spokesman, says, "We're not interested in large-scale M&A activity in pharma and believe small and medium scale acquisitions, licensing and internal development" are the best way forward for Lilly.
 
Bristol-Myers faces a similar dilemma, because Plavix, the bloodthinner it sells with Sanofi-Aventis, faces generic competition in 2011. A merger with Lilly could face antitrust hurdles because both companies have clotting drugs and antipsychotics. A tie-up with Sanofi-Aventis is frequently rumored because of Plavix.
 
Bristol-Myers sold its ConvaTec wound-care business last May for $4.1 billion and offered a $720 million partial initial public offering for its nutritional business last month -- divestitures that could either add to its war chest for deals or make it a more attractive takeover target. Bristol-Myers declined to comment.
 
Sanofi-Aventis's new chief executive, Christopher Viehbacher, said in an interview last week that he isn't seeking a megamerger but would consider deals of under $19 billion. Some analysts say that could leave Sanofi-Aventis open to buying the U.S. biotech company Biogen Idec Inc., which has a market value of $13.3 billion. Both companies have declined to comment.
 
Another possibility for Bristol-Myers could be a deal with Britain's AstraZeneca because the companies are co-developing a drug for diabetes called saxagliptin.. One rationale for the combination of Merck and Schering-Plough is to run the companies' joint venture selling the cholesterol medicines Vytorin and Zetia under one roof. AstraZeneca declined to comment, but has said in the past it's not interested in big deals.
 
Catherine Arnold, a drug-industry analyst at Credit Suisse, says that hasn't stopped companies in the past. "Sanofi, Glaxo and Novartis have said they're not interested in big deals, but Jeff Kindler said that nine months ago," she said, referring to a statement in March 2008 by Pfizer's chief executive that he did not see a megamerger on the horizon.
 
Meantime, 180, or 45%, of publicly traded biotech companies have less than a year of cash on hand, and about half are trading below $1 a share, according to BIO, the trade group for the biotechnology industry based in Washington.
 
But biotech acquisitions aren't a panacea. One reason is that small companies offer little opportunity for cost savings. Another is the worry that founders and scientists will leave if their companies are taken over.
 
In the interview last week, Mr. Viehbacher indicated his preferred strategy would be to enter partnerships with biotech companies rather than acquire them. "You don't want to bring them in to the mother ship because then you ruin it," he said.
 
The severe funding crunch facing small biotech companies is prompting worries that important new drugs won't make it to market, impeding the progress of medicine. "Innovation has been on the biotech side, but now the money is gone," says Edward Saltzman, president of industry consultant DefinedHealth. "We're in a pickle."
 
Meanwhile, the next target could actually be Schering-Plough. Johnson & Johnson, an historically acquisitive company, could throw a wrench in Merck's plan by making a more attractive offer for Schering. J&J sells Remicade, an anti-inflammatory drug, with Schering-Plough, and a deal for the company could give it full rights to the drug.
 
--Jeanne Whalen contributed to this article.
 

Merck Trials an M&A Remedy
 
Wall St Jnl March 10 2009
By JOHN JANNARONE
 
Big pharma's deal addiction is back. Hot on the heels of Pfizer's agreed $61 billion acquisition of Wyeth, and Roche's $47 billion pursuit of Genentech, Merck has bid $41.1 billion for rival Schering-Plough.
 
On the face of it, the deal looks pretty straightforward. Merck, with its emptying drug pipeline, gets control of a coveted cardiovascular business, a bevy of drugs in development, and Schering's anti-inflammatory blockbuster Remicade.
 

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Within a few years, cost savings alone should justify the 34%, or $9.8 billion, premium reflected by the initial value of Merck's bid. After modest upfront charges, it expects cost savings of approximately $3.5 billion annually beyond 2011. While a huge number, that is realistic in the context of other big pharmaceutical mergers.
 
Taxing the savings at 30%, and putting them on ten-times multiple gives them a value of almost $25 billion -- far in excess of the premium being paid.
 
