J&J seeks benefits from Schering takeover

Release Date: 2009-03-28

Dealmakers say Johnson & Johnson is to agitate for control of Merck's takeover of Schering or for other concessions as an alternative to a battle over Schering in its entirety

Johnson & Johnson is preparing a push to extract concessions from Schering-Plough in exchange for allowing Merck’s planned $46bn takeover of Schering to move forward without a messier fight, dealmakers say.

J&J and Schering are partners in marketing two lucrative arthritis drugs, which Schering has the rights to sell outside the US. Merck and Schering say their merger is structured in a way that will not terminate that partnership agreement, which could give J&J a chance to control the drugs outright.

J&J had no comment on its plans. But people close to the matter say J&J is readying a legal argument against the deal as structured, and they expect J&J to agitate for control of the joint venture or for other concessions as an alternative to a battle over Schering in its entirety.

J&J has long been seen as Schering’s other natural suitor. While it has taken a look at the company in the past and opted against a deal, the threat of a counterbid could still give it some leverage.

“I don’t think this will result in nothing out of J&J – they’re going to assert their rights and create leverage,” said one dealmaker familiar with the matter, who expected J&J to attempt to cut a deal with Merck and Schering privately if possible.

J&J has the right to request binding arbitration over whether the Merck merger violates terms of its partnership with Schering on the two key arthritis drugs, Remicade and golimumab. With arbitration or a potential counterbid as a threat, J&J could angle for a range of concessions from Merck and Schering.

Fred Hassan, Schering-Plough chief, cited “good respect among the three companies” in response to analysts who grilled Merck and Schering over the issue when the deal was announced.

Healthcare dealmakers say they expect J&J to extract benefits from the transaction, but the level of aggression it will use remains to be seen.

Merck said its earnings growth, dividend policy and general rationale for the acquisition would not be affected regardless of whether the deal included the two drugs, prompting questions over whether Merck was already expecting J&J to lobby for control of the venture.

While the arthritis franchise is important to Merck, its interest in Schering is broad and includes Schering’s strengths in treating cardiovascular disease. Merck could agree to carve out the arthritis venture and trade it to J&J – which may hand J&J the asset it wants most without forcing it to buy the rest of Schering.

Bankers pointed out, however, that such a transaction could have been worked out before Merck and Schering announced their merger if the parties had been willing, suggesting that any battle over Schering’s assets may grow complicated.

One person close to Merck and Schering was not aware of any notable communications between the two companies and J&J over the matter, but said it was expected that J&J would have its lawyers attempt to poke holes in the agreement between Merck and Schering.

If J&J believes the merger triggers a change in control, it has another two weeks to seek mandatory binding arbitration. Loss of the key arthritis franchise would reduce Schering’s yearly sales by more than $2bn and, after the targeted 2010 launch of golimumab, potentially by another $1bn.

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