Rumor Mill Grist: Quiet Pre-Holiday Friday "Fast Fred" Chronicles Edition

Normally, I'd leave this alone. It only tangentally connects to New Merck, in any sense. However, it's a quiet Friday here in the office, so. . . I'll comment on this WSJ-sourced rumor piece.

While it is true that Valeant, a Canadian outfit, has shown a true proclivity for bidding into deal spaces, recently -- it has closed very few of those it has set out to hunt down -- and none, in this size range, as far as I can tell.

At (a rumored) more than three times B + L's TTM sales revenue, this would be very rich pricing, indeed. Recall that no one would firmly offer to pay Mr. Hassan's wanted $10 billion price, at the end of last year. Recall also that B + L has spent quite a bit to get ready for an IPO, this Spring.

Knowing Fast Fred as I do, it wouldn't shock me if this is simply a "stalking horse" rumor, to get the IPO fires stoked -- and get potential retail investors in such a planned IPO thinking that the newly public company called B + L (soon to be renamed from the awful WP Prism, Inc.) could at some future point be "flipped" -- at near these valuations. Get 'em hearing the sizzle -- then deliver no steak. . . That's Fred's usual way.

In any event, for what it's worth -- here is a bit of the WSJ piece -- do go read it all:

. . . .Bausch & Lomb, which is owned by private-equity firm Warburg Pincus LLC, could strike a deal to be sold to Valeant next week, the people said. The deal isn't done yet and could still fall apart, one of the people cautioned.

Should that happen [Valeant deal falls apart], Warburg and Bausch & Lomb could proceed with an initial public offering of stock in the eye-care company that had been planned. . . .

Me? I'll be surprised if it does turn out to be true -- certainly, at that $9 billion price. Note that I added the bracketed matter to the quote, to clarify what the writer meant. If the deal falls apart, Fred has now already been able to generate some great (pre-IPO) "quiet period" pump-priming rumors. Normally, rumors a-swirling are no big deal -- but if he uses them to help him flog the stock, prior to SEC granting the IPO an effectiveness order, he's likely to be in some hot water. [I wonder if the SEC will open a jacket on this one, as well -- if such a leak were traced back to B + L, or its bankers, or Warburg Pincus -- that would be a plain violation of about a dozen SEC rules.]

Yep -- this looks to me like some cha-cha to help sell the initial public offering of B + L stock, in the next couple of weeks. To be clear, I expect that Valeant is actually in talks, and actually believes it might "win" the deal. I just think Valeant may be serving as Fred's cannon-fodder -- for the IPO. But what do I know?

Nation's Most Populous State Unwraps Its Health Care Exchange -- And At Least 13 Private Insurers Join The Effort

California has unveiled its private public state-run exchange. And it is a model of cooperation. Even the rhetoric in the health insurance companies' on-air ads reflects this: last fall, health insurers were referring to the effort's prospects "an uncertain time" -- as they pitched their products -- to individuals and businesses.

Yesterday, in the land of Big Sur, I heard several on-air FM radio ads that touted the "great opportunities" in "health care reform" for all of the state's insureds. Yes, a private, for profit insurer was calling "reform" by its name -- and lauding it, as "positive reform". That is how far we've come.

[BTW, Congressional Republicans planning on running at the mid-term against this wave, will do so at their considerable peril.]

Of course, there will be glitches, and of course it will need some fine tuning and mid-course correction(s) -- but we are seeing a new delivery model, in action, in California -- with millions more patients eligible for, and receiving at least basic health care, at an affordable price.

Yes, change is always hard -- but that is what most of the complaining will be about, from here on, in California -- people just get uncomfortable around change. But it is the way of all things -- they change. We will keep an eye on all of this for the readership, of course.

From a bit of The New York Times story, then -- do go read it all:

. . . .The new rates for individuals will be about the same — or lower — than the current rates for small businesses, according to officials from Covered California, the group operating the exchange.

“The changes in the market are really making individuals much more like employer groups,” Paul Markovich, the chief executive of Blue Shield, said. Like people who now receive health insurance through their employers, individuals buying policies on their own will be able to enroll next year even if they have a potentially expensive medical condition, and the policies’ benefits and premiums will be more standardized.

“We held insurers’ feet to the fire,” said Peter V. Lee, the executive director of Covered California, who said that the exchange had received interest from 33 insurers and actively negotiated with them over their proposed rates and the kind of network of doctors and hospitals they would offer. Covered California estimates that the plans offered will allow consumers access to about 80 percent of the state’s practicing physicians and hospitals.

While Washington, Vermont and several other states have also announced the details of their respective exchanges, California’s size and previous support for the health care law made it an important test of the law, said Paul B. Ginsburg, the president of the Center for Studying Health System Change, a nonpartisan research group in Washington. “A lot of people will be watching California to see how well it succeeds,” he added.

California chose to behave more like Massachusetts in aggressively negotiating with insurers on behalf of its residents. . . .

I think California (and Massachusetts) have that just right -- these states must negotiate fiercely with the private insurers -- on price. That is their duty, to their citizens. The charge is to provide as much health care as possible, at the best price, to the highest number, and widest swath, of state residents. It will be bumpy at first -- but it bears watching. It is the wave of the future. And it is the right thing to do.

Finally, even though anti-reform worry-warts were predicting close to 30 per cent premium increases for healthy young people in California, the increases are averaging around 13 per cent -- less than half the fear. And, it is highly likely that these healthy young people were being undercharged under the prior rubric. So now you know.