But the detail around Remicade makes the math a little murkier. The drug generates annual revenue of about $2.1 billion. And those sales come from a partnership with Johnson & Johnson, which has the right to market the drug in the U.S. while Schering sells it overseas. The wrinkle is that the international rights in theory pass to J&J if there is a change of control at Schering.
 
Assuming Remicade's international rights are worth three to five times revenue, it could be worth up to $10 billion. Subtracting that from Schering's value would make the Merck bid far less compelling.
 
To avoid violating the letter of the agreement, Merck has crafted the deal as a "reverse merger." Schering would be the surviving company, but would then change its name to Merck, be 68% owned by existing Merck investors, and be run by Richard Clark, Merck chief executive.
 
Given that unconvincing cover, J&J seems likely to argue that the deal is actually a takeover by Merck. On that uncertainty, coupled with the integration risks and the fact that such megamergers often fail to solve longer-term growth problems, Merck shares fell 7.6% Monday.
 
J&J could try taking legal action or attempt to force a cash settlement over Remicade's international rights. Alternatively, it could be even more aggressive and launch a counteroffer, although that looks like a stretch given Schering's exposure to consumer products such as Coppertone sunblock and Dr. Scholl's shoe-support products. J&J already has plenty of nonpharmaceutical health products of its own.
 
To add to the fear, Merck investors will have watched Pfizer's shares tank since it bid for Wyeth. Admittedly, that fall was fueled by a dividend cut. Merck has ruled out doing the same. But losing out on Remicade could still leave investors feeling bruised.
 

A Drug Deal That's Actually About the Drugs
 
March 10, 2009, 6:28 am
A drug deal that is mainly about the drugs.
 
That was many analysts' assessment Monday of Merck's agreement to pay $41.1 billion in cash and stock for Schering-Plough, The New York Times's Natasha Singer reported. The merger would join pharmaceutical companies that had combined sales of $46.9 billion last year.
 
Mega-mergers of this sort have been widely expected ever since Pfizer began the consolidation race in January by agreeing to pay $68 billion for Wyeth. And others are likely to follow, as many of the same factors - like expiring patents and soaring development costs - propel drug makers into one another's arms.
 
But if Pfizer-Wyeth was driven in part by desperation, analysts said, for Merck the Schering deal may actually be a good opportunity to restock its medicine chest. Merck's former blockbuster bone drug Fosamax has gone generic, and in a few years the same thing will happen to its best-selling allergy and asthma drug Singulair. The merger gives it access to successful brand-name Schering products with much longer patents, like the prescription allergy spray Nasonex. And Merck could capitalize on Schering's investments in promising biotechnology drugs.
 
"It's better than the other deal," Robert Hazlett, an analyst with BMO Capital Markets, told The Times of the Merck-Schering merger. "I'm not enamored of Pfizer-Wyeth."
 
Among other measures, he said that Pfizer had said it would slash its second-quarter dividend in half - to 16 cents - when it agreed to buy Wyeth, while on Monday Merck told shareholders it would not change its 38-cent quarterly dividend.
 
Still, like any marriage of convenience, this one has potential dissenters who are unlikely to forever hold their peace.
 
One likely controversy involves the cholesterol drugs Zetia and Vytorin, which the companies already jointly market and which last year had combined sales of $4.6 billion.. But sales have been plummeting in the wake of studies that raised questions about Vytorin's effectiveness and safety.
 
On Monday, Senator Charles E. Schumer, Democrat of New York, criticized the companies over Vytorin and raised concerns about their planned merger.
 
"The last time these two companies teamed up, it was to aggressively market a brand-name drug that may not have provided any additional benefits over existing generics," he told The Times in an e-mail statement. "That incident left a sour taste in the mouths of a lot of people, and may have cost the government a lot of money."
 
The House Committee on Energy and Commerce has also been investigating the safety and efficacy of Vytorin.
 
Merck executives said Monday they were confident that a broader, longer-term Vytorin study, set to conclude in 2012, would prove the drug to be safe and effective for lowering bad cholesterol.
 
Schering would also provide Merck with popular consumer brands like Coppertone and Dr. Scholl's, as well as a strong international presence - 70 percent of Schering revenue comes from outside the United States - that would extend Merck's global reach.
 
