J&J vs. Merck and Schering: Who Is Most Desperate in This Bizarre Love Triangle?

Nobody wants to say anything about the great Remicade tug of war that has broken out between Johnson & Johnson and the soon-to-be-merged Merck and Schering-Plough.

A look at the Q1 2009 numbers suggest that each member of this trio has their own reasons to be quietly desperate over the outcome (which is always the way with threesomes, if you think about it).

J&J and Schering share revenues from the still-growing Remicade, but J&J has an option to end the pact if there’s a “change of control” at Schering. Merck’s buyout of Schering has been engineered with a thin layer of legalese to create a situation in which although Merck is actually buying Schering, on paper Schering will be the surviving company that technically merged with Merck.

The merger partners are hoping this hoop-jumping will not trigger the change of control provision that gives J&J rights over Remicade.

So let’s look at the numbers.

Merck’s Q1 2009 numbers revealed why it needs to buy Schering, its revenues were $5.4 billion, down 8 percent; net income was down 56 percent to $1.5 billion.

We knew Merck’s profit would be down. Why? Because it only made a profit of $3.3 billion this time last year after a $2.2 billion one-time payment from AstraZeneca.

Merck’s big brands Singulair and Zetia are both in decline. It’s not all bad news; Merck is actually cutting expenses as its sales are declining, but not fast enough — its operating efficiency is still trending down.

Schering saw revenues decline  to $4.4 billion from $4.7 billion. Net income was $805 million, up from $314 million. Unlike Merck, it’s cutting expenses faster than its revenues decline, so it’s a lean, shrinking machine, if you want to think of it that way.

The merger thus represents two partners who both have holes that need to be filled, to torture this analogy further.

Which is where J&J and Remicade fit in. Schering’s share of Remicade netted it $518 million, up 2 percent. Remicade is SGP’s biggest product, and one of only four products that sells more than $200 million a quarter. Of those four, Nasonex is showing zero growth and Pegintron saw a 4 percent sales decline. Underneath that there’s a lot niche products (Nuvaring) and former blockbusters (Clarinex) that have seen better days.

But J&J is no B.S.D. in this party. Its revenues were $15 billion, down 7.2 percent. Net income was $3.5 billion, down 2.5 percent. Pharma sales were down over 10 percent. But its Remicade revenues were $1 billion, up 3 percent.

This seems to give J&J the best hand; the other two need Remicade more than J&J does … but the declining health of J&J’s scrip business gives it reason to want to make a deal.

Merck need not buy Schering, after all. It could walk away and merge with any of half-a-dozen equally unhealthy/promising companies. Sure it would be an embarrasment for Merck CEO Dick Clark, but shareholders may yet profit from such brinksmanship.