Legacy Schering-Plough Parkinson's Candidate (SCH 420814) No Better Than Placebo; Phase III Program Terminated.

The chemical name of the candidate was (is) Preladenant (SCH 420814). Kudos to Merck, I guess -- for promptly sticking a fork in it -- and not waffling about other potential redesigns.

[Insert here my usual rant about legacy Schering-Plough CEO Fred Hassan's [non-] pipeline dreams. I'm even boring myself, with this stuff -- so repetitive, right?] I'd guess that between them, Schering-Plough and Merck spent north of $400 million from early-concept, to the latest three Phase III studies, on this.

From the presser:

. . . .The Phase III clinical program for preladenant included three randomized, controlled clinical trials to evaluate safety and efficacy. Two of these studies assessed preladenant when added to levodopa therapy in patients with moderate-to-severe PD, and one assessed preladenant as monotherapy in early PD. More information about the preladenant Phase III clinical trials is available on www.clinicaltrials.gov. . . .

And. . . yet another one bites the dust. Thanks, Fred! [We can't spell "Failure" without. . . U!]

A "White Whale" -- Now Disappearing -- Over The Still-Luminous Horizon?

More than a few usually-reserved journalists have referred -- over the last few days -- to suvorexant's potential to be an insomnia agent with a "clean" morning wake-up (no impairment, or grogginess) as the "great white whale" many a pharma-captain has long roamed the oceans, hunting, just as we all remember, Ahab did.

Me? i'm not so sure. . . .

Based on the newly-public, more detailed looks at the study data Merck submitted to support FDA approval of suvorexant, several FDA staffers are now apparently concerned that -- as is true of all agents now on the market (including many cheap generics) -- a 40 mg dose of suvorexant will be associated with some non-trivial morning after impairment.

And so -- when you read of stock analaysts boldly predicting north of $500 million in peak annual sales for this drug -- they are doing so on the assumption that it is the legendary white whale: a drug that lets you sleep, but doesn't leave you foggy, in the morning.

After hearing Merck's own science staff suggest that suvorexant is likely "not very effective" at improving sleep, at the 10 mg dose which these FDA staffers felt would be "safest" (for driving, on the morning after), I simply cannot shake the notion that this agent -- while first in its brand new class -- is going to be much more of a "me too" product. A me too -- fighting it out with the generics -- at perhaps ten times the cost.

So, now it is up to FDA: does Merck get approval for a sleep maintenence indication, at the higher doses (30/40 mg)?

And, if so, will FDA slap lots of tough label restrictions, onto to the bottle/into the insert? That is, will the label read like all the others now on market: "don't drive the morning after taking," etc.? [If so, why not take the cheaper generic?]

If, on the other hand, FDA grants approval on the 10 mg dose only, and thus sends a signal that "safety" here is far more important than being sure to sleep through the night (go low and slow, at first) -- will doctors write off-label, in double (or higher) doses? And even if they don't -- what to make of patients who decide to double dose, on their own, when they cannot sleep?

All of these vagaries lead me to the strong hunch that suvorexant's approval -- which will happen in 2013 -- will only be moderately good news for Whitehouse Station. I remain convinced that it will peak at under $200 million in annual sales -- in 2017 or so, based on the signals buried in the study data, seen yesterday.

And so, Ahab's "great white whale" has likely crested the horizon, showing its tail to us, yet again. At least that's my guess. What's yours?

Merck Should Be Preparing Contingency Plans -- For Other Means Of Generating "No- or Low-Tax" Transfer Pricing/Licensing, On Its Intellectual Property

An Irish minister just "played the soft part, loudly" -- on multinational corporate tax gamesmanship (see quote, below -- uttered midday time in Dublin -- very early in our morning hours, on the east coast). It is clear that this is going to become a larger problem for Merck, GE, Pfizer, Lilly, HP and Intel -- just to name a few. Yep -- today, the ministry-level official tasked with encouraging multi-nationals to locate on the Emerald Isle called for an end to the aggressive gaming of the "stateless" corporate structure, for taxation purposes.

[By the way, a few days ago, I said I'd (at some point) get into how Merck's use of intellectual property transfers (primarily off-shore licensing of the patents, and know how, related to its drug compounds and molecules, but increasingly, on the brand names' registered trademarks, as well) differed from Apple's. Consider this to be that post.]

As a result of some sharp questioning before Congress, we all learned yesterday that Apple does essentially the same thing Merck does. And to be fair, Pfizer, and Abbott and Baxter and Lilly and HP and Intel all do it, too. That is, Apple has caused ownership of its patents and know how, on its tech products, to reside in companies set up in Ireland. So, we may quibble about whether Tim Cook is engaging in sophistry when he declares Apple uses no "tax gimmicks", but it is now certain that Mr. Cook's company uses almost every one of the same structures (gimmicky or not so) the multinational pharmaceutical companies use, to minimize their tax payments in high rate jurisdictions like the United States, and shift profits to low rate jurisdictions like Ireland, and parts of the Carribean.

I'd look for PhRMA to shortly come out, from behind the Oz-curtain, and make a pronouncement supporting reform -- corporate tax reform -- that would reduce the incentive for this sort of maneuvering. It seems that Apple has been a stalking horse for pharma, right along. Because Apple's gagets are so widely-adored, it was thought by PhRMA, Apple would have a better chance of getting through Congress or the White House, on a lowered tax rate mantra. Mean old evil pharma was long-known to have no such possibility -- not even remotely so.