And much more than Merck, Schering has been investing in developing biologics - biotechnology drugs derived from living cells, which are much harder for potential generic makers to copy than the small-molecule chemical compounds on which the big pharmaceutical companies have traditionally based their businesses.
 
In 2007, Schering paid $14.4 billion for Organon, a biotechnology company that has several novel drugs, including a fertility treatment, under late development.
 
Fred Hassan, the chief executive of Schering-Plough, described the new company as a juggernaut of drug innovation and development that would have 18 drugs in phase 3 clinical trials - the late-stage human studies that are required before new drugs can gain approval from the Food and Drug Administration.
 
"Eighteen phase 3 projects will make this the most effective and strongest R.& D. machine in the industry," Mr. Hassan told The Times.
 
By 2011, the merger should generate $3.5 billion in annual cost savings by consolidating research, manufacturing, administration and marketing, Merck's chief executive, Richard T. Clark, said in a conference call with analysts. The new company could reduce the current work force of more than 100,000 by up to 15 percent with the cuts coming mainly from staffing outside of the United States, Mr. Clark said.
 
Further details of the merger are to be made public later in the week, he said.
 
There is at least one big question that hangs over the proposed merger: What happens with Remicade, a rheumatoid arthritis drug that represented $2..1 billion in sales for Schering last year.
 
Schering markets Remicade outside the United States in an agreement with Johnson & Johnson, which sells the drug in this country. Under a termination clause in that agreement, the rights to Remicade and another drug under development could revert to Johnson & Johnson if control or ownership of Schering changes.
 
Hoping to avoid a challenge from Johnson & Johnson over the change-in-control clause, Merck devised an unusual strategy called a reverse-merger agreement. Under it, Schering's ownership will not change, at least on paper. Instead, even though Merck is putting up the money to buy Schering, and Mr. Clark of Merck would run the combined companies, Merck would technically become a subsidiary of Schering.
 
In turn, Schering would be renamed Merck, Bruce N. Kuhlik, Merck's general counsel, told The Times in an interview Monday..
 
"We are very confident in our belief that this will not be a change in control," Mr. Kuhlik said. Any dispute from Johnson & Johnson would go to arbitration, he said.
 
Johnson & Johnson declined to comment on the deal, The Times said.
 
Mr. Clark of Merck said that even if the merged companies somehow lost rights to sell Remicade, that would not diminish Schering's allure as a partner.
 
But Jason Napodano, an analyst with Zacks Investment Research, disagreed. "I think that is a lot of malarkey," he told The Times. "You don't take out around 20 percent of a company's revenue and their core international growth driver and say it is not worth anything."
 
David S. Moskowitz, an analyst with Caris & Company, told The Times that the uncertainty over Remicade puts Schering shareholders at a disadvantage. One response, he said, would be for Johnson & Johnson to make a higher bid for Schering.
 
Like some other analysts, he said that the $41.1 billion price tag for Schering was too low.
 
"It's the right move, but we don't believe it's the right price," Mr. Moskowitz told The Times. "We valued the deal at $50 billion."
 
The deal values Schering at $23.61 a share, a premium of 34 percent over its closing price Friday. For each share of Schering, shareholders will receive 0.5767 shares in the new company plus $10.50 in cash. Shares of Schering rose 14.18 percent, to $20.13 Monday. Shares of Merck were down 7..7 percent, to $20.99.
 
The stock prices of all big drug companies have plummeted over the last decade, in light of increasing competition and drug price pressures from generics and the high cost of developing new drugs. But the drug giants remain relatively cash rich, and the terms of this deal indicate that, even in a tight corporate credit market, financing is available under certain circumstances. Merck will use $9.8 billion of its own cash for the purchase plus $8.5 billion in short-term financing, Mr. Clark said in a conference call with investment analysts on Monday. The companies expect the deal to close in the fourth quarter of this year, subject to regulatory approval.
 
Mr. Moskowitz of Caris predicted that the Merck-Schering deal would not be the last big drug merger of 2009. He cited Bristol-Myers Squibb, a company comparable in size to Schering with an attractive product pipeline.
 
