IHS Global Insight Perspective | |
Significance | Johnson & Johnson (J&J; U.S.) is seeking to examine the impact of the merger of Merck & Co and Schering-Plough (both U.S.) on its own joint venture with the latter firm. The firm is also facing generic competition for its drug Topamax after several generic versions received U.S.FDA approval. |
Implications | The pharma major is rumoured to be considering a legal challenge that could put a spanner in the works for the Merck-Schering merger timeline. The increasing Topamax competition was predicted, as the product went off-patent on 26 March 2009. |
Outlook | While legal recourse could force Merck & Co to offer concessions to J&J over the joint-venture deal, it remains to be seen whether this would involve the transfer of rights for the two arthritis drugs completely to J&J. |
J&J's Problem with the Merck-Schering Deal
Pharma major Johnson & Johnson (J&J; U.S.) is reportedly considering taking legal action to challenge the US$41.1-billion merger deal between Merck & Co and Schering-Plough (both U.S.). The Financial Times quoted an unnamed source suggesting that J&J is in the process of re-examining the structure of the Merck-Schering deal, particularly the impact this would have on its own alliance with Schering-Plough. J&J and Schering-Plough currently have a marketing deal for two arthritis drugs—Remicade (infliximab) and Golimumab. Centocor, a unit of J&J, discovered golimumab and has exclusive marketing rights to the product in the United States. A biological licensing application (BLA) was submitted last year to the U.S. FDA seeking approval for the treatment of rheumatoid arthritis, psoriatic arthritis, and ankylosing spondylitis. Pending regulatory approval, Schering-Plough will assume exclusive marketing rights outside the United States except in Japan, Indonesia, and Taiwan. Remicade, on the other hand, is an established drug in the arthritis therapeutic area, garnering US$3.74 billion in sales revenue in 2008 according to J&J's financial results.
J&J is expected to "extract benefits" from the transaction, suggests the source, adding that a legal challenge could force Merck & Co to offer "concessions" relating to the two products under the joint venture with Schering-Plough. Still, there is no official confirmation of such a move, and Schering-Plough had indicated at the time of the merger announcement that there was relative mutual confidence and communication between the three firms over the joint venture.
Topamax Faces Generic Competition
Separately, J&J is facing generic competition for one of its top drugs, Topamax (topiramate). The product's exclusivity in the U.S. market including paediatric ended on 26 March 2009, opening the floodgates for a series of generic drug versions to enter the market segment. The FDA approved generic versions of Topamax from Teva Pharma (Israel), Sun Pharma, and Ranbaxy Laboratories (both India) among others. Topamax is indicated as a treatment for epilepsy and migraine. The product garnered sales of US$2.73 billion in 2008 for J&J, registering annual growth of 11.3%.
Outlook and Implications
A potential challenge to the Merck-Schering-Plough joint-venture arrangement with J&J was expected, but the timing of J&J's opposition to the deal is significant. While it is not clear if J&J will seek to question the entire merger or just its impact on the joint-venture operations, it is clear that such a move will force Merck & Co to consider certain options relating to the joint venture. These options include transferring the rights completely to J&J, which would be extremely beneficial to the latter, potentially adding more than US$5 billion to its revenue from Remicade alone. Furthermore, the approval and launch of golimumab is another potential addition to topline growth within the next four to five quarters. But the development may not bode well for Schering-Plough, as Remicade itself has added US$2.1 billion and is the highest-grossing drug for the firm in 2008. It will be disappointing for Merck to let go of the rights to the two drugs, but if that ensures there is no spanner in the Merck-Schering-Plough merger timeline it could be green-lighted.
There is also the contention that Merck & Co is looking to the wider benefits of the deal with Schering-Plough, such as improved marketing presence, drug portfolio, and research and development efforts, as opposed to the joint venture with J&J. Clearly, these synergies are providing impetus behind the acquisition initiative, and there is some indication that Merck would be interested in nurturing Schering's strengths in the cardiovascular drugs market. Still, a legal challenge by J&J could provoke a matching response from Merck in the short term, however destabilising it may prove for the joint venture.
The prospective generic competition for one of J&J's top-ten performing products—Topamax—underscores the challenges facing the firm in the near term. The generic versions of Topamax will impact J&J's revenues and be reflected in the second-quarter financials. Revenues for the generic firms involved will be boosted as market share increases. J&J's structural focus on market diversification should ensure that there is minimal impact on the firm: despite top drugs being closer to losing exclusivity, there is enough strength in the current drug portfolio to put the firm in a slightly better position than most other Big Pharma firms, including Pfizer and Merck & Co prior to their respective mergers with Wyeth and Schering-Plough. Still, the threat from generics and a focus on drug discovery will help sustain long-term growth prospects for the firm.
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