Afterall, pharma would certainly like to have easier access to all its retained cash earnings, worldwide, at some overall lowered tax rate. And that will be exactly what the conjectured, but likely coming PhRMA white paper will ultimately angle toward -- though quite completely silently -- like a shark, in the deep, azure, open oceans. Watch for it in 3... 2... 1...

We will keep you posted -- but as several of these companies execute the (i) parent-only obligor debt issuance, followed by the (ii) super-sized stock buyback and (iii) debt repayment strategies across the globe, they will have a reduced near term need for an outright tax holiday, on repatriating overseas earning,s to the US. Why? Because they are acheiving much the same thing, in these three step transactions -- without having to get Congress or the President involved.

From AppleInsider, then:

. . . .The minister in charge of attracting foreign companies to Ireland is now saying that those companies need to be brought under control, according to Reuters.

"They play the tax codes one against the other," Richard Bruton told Irish state broadcaster RTE, "and I think we do need international cooperation through the [Organization for Economic Cooperation and Development] to deal with the aggressive nature of that."

Ireland has long drawn criticism from other European nations for its low corporate tax rate of 12.5 percent. That tax rate encourages companies to locate at least some operations in Ireland for tax purposes, which is what Apple does, along with Google and Yahoo, Pfizer, and Intel, as well as many others. Of Ireland's two million-strong labor force, about 150,000 work for foreign companies headquartered there for tax purposes. . . .

It seems that the antiseptic effect of. . . sunshine. . . is starting to take hold -- even in my cousins' government, on the Emerald Isle. Having said all of that, I do support a simplification of the US tax code applicable to multinational corporations. We could easily take away the vast incentives to engage in this sort of gamesmanship, and have a no-deductions, straight-ahead tax on corporations' profits (Tim Cook even said so!). But, more on that -- some other day.

UPDATE: 16 YES VOTES -- We're Monitoring FDA Advisory Committee Meeting On Suvorexant: Unfolding As Expected

05.23.13 @ 4:42 PM EDT | UPDATE | I've put together some "day after" analysis, under that link, there.

As expected, most of the healthy skepticism centers around dosing levels -- not overall safety, or efficacy. You can follow along here, by logging in as a "guest" -- no password or email needed.

4:35 PM EDT | UPDATE | VOTE 8 against suvorexant's automatic up-dosing, at 30/40 mg dosing, if no improvement seen at lower doses (15 mg) -- 7 vote for higher doses -- 2 abstaining. So Merck may have labeling warnings, as to the higher doses.

4:14 PM EDT | UPDATE | VOTE 13 in favor of suvorexant's safety at 15 mg dosing -- 3 vote against -- 1 abstaining. So Merck may well get it across the finish line unchanged, on dosing -- labeling looks to be where this is sorted out.

3:36 PM EDT | UPDATE | VOTE 11 vote against new 10 mg efficacy studies -- 5 in favor of new studies -- 1 abstaining. So Merck need not do additional studies -- the dose discussion continues -- labeling may be where this is sorted out.

2:53 PM EDT | UPDATE | VOTE 16 in favor of approval -- 0 against -- 1 abstain -- on the question of "sleep maintenance". So Suvorexant is approvable -- now the dose discussion begins.

2:50 PM EDT | UPDATE | VOTE 12 in favor of approval -- 4 against -- 1 abstain -- on the question of "sleep onset". So Suvorexant WILL reach the US market, in a about a month.

2:40 PM EDT | UPDATE | There is a move toward separating the approvability vote into a "sleep onset" and "sleep maitenence" votes -- essentially suggesting two separate indications will be voted upon, at 4:30.

In either case, it does seem that there is a visible majority of committee members who are leaning toward recommending approvalbility (on one or both indications) -- but likely with some suggestions about lower dosing, to start.

I will post the outcome of the vote, around 4:30 PM EDT. And although the full FDA Commission is not required to follow the Advisory Committee's views, they usually do. I do continue to see a 2013 approval date in the US for Suvorexant.

I also see only modest sales uptake, given the number of generic competitors in the sleep aid space.

Debt Deal Closed Last Night; Merck Up 4.7% On Triple Volume Today. Why? Goldman Sachs, That's Why.

We interrupt my dry, wonkish patter (on tax advantaged foreign earnings repatriation strategies), to note for the record that less than 24 hours after Merck closed on the $6.5 billion debt deals, it hired Goldman Sachs (a lead underwriter of the same just-closed debt deals) to conduct an accelerated stock repurchase, or buyback -- of up to $5 billion, or about 99 million Merck shares, at yesterday's NYSE closing price.

I have to wonder, though, whether the SEC market surveillance folk don't already have a file open -- given that Merck fell almost 2 per cent yesterday, on average volume -- only to rise 4.7 per cent today, on triple volume, to boot.

It sure feels like someone knew about the accelerated timing, and massive sizing, on this Goldman contract for the ASR. [I suppose it could be that the market finally agrees with me, that Suvorexant will be given a green light tomorrow afternoon at the FDA Advisory Committee meeing -- but that is not even a one quarter of one percent uptick event, in my estimation -- and Merck was up close to five per cent at various points today.] So -- does someone at Goldman have loose lips? We will soon know.