"We think Bristol-Myers is the next on the block," Mr. Moskowitz told The Times.
 

Merck Deal Puts Pressure on AstraZeneca, Sanofi, J&J
 
By Trista Kelley and Tom Randall
 
March 10 (Bloomberg) -- Merck & Co.'s $41.1 billion takeover of Schering-Plough Corp. puts pressure on drugmakers Sanofi- Aventis SA and AstraZeneca Plc to make megamergers of their own to gain new products.
 
Merck's agreement, which follows New York-based Pfizer Inc.'s $68 billion bid for Wyeth, of Madison, New Jersey, and Swiss drugmaker Roche Holding AG's $45.7 billion offer for Genentech Inc., of South San Francisco, will propel other drugmakers fearful of missing opportunities, said David Moskowitz, an analyst with Caris & Co. in Washington.
 
The world's biggest drugmakers, armed with about $100 billion in cash and short-term investments, are seeking acquisitions to replace $84 billion in sales from products nearing the end of their patent life. The takeover of Schering- Plough, of Kenilworth, New Jersey, by Whitehouse Station, New Jersey-based Merck would give Merck a larger experimental pipeline and products unhindered by imminent patent losses.
 
"Most companies now are pretty cheap, really, and anyone sitting on cash can make a bid," said Nick Turner, a Mirabaud analyst in London, in an interview yesterday. "This could be a trigger for a wave of mergers and acquisitions."
 
Paris-based Sanofi may target Bristol-Myers Squibb Co., of New York, which sells the French company's Plavix blood thinner and Avapro hypertension treatment in the U.S. Other possible suitors for Bristol-Myers include AstraZeneca, of London, and Johnson & Johnson, of New Brunswick, New Jersey, Moskowitz said.
 
J&J may also make a bid for Schering-Plough, Sanford C. Bernstein analyst Tim Anderson said in a note to clients.
 
Bristol Next
 
Bristol-Myers rose 80 cents, or 4.2 percent, to $19.81 at 1:08 p.m. in New York Stock Exchange composite trading, after climbing 3.6 percent yesterday on investor speculation it may be a target. The U.S. drugmaker has bolstered its pipeline of experimental drugs, making it a candidate for acquisition, Moskowitz said.
 
AstraZeneca rose 52 pence, or 2.3 percent, to 2,275 pence in London trading.. Sanofi gained 53 euro cents, or 1.3 percent, to 40.83 euros in Paris.
 
"Bristol-Myers is next," Moskowitz said in a telephone interview yesterday. "There is more consolidation to come."
 
Brian Henry, a spokesman for Bristol-Myers, and Geoffroy Bessaud, a spokesman for Sanofi, declined to comment on acquisition strategies. Sarah Lindgreen, a spokeswoman for London-based AstraZeneca, said the company doesn't comment on market speculation. Bill Price, a J&J spokesman, declined to comment.
 
J&J Chief Executive Officer William Weldon said in a Jan. 20 interview he has a list of takeover targets and is evaluating "unique opportunities" and "big mergers and acquisitions."
 
Sanofi's Viehbacher
 
Sanofi Chief Executive Officer Chris Viehbacher, while not ruling out a large deal, has said he will seek "small to medium- sized" acquisitions to replace revenue that will be lost to generic competition. He told CNBC in a March 5 interview the French company's partnership with Bristol-Myers is "sufficient" for now.
 
Other drugmakers have also said they will avoid large mergers. Andrew Witty, chief executive officer of London-based GlaxoSmithKline Plc, said last month that a megamerger would "distract" the company. Glaxo will rely on agreements valued from about $50 million to the "low billions," Witty said in a January interview.
 
Chief Executive Officer John Lechleiter, chief executive officer of Eli Lilly & Co., of Indianapolis, Indiana, said his company is shopping for small to mid-sized acquisitions after buying New York-based ImClone Systems Inc. in November for $6.3 billion.
 
