Not So Fast, Schering ... er, Merck ... er, Whoever You Are

Merck (NYSE:MRK) might have thought it would be able to get away with it, but Johnson & Johnson (NYSE:JNJ) isn't putting up with Merck's games.

Merck got cute with its acquisition of Schering-Plough (NYSE:SGP) by setting up the merger so that Schering is technically merging with Merck and then changing its name to Merck. That seemingly schizophrenic move has a purpose: Schering-Plough's overseas marketing deal for Johnson & Johnson's anti-inflammatory Remicade and its follow-on Simponi has a provision that allows Johnson & Johnson to terminate the partnership if a company takes control of Schering-Plough.

In Securities and Exchange Commission documents, Schering-Plough said that earlier this month Johnson & Johnson told Schering-Plough that it plans to seek arbitration over whether Johnson & Johnson can terminate the contract given the circumstances of the reverse merger.

Partnerships and acquisitions hardly ever meld well together. Earlier this month, Japanese drugmaker Eisai said that it plans to end its partnership with Pfizer (NYSE:PFE) to market its Alzheimer's drug, Aricept, after Pfizer buys Wyeth (NYSE:WYE), because Wyeth has a phase 3 Alzheimer's drug in development with Elan (NYSE:ELN).

The stakes of the arbitration are huge for Merck. The $2.1 billion worth of Remicade sales last year were about 10% of Schering-Plough's adjusted sales, which include sales from its cholesterol drugs partnership with Merck. And Simponi is a potential blockbuster in its own right.

Whether the feud will go that far remains to be seen. I'm not sure either company thinks it's on firm enough legal ground to roll the dice and let an arbitrator decide the fate of Remicade and Simponi. Instead it seems likely that the companies will negotiate and work out a compromise. That'll likely mean that Merck ends up getting less than the full value of what Schering-Plough is worth, but won't lose the two drugs all together.

While not ideal, it's likely what investors in Merck and Schering-Plough will have to settle for.

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