Well, if I was a Goldman Sachs bond buyer last night, who also happens to hold Merck common stock -- I might promptly ask to get best price sales treatment on my Merck shares, given that Merck is buying them with my money -- money I just lent Merck, yesterday.

From Merck's just-issued press release, then:

. . . .Under the terms of the ASR, Merck has agreed to repurchase $5 billion of its common stock from Goldman, Sachs & Co., in total, with an initial delivery of approximately 99.5 million shares based on current market prices. The final number of shares to be repurchased will be based on Merck’s volume-weighted average stock price during the term of the transaction, which is expected to be completed no later than November 25, 2013. . . .

This is exactly why that FINRA Rule 5121 discussion matters. It is very easy for the little guys to get crushed here -- but Merck will rise, as I said, through the end of 2013 -- in general, broad strokes -- and this sort of stuff is no small reason why.

Since I've Been Comparing Merck To Apple -- On Repatriation -- Here's Is (Apple CEO) Tim Cook's Testimony, For Capitol Hill, This Week

UPDATED: 6:05 PM CDT | 05.20.13 -- The New York Times now has released its piece on all of this, online -- and Apple's Time Cook gets excoriated in it -- for some of the hyperbole in his 17 pages, below. In my estimation, it is only a matter of time before the Times catches up to Merck and Pfizer. And possibly Congress will, too. [End, updated portion.]

At some point tomorrow, I'll get around to explaining the ways in which Apple's corporate structure, and use of CFCs, or controlled-foreign-corporations, differs from Merck's approach. [Hint: It primarily involves the transfers of intellectual property, to generate more income in tax haven jurisdictions -- in Merck's case.] But for now, you may safely assume that -- in the main -- they are largely similar. At least similar enough to make it worthwhile to watch what Apple does -- on foreign cash repatriation, as a "canary in the coal-mine" -- for what Merck might do.

And so, here is the advance-copy (that is some 17 pages of PDF goodness!) of Mr. Cook's upcoming testimony before Congress -- on Apple's recent $17 billion debt issuances, its unimaginably large $60 billion stock buyback program. . . . all of which drives his call for reform of the United States corporate tax code (which, he argues, makes most of these complex financial machinations necessary).

Having said all of that, though -- Apple does pay an immense amount of US corporate income tax. Mr. Cook estimates that Apple is responsible for almost $1 of every $40 the US Treasury collects, in corporate income taxes, from all corporate taxpayers -- paying more than $6 billion in federal taxes in 2012 (which, to be fair, of course -- may just mean that companies like Merck and Pfizer aren't paying their fair share). Wow. Apple's effective 30.5 per cent federal income tax rate here in the US is much higher than Merck's (which stood at 27.9 per cent at year end 2012, but was around 11 per cent in 2011) -- and dwarfes Merck's 2012 $2.44 billion in tax payments, on a dollar for dollar basis.

. . . .Apple, a California company, employs tens of thousands of Americans, creates revolutionary products that improve the lives of tens of millions of Americans, and pays billions of dollars annually to the US Treasury in corporate income and payroll taxes. Apple’s shareholders – from individuals and institutions to pension funds and public employee retirement systems – have benefitted from the Company’s success through the appreciation of its stock price and generous dividends. Apple safeguards the capital entrusted to it by its shareholders with prudent management that reflects the Company’s extensive international operations. Apple complies fully with both the laws and spirit of the laws. And Apple pays all its required taxes, both in this country and abroad. . . .

More tomorrow. And by the way, Merck CFO Kellogg did talk about why he did the aggregate of $6.5 billion debt deals last week, and why the $16.5 billion stock buy-back is happening now, at Merck -- but didn't even remotely hint at repatriation, in his UBS talk today, in Manhattan. And he didn't mention the underwriters' conflict of interest -- even though Merck did a much more complete job of disclosing it, under FINRA Rule 5121, than Apple did -- in its similar definitive 424(b) debt prospectus, of early May.

Suvorexant Update: Still On Track For 2013 FDA Approval, Sales Uncertain In Crowded, Genericized Sleep Space

The good news here is that nothing untoward has turned up in this morning's FDA reviewer/staff packet, in advance of Wednesday's FDA Advisory Committee meeting.

The candidate is still on track. However, the pitch has always been that suvorexant's appeal would lie in its "next morning clarity" -- that is, it would not be associated with impairment in the morning after being taken -- as so many previously FDA approved sleep aids are, on market.

The FDA reviewers are now noting some morning after impairment -- and talking about lower initial dosings -- all in a space full of generic competitors. That makes the sales outlook a little cloudy. A bit from Reuters, then -- do go read it all:

. . . .Merck's experimental insomnia drug suvorexant appears generally effective, according to reviewers at the U.S. Food and Drug Administration, but they questioned the company's proposed dosing levels.

The reviewers posted their comments on the FDA's website on Monday, two days ahead of a meeting of outside medical experts which will advise the agency on whether or not it should approve the drug. . . .

We will of course keep you posted on Wednesday afternoon, but I expect a solid majority vote, in favor of US FDA approvability.

In Ten Days, Linda Secrest Will Likely Know Whether The Supreme Court Will Grant Her A New Fosamax® ONJ Trial

As I mentioned here on May 5, I don't hold much hope for Mrs. Secrest. Here's a link to the Supremes' docket sheet, on the Secrests' petition.