Novartis's Vasella
 
Novartis AG's CEO Daniel Vasella said that the Swiss drugmaker will continue to make small acquisitions to replace products facing generic competition. AstraZeneca CEO David Brennan has also said he favors smaller licensing deals to shore up its pipeline of new products.
 
The heads of Bristol-Myers and Abbott Laboratories, of Abbott Park, Illinois, have made similar statements.
 
Licensing entanglements between pharmaceutical companies may complicate future deals.
 
Schering-Plough sells the anti-inflammatory drug Remicade outside the U..S., and its agreement allows J&J to claim all rights if Schering-Plough's ownership changes, said Lawrence Biegelsen, a Wachovia Capital Markets analyst in New York, in a note yesterday. Remicade generated $2.19 billion for Schering- Plough last year, 16 percent of company revenue..
 
Merck said the acquisition won't affect Schering-Plough's agreement to share revenue on Remicade with J&J. Merck said it will keep the rights because the deal is structured as a reverse merger, meaning that for accounting purposes, Schering-Plough rather than Merck will be the surviving corporation.
 
J&J Bid Unlikely
 
A bid by J&J is unlikely, as J&J isn't known for hostile bids, said Les Funtleyder, a Miller Tabak & Co. analyst in New York, in an interview. Schering-Plough's products seem a better fit for Merck, though a fight can't be ruled out, he said.
 
"J&J has been oddly silent in this sort of megamerger festival we've had," Funtleyder said. "J&J, I'm sure at this moment, is looking at their options, legal and strategic."
 
Bristol-Myers doesn't have so-called change-in-control agreements, the company has said. If the drugmaker is bought, it retains rights to sell Plavix, its best-selling drug, with $7.1 billion in sales last year. It also maintains sales of the cancer drug Erbitux, marketed with Lilly, the experimental blood thinner Apixaban, sold with Pfizer, and a diabetes treatment partnership with AstraZeneca.
 
Pfizer has lost 60 percent of its value since completing its acquisition of Pharmacia Corp. in 2003. Glaxo's shares have declined 46 percent since the U.K. drugmaker bought SmithKline Beecham Plc in 2000.
 
"If you can name a merger that worked, I'll personally give you a bouquet of flowers," Mirabaud's Turner said.
 
To contact the reporter on this story: Trista Kelley in London at tkelley2@bloomberg.net; Tom Randall in New York at trandall6@bloomberg.net.
 

With Merck Deal, New Jersey Braces for Big Drug Industry Job Cuts
 
By PATRICK McGEEHAN
Published: March 9, 2009
 
On Monday, two of the biggest pharmaceutical companies with headquarters in New Jersey, Merck and Schering-Plough, announced plans to merge and eliminate about 16,000 jobs. That announcement came just six weeks after Pfizer, based in Manhattan, said it would buy Wyeth, which is based in Madison, N.J.
 
If the deals are consummated by the end of this year as expected, New Jersey will be home to two fewer Fortune 500 companies, and its status as the leading location for pharmaceutical companies and their high-paying jobs will have slipped a bit further. Analysts said they expected the trend toward consolidation to continue, portending more job losses in the state.
 
"It's tough on New Jersey and it's tough on the economy," said Dr. Jon LeCroy, who follows pharmaceutical stocks for Natixis Bleichroeder in New York. "These are also mergers of desperation, you could say.. The biggest thing they're going to do is try to cut costs."
 
Indeed, Merck executives said they expected to eliminate about 15 percent of the jobs at Merck, which is based in Whitehouse Station, and Schering-Plough, based in Kenilworth. Together, the companies employ more than 105,000 people worldwide. Dr. LeCroy said he expected Pfizer to close Wyeth's headquarters, where more than 900 Wyeth employees work.
 
Those losses would accelerate the decline in New Jersey's share of jobs in the pharmaceutical industry. Estimates of the total number of jobs in that field vary because some of the biggest drug makers also make medical supplies and consumer products. For example, Johnson & Johnson, which is based in New Brunswick, N.J.., makes everything from baby oil and bandages to cancer treatments.
 
