The Most Important Thing Affecting Merck

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It's not often that one binary event can mean so much for a large pharma. It takes a lot of sales to move the revenue needle and one drug launch isn't going to do that in the short term.

That is unless the drug is already on the market and bringing in a cool $2.7 billion, in which case the potential loss of the drug is a very big deal.

That's the situation Merck (NYSE: MRK  ) faces with the potential loss of Remicade. The anti-inflammatory made up nearly 6% of Merck's sales last year, but it could all go poof if arbitration with its marketing partner Johnson & Johnson (NYSE: JNJ  ) doesn't go its way.

Merck acquired the rights to market Remicade and Simponi, a follow-up compound, in most countries outside the U.S. through its purchase of Schering-Plough. Technically Merck set up the acquisition so that the smaller Schering-Plough bought Merck, and then changed its name to Merck to avoid triggering the change-in-control provision in the marketing agreement.

Johnson & Johnson balked and took Merck to arbitration. Johnson & Johnson doesn't need Merck's help in marketing the drug. The partnership dates back to Schering-Plough marketing the drug for Centocor, which Johnson & Johnson bought in 1999.

Remicade isn't going to be a cash cow forever. Pfizer (NYSE: PFE  ) , Rigel Pharmaceuticals (Nasdaq: RIGL  ) , and Incyte (Nasdaq: INCY  ) are developing oral rheumatoid arthritis drugs that will likely take market share from Remicade and the rest of the anti-inflammatory drugs that have to be injected or infused.

But for now Remicade is a major contributor that increased 17% last year. Losing the rights to Remicade is going to hurt. A lot.

The companies haven't guided exactly when the arbitration ruling will be handed down, but most analysts believe it'll happen in the next few months. Unfortunately, unless you're a lawyer specializing in acquisitions -- and probably even if you are -- it's nearly impossible to guess the outcome of the arbitration hearing.

What is clear is that this is a very big deal for Merck. Investors should expect biotech-FDA-decision like movements in the stock price in either direction depending on the outcome.

Interested in keeping track of Merck as it waits for the arbitration ruling? Click here to add it to My Watchlist, which will help you keep track of all our Foolish analysis on Merck.

Johnson & Johnson and Pfizer are Motley Fool Inside Value recommendations. Johnson & Johnson is a Motley Fool Income Investor choice. Motley Fool Options has recommended a diagonal call position on Johnson & Johnson. The Fool owns shares of Johnson & Johnson. Motley Fool Alphaowns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Fool has a disclosure policy.

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  • Report this Comment On February 16, 2011, at 8:36 PM, jasmin45 wrote:

    Usually these kind of issues will be sorted out in a mutual agreement between the corps. lawsuits are just to ensure a level playing field for negotiations and create a win-win agreement.

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