I think the Supremes will leave the decision of the Second Circuit undisturbed. I expect they will deny cert. without an opinion. I'd expect it to be part of a long list of no cert. dispositions, by the Court.

In fact, Merck seems pretty confident: Whitehouse Station has waived its right to brief the court on the reasons why it might feel the Second Circuit's decision -- upholding the able trial Judge Keenan's summary judgment for Merck -- was correct. Here's a bit from Law 360, as to what the appeal is all about -- do go read it all:

. . . .The physician at issue, Dr. Lawrence Epstein, testified in a deposition in 2008, before Merck filed a summary judgment motion, that he had not known Secrest was taking Fosamax in 2004 and 2005, after she had started seeing another doctor.

When he was deposed again in 2011, after the motion was filed, he said he had known about Secrest's Fosamax use during those two years, and that he would have advised Secrest to stop taking the drug if Merck had warned him of the jaw-related risks.

"If the Second Circuit had applied the more expansive standard of the Seventh Circuit, it would have determined that Dr. Epstein's second deposition was merely a conflicting deposition, not a sham," Secrest's petition states. . . .

We will let you know how the May 30 Supreme Court Conference session on this one turns out -- but I'd be very surprised if they grant Mrs. Secrest a hearing, or any sort of remand for new determinations on this trial record.

All of that said, though -- I do think the Seventh Circuit's formulation of the test more reliably comports with our long-standing notion that issues of fact (and credibility) should be left in the hands of a jury to decide. I suppose it is possible here, that Judge Keenan (who sat through the whole trial with the jurors) found Dr. Epstein's statements so lacking in credibility that he decided no reasonable juror could rely on either version of the doctor's testimony, and thus took the matter out of the jury's hands, altogether.

2013 Thesis: Merck's Stock Is Almost Certain To Rise -- Through At Least The End Of Year

There will be dips, and there is always the remote possibility of some vast disaster hitting Merck's sales line in 2013. That much must be said at the outset. But it would have to be a more than 10 per cent real decline, to matter this year¹. Why? Well, because Merck is pulling some non-operating financial levers, and very adroitly so, at the moment.

In sum, I'll conservatively predict an overall three to six per cent Merck NYSE stock price increase, net of everything else, by year end 2013. This will be true, I predict, even if not all its expected 2013 "in the pipeline" FDA approvals materialize.

With all the financial engineering now being laid into Merck's second half of 2013, it is hard to see how the stock won't -- in general -- rise more often (and in greater amplitudes) than it sinks. It is likely that some $10 billion worth of Merck's common stock will go back into its treasury account during 2013, decreasing outstandings. It is also highly likely that Merck will bring home a like amount of cash, from overseas, at near-nil tax rates, and thus pay off most of the debt it issued last week. [Of course, not one for one (many of the trauches are multi-year) -- but the cash returned is fungible, and will decrease interest expense -- and soon.] Thus, every penny it doesn't spend on taxes (for repatriating dividends) will fall right to the EPS line, and be levered with a debt reduction effect.

And that EPS line will garner the benefit of a smaller denominator -- over 12 per cent fewer outstanding shares over the life of the buyback, which will concentrate Merck's reported earnings over a smaller base of shares. This EPS levering will begin slowly, as the share equivalents are counted on 360 days outstanding as a linear average, in a year -- but the share count will drop significantly in the back half of 2013, if Merck gets started repurchasing shortly. [And remember, Merck's dividend is nearly a riskless almost four per cent cash return, every year, on each share.]

Now, on top of all of that (the factors within Merck's control), we will see an "out of Merck's control" knock-on effect. That knock on effect will appear, as many of the investment banking houses (through their buy side analysts) shortly start increasing their 12 month targets, for Merck's NYSE stock price, even if sales of Januvia^® remain fairly underwhelming through all of 2013. They will do so, because they know that the above financial structuring steps will net, net actually increase Merck's unrestricted cash flows, by year end (and very tax efficiently so), and in perpetuity. UPDATED: Here is a list of bankers, from which I'd expect we will see increased 12 month NYSE price targets -- as each of them were underwriters of Merck's debt last week, and each of them undoubtedly have clients holding Merck stock, even if the smallest among them don't hold Merck stock directly as a firm. The names cover all of Wall and Broad: BNP PARIBAS, Deutsche Bank Securities, J.P. Morgan, Morgan Stanley, BofA, Merrill Lynch, Citigroup, Credit Suisse, Goldman, Sachs & Co., HSBC, RBS, UBS Investment Bank, Drexel Hamilton, Santander, SOCIETE GENERALE, Standard Chartered Bank, SMBC Nikko, US Bancorp, Wells Fargo Securities and The Williams Capital Group, L.P. [End, updated portion.]

Afterall, even if Merck pays somewhat higher prices, on the NYSE, for these repurchased shares (due in part to the conflicted interests the investment bankers now have -- to get their Merck shares, and those of their clients, repurchased at marginally higher prices) -- Merck's tax benefit will very likely still outstrip the increase in Merck's NYSE quoted price per share. That is, I don't expect that Merck's NYSE price will increase by more than the tax rates -- on a percentage basis -- had Merck repatriated the same amount of offshore cash, using a strategy that required Merck to pay "full-freight" federal income taxes.

In short, the (would-be) Masters of the Universe on Wall Street are lining up, all with powerful incentives to drive Merck's stock price north -- almost without regard to how Merck's operating business fundamentals pan out in the back half of 2013. So, even a slightly better than expected performance from any of the operating businesses, in 2013, will magnify the effect of all the above financial manuevering.