The HealthCare Institute of New Jersey estimates that the state has about 60,000 biopharmaceutical jobs, or about 10 percent of the worldwide total.. But James W. Hughes, dean of the Edward J. Bloustein School of Planning and Public Policy at Rutgers University, said that by a narrower definition, the state's employment in drug manufacturing was about 41,000 jobs.
 
That number, Mr. Hughes said, amounted to less than 15 percent of the nation's jobs in that industry - still a high concentration, but down from more than 20 percent in 1990.
 
Many of the new jobs have been created in places like San Diego and the area around Boston, where biotechnology research institutes serve as magnets. California overtook New Jersey as the state with the most pharmaceutical industry jobs five years ago, Mr. Hughes said.
 
Still, New Jersey has remained the most popular place for world and regional headquarters of the big drug makers and, until recently, that has been a boon for the state. The pharmaceutical jobs in New Jersey have paid more, on average, than those elsewhere. According to figures from the federal Bureau of Labor Statistics, the average weekly wage of the industry's jobs in New Jersey last year was almost $2,100, about 30 percent higher than the national average for such jobs.
 
Drug companies based in the New York metropolitan area have been building plants in places like North Carolina to save money, Mr. Hughes said. But, he added, the losses expected are not attributable to any state policies that have made New Jersey less hospitable.
 
A. G. Sulzberger contributed reporting.
 

Side Deal with J&J Clouds Schering Sale
March 9, 2009, 11:13 am NY Times
 
Could Johnson & Johnson inject some serious complications into Merck's acquisition of rival drug maker Schering-Plough?
 
In Merck's conference call Monday morning announcing the $41 billion deal, several analysts questioned whether Merck would be able to pick up two drugs that Schering and J&J developed and marketed together over the years to treat rheumatoid arthritis.
 
The questions arose because of the terms of a long-standing distribution agreement between Schering and J&J. The agreement specifies that if Schering-Plough were acquired, J&J would have the right to cancel the agreement and take full control of the drugs - and the billions of dollars they generate.
 
The two drugs are Remicade, which generated $2.12 billion for Schering-Plough last year, or 16 percent of the company's international sales; and golimumab, an experimental follow-up drug. Currently, Schering has exclusive marketing rights to both drugs outside the United States, Japan and certain Asian markets.
 
In Monday's call, Merck said that rights to the two drugs would remain safely with the combined company even though it was Merck that was taking over Schering-Plough and paying a premium to Schering's shareholders.
 
Merck executives explained that Monday's deal was structured as a "reverse merger," so that the surviving parent company will be the existing Schering-Plough corporate entity. That company will be renamed Merck and be led by Merck management, but won't technically be the "old Merck" in the eyes of the law, Merck said.
 
Therefore, Merck believes the deal does not trigger the change-of-control clause in the agreement between Schering-Plough and Johnson & Johnson..
 
"Under the express terms of the distribution agreement, this change of control provision focuses on whether there has been a change in the surviving public company," Bruce N. Kuhlik, Merck's general counsel, told analysts Monday morning.
 
The agreement "doesn't refer to stock ownership or anything of the sort - as you know, that does appear in other change-of-control provisions, not in this one. That's why we are confident in our belief that we will not trigger a loss of rights," he added.
 
Schering's original 1998 distribution agreement was made with a company called Centocor, which Johnson & Johnson later acquired.
 
A J&J spokesman told DealBook on Monday that the company isn't commenting on the Schering agreement. And neither Merck nor Schering responded directly to questions from analysts about whether they had reached a separate agreement with J&J.
 
"There is a very good respect among the three companies in New Jersey, good dialogue," Fred Hassan, chief executive of Schering-Plough, said on the conference call, "In fact I had a cordial conversation with Bill Weldon this morning," Mr. Hassan added, without going into specifics. William Weldon is J&J's chief executive.
 
The agreement between J&J and Schering-Plough provides for mandatory binding arbitration in the event of a dispute, which means that a court battle probably isn't in the cards.
 
But there's always the possibility that J&J might decide to skip the arbitration - and make a play for Schering-Plough itself.
 
- Cyrus Sanati
 
 
 
 
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