My advice? Do not go short on Merck in the rest of 2013 -- or buy puts -- unless you plan to buy and hold a multi-year position.

The scenarios for sustained NYSE price declines, at Merck -- are all but evaporating, even if currencies take another 7 or 8 per cent from the global sales line -- by year end. You've been warned. Know that Merck's stock is over 75 per cent held by large institutional investors, and they've figured all of this out, as well. They will sell a little, as the stock rises, and buy a little more, if the stock dips. This is essentially a downside protection structure for Merck's common stock.

<sup>~~~~~~~~~~~~~~~~~~~~
1. I expect the same effects will appear at Apple in 2013 through 2014 -- only in even larger proportions -- as its benefits from the same strategies will be proportionately-larger, than Merck's. Just FYI -- of course, do your own diligence here -- but know that I've been a bear on Merck for quite a while. For 2013, I am now a bull.</sup>

Merck CFO To Talk About "What's Next" -- At UBS In Manhattan Monday Morning

Assuming I am not stuck in meetings (or attending to other duties), I'll tune in -- at least for the replay, at day's end. My guess is that he'll offer a little local color on the largest single takedown debt deal in Merck's history, just completed this past week. UBS Investment Bank was a co-lead underwriter, on the 2016, 2018 Floating Rate, 2023, and 2043 Notes (see the prospectus cover page, bottom table -- tombstone lineup).

I'll also point out, in passing, that all the underwriters had a significant conflict of interest last week. That is so, because Merck intends to use the bulk of the $6.5 billion borrowed to buy-back its own common stock. So, it is true that the underwriters -- UBS included -- were essentially raising the money, from their clients. . . to help pay themselves, as they run (and, in various combinations, from time to time actually sell Merck back some of the bankers' own Merck stock-holdings -- and their clients' holdings, of Merck common stock) -- all as the massive Merck $16.5 billion stock buyback program steams out of the roundhouse.

Thus, they are all "conflicted-interest" underwriters, but largely exempt from the special rules applicable to conflicted-interest underwriters -- since Merck's paper is high-end investment grade, and comes from a seasoned issuer. [See the prospectus quote below.]

I bet Peter Kellogg won't mention any of that -- but feel free to register, and listen in, yourself. 

That said, I don't expect any major news on the overall business fronts, given that the Womens' Health lead just presented last week at another conference, and had little new to say -- and nothing of a materially-new nature. Here's the prospectus disclosure I mentioned above (page S-23), folowed by the EON notice, announcing the UBS conference:

. . . .We expect that a substantial portion of the net proceeds from this offering will be used to repurchase our common stock through one or more of the underwriters. Accordingly, affiliates of one or more of the underwriters will receive more than 5% of the proceeds of this offering, not including underwriting compensation. As a result, such underwriters will have a "conflict of interest" as defined in Rule 5121 adopted by FINRA. Consequently, this offering will be conducted in accordance with Rule 5121. No underwriter having a conflict of interest will confirm sales to accounts over which discretionary authority is exercised without the prior written consent of the account holder. In accordance with Rule 5121, a "qualified independent underwriter" is not required because the notes offered are investment grade rated, as that term is defined in Rule 5121. . . .

[snip]

. . . .Peter N. Kellogg, executive vice president and chief financial officer, Merck, is scheduled to present at the UBS Global Healthcare Conference in New York City on May 20, 2013 at 10:30 a.m. EDT. Investors, analysts, members of the media and the general public are invited to join a live webcast of the presentation at: http://www.merck.com/investors/events-and-presentations/home.html. . . .

As to the UBS $50 stock price target -- we will see whether UBS analysts offer an upward revision, after the talk. I'll let you know, if they do. It is absolutely true that all these debt underwriters now have a powerful incentive to increase their price targets, on Merck common stock -- and thus (they would hope) increase the price at which Merck buys back the common stock they hold, and the stock their clients hold. Do stay tuned.

I'll offer some analysis of what FINRA rules -- 5121 in particular -- will mean, in terms of Merck's likely NYSE mid-term price trend, tomorrow morning, over my Sunday morning coffee.

"Down Under"; Not Done -- Vioxx® Class Action Not (Yet) Settled: Federal (Australian) Judge

Just exactly one month ago, I mentioned that I thought the Australian class action settlement of the Vioxx^® claims, filed there -- was in danger of not being approved by the able judge overseeing the case.

This morning, Sydney time (Thursday EDT US), the judge formally rejected the aggregated $504,000 settlement -- for all 1,700 potential claimants -- saying it did not adequately take into account how individual circumstances might change payouts. [A sincere hat tip here, to that gent Ed Silverman, over at Pharmalot, for alerting me to this.]

Here's the operative bit, from the online Sydney Morning Herald "Business Day" section -- but do go read it all:

. . . .The parties last month reached a $540,000 settlement, subject to Federal Court approval, which would have resulted in the proceedings being dismissed and the matter finalised, meaning no future claims could be brought against Merck over the drug.

Justice Christopher Jessup on Friday refused to approve the settlement. He said the agreement did not take into account individual circumstances and may not be fair to those who had a stronger case against the drug company. . . . "I don't just consider myself to be a street sweeper," he said.

"I want to know what's really lying around and whether people's interests or rights are being affected. . . ."

We will keep you posted.

However, this likely means Merck, or MSD Australia, more precisely, will have to both put more money on the table -- and set up a matrix which awards multiplier amounts (or reduction factors), depending on various medical conditions/events, in individual claimants' cases. That matrix will take time to negotiate, and new notices will need to be prepared and sent out. After all this, the same judge will be asked to approve (or diapprove) the renegotiated settlement terms.

And so -- Vioxx is not going to be entirely in Whitehouse Station's rear view mirror in 2013, after all -- it would seem.

New Appearance, In A Leading Role: BNP Paribas Is Lead Book-Running Manager Of Merck's $6.5 Billion Debt Deals

While the lineup -- on down the tombstone/card -- of Merck's underwriters contains all the usual names, CFO Peter Kellogg's choice of BNP Paribas Securities Corp. as the book-running lead suggests one of two things: (1) BNP Paribas offered "loss-leader" style-pricing to win the lead role, or (2) Merck is sending a message to the usual line-up of bankers -- that their roles will not always be assured.

These sorts of huge traunche debt deals are -- when issued by high-end, stable, seasoned issuer credits like Merck (and Apple) -- essentially a license to print money, at the investment banks granted lead or co-managing roles.

The fee income (on commissions) is the first (smallest) piece, and on a deal of this size, the incremental work is tiny -- compared to the size of the fee. But the real money is made in the after-market, as the investment bankers may engage in various "market stabilization" activities for several weeks after yesterday's initial sale. "Stabilization" includes profiting handsomely on the aftermarket positions -- as the banks may be both bookmakers, and traders, during this time frame.

From the overnight pricing sheet, filed with the SEC after 10 PM EDT last night -- where to call to get a prospectus:

. . . .BNP Paribas Securities Corp. toll free at 1-800-854-5674, Deutsche Bank Securities Inc. toll-free at 1-800-503-4611, J.P. Morgan Securities LLC collect at 1-212-834-4533 or Morgan Stanley & Co. LLC toll-free at 1-866-718-1649. . . .

We will -- as ever -- keep you informed, but the other thing that's clear from yesterday's selection of BNP Paribas is that it was not undertaken to win favorable equity analyst coverage. Why? Because the investment house doesn't follow Merck, on the equity side. Now you know.

Moody's Cited Merck's Debt For Not Being Guaranteed By MSD -- But That's What Makes Merck's Repatriation Tax-Free

Yesterday, Moody's dropped Merck's debt ratings by one notch. Yawn. Merck is still firmly at the higher end of investment grade. [My backgrounder here, on all of that to and 'fro.] Moody's took special note of the fact that MSD -- Merck's primary non-US subsidiary -- would not be on the hook for Merck's upcoming debt issuances.

Today, Merck priced a $6.5 billion series of six debt traunches. None of the traunches is guaranteed by MSD. Why?

Because Merck intends to use the $6.5 billion borrowed -- ultimately -- to acheive a repatriation of MSD's foreign net cash earnings, free from United States federal income taxation (on deemed dividends), that's why.

By preventing (disallowing, actually) Merck's "controlled foreign corporation" (MSD) from backstopping today's debt issuances, Merck created a "US shareholder-only" obligation, in the language of applicable federal income tax regulations.

Merck will now ultimately fund the first large chunks of its stock buyback from the debt issued today, then use the MSD permanently-parked foreign net cash earnings to repay the non-guaranteed debt. Under several convoluted IRS memos, if Merck stirs its stock-buyback/debt issuances/debt repayment soup "just absolutely perfectly" [in Martha Stewart's affected New England clenched teeth accent, no less!] -- it will not have to pay federal income taxes on any part of these transactions. And it will have reduced the foreign net cash earnings it is presently holding through MSD second-tier subs (in Europe and Japan, primarily).

[To immensely over-simplfy a long series of intervening steps, here -- if MSD (with its own cash) pays off parent US Merck's debt -- when it is not contractually "on the hook" for it, IRS memos declare it is not a dividend ordered by the parent, US Merck -- and thus it is not taxable as part of Merck's repatriated earnings. If on the other hand, US Merck were to nakedly order MSD to send the cash home to pay an obligation MSD had backstopped anyway, that is plainly a "deemed dividend", in IRS speak.]

So -- again -- we see that Moody's knee-jerk reaction was simply ill-advised, and ultimately will mean nothing. The other debt rating agencies have put Merck on watch, but havn't downgraded it -- presumably because their analysts understand that bringing home foreign net cash earnings, tax free, is a good thing for both the Merck debt-holders, and the Merck common stockholders. Here's a bit from Merck's "Red Herring" 424(b) debt prospectus, filed this morning, with the SEC (at pages S-3 and S-5)

. . . .The notes are obligations exclusively of Merck and not of our subsidiaries, and payment to holders of the notes will be structurally subordinated to the liabilities of our subsidiaries.

The notes are not guaranteed by any of our subsidiaries and therefore the notes will be structurally subordinated to all existing and future secured and unsecured indebtedness and other liabilities of our subsidiaries. The indebtedness of our subsidiaries totaled $6.7 billion as of March 31, 2013. In addition, as of March 31, 2013, certain of our subsidiaries also guaranteed $6.3 billion aggregate principal amount of our existing indebtedness. Our obligations under the notes will be structurally subordinated to guarantees by our subsidiaries of our indebtedness. We also guarantee indebtedness of our subsidiary Merck Sharp & Dohme Corp. ("Old Merck"), including $6.2 billion aggregate principal amount of its outstanding debt securities (which is part of the $6.7 billion of indebtedness of our subsidiaries referred to above). Therefore the notes will be structurally subordinated to Old Merck's obligations with respect to those debt securities, and our guarantee of those debt securities will rank pari passu with the notes. The terms of the notes and the indenture do not preclude our subsidiaries from incurring debt or other liabilities or providing guarantees that will be structurally senior to the notes. . . .

We intend to use a substantial portion of the net proceeds of the offering to repurchase our common stock. . . .

Apple is doing it -- Merck is doing it. And Moody's doesn't get it (at least as to Merck). But that's all okay. The world will soon move on. Something new tomorrow, here.

A Big Chunk Of Whitehouse Station's Move To Summit Underway: Animal Health (Legacy S-P)

All of this was lined out as "in the works" last year, but it is now underway, in earnest.

Do go read all of last night's NJ Biz article -- but here's a bit:

. . . .Merck Animal Health will employ 300 people at a 145,000 square-foot building at the company’s Morris Avenue campus. The realignment of Merck’s animal health division, a global operation with more than 6,000 employees in 50 countries, is part of ongoing restructuring the New Jersey pharmaceutical company. . . .

Lt. Gov. Kim Guadagno, who attended the event, said the company’s decision to locate animal health operations — previously based in the Netherlands — in New Jersey is a boost for the state. . . .

Merck’s move of its animal health unit precedes a planned relocation of its corporate headquarters to Summit from the Whitehouse Station section of Readington by the end of 2015. Merck announced the move last year as part of a cost-savings plan. The pharmaceutical giant has announced several restructurings and work force reductions in recent years as it integrates with Schering-Plough, which Merck acquired in 2009. . . .

We will keep you apprised -- but, yes, this is sad (although by no means unexpected) news, for our good friends in Oss.

Will "Drug Reimportation" Rise Anew -- But This Time, By Another Name? Of "Moral Suasion" As Pricing Pressure?

Back in very early 2007, as Mr. Obama prepared for his first White House run, many of us gathered in Philadelphia to discuss practical ways to make United States health care delivery reform an important part of his manifold -- and then still emerging -- platforms.

Much talk centered around policies to liberalize drug reimportation rules, as it was clear that price disparities even between Canada and the US, meant that US patients were paying much more for the very same pills -- made in the very same facilities, than our good neighbors to the North. [I'll spare you the intervening narrative, of all that transpired -- since that February weekend.]

Fast forward to 2013 -- and pharma has largely taken reimportation off the table, by offering to kick in what started at $80 billion, and settled at around $100 billion, over ten years, to help close the donut hole. This is admirable -- but it probably won't be enough -- as I've said since early 2008.

No, here in 2013, as Obamacare is being implemented, day by day, I think we are going to see a "back-door" form of loosened drug reimportation rules. It will initially appear in the form of direct "moral suasion" -- on drug company pricing disparities -- even within the (awfully named) "first world" economies (US, Canada, Japan and the euro-zone, for starters). And, it will escalate, to more formal measures -- if need be.

Here is a bit of a good Reuters piece on it -- updating the state of the play. Do go read it all -- but I offer this bit, below, insofar as it mentions Whitehouse Station's Januvia^® (until the end of Q1 2013, Merck's largest seller), by name:

. . . ."Over the intermediate term it doesn't look good for the industry. We will be facing enormous healthcare cost containment pressure in this country," said Joel Hay, professor, pharmaceutical economics and policy at the University of Southern California. "Big pharma will then have less and less resources to plow back into research and development."

It will mean less tolerance for wide variations in pricing for the same drugs. The wholesale U.S. price for a 100 milligram tablet of diabetes drug Januvia, the top-seller at Merck & Co, is $8.20, according to the company. The Common European Drug Database lists the same pill at $1.52 euros ($1.99) in Austria. . . .

There will be more -- but I must tend to other responsibilities, right now.

And, BTW -- Who Said Nerds Don't Have A Subtle Sense Of Humor?

I can't resist -- I should have done a better job, on the graphic for the story below. So, here's my second effort -- enjoy:

More substance -- later today. I'm out.

UPDATE On "Next-Gen" Melanoma Candidates: Merck's Lambrolizumab (MK-3475), Courtesy Bloomberg

This morning, Bloomberg is reporting that Merck's enrolling of a Phase II study on MK-3475, lambrolizumab (so named, as a dig at the most likely beneficiaries of the drug: gold-chain wearing, pot-bellied, high-multi-millionaire net-worth "Lamborghini-Lizards species"  -- at risk of melanoma, due to their penchant for flashy top-down driving!. . . where was I? Oh, right.), may turn out to be bigger than just the usual science backgrounder news it appears to be at first blush.

Why?

Because, at 500 patients, and with breakthrough status at FDA -- the Phase II 500 patient data just might be a large enough "n" to grant approvability, on that Phase II study, alone. IF the FDA accepts that argument, and that data is clearly, and appropriately powered, to demonstrate strong efficacy and safety. . . then Merck is essentially tied with BMS, and its nivolumab candidate, on timing. [As I had reported last month, Merck was about a year behind BMS, because Merck's initial safety study was too small to support direct NDA submission. It seems that is changing.]

This is materially good news for Merck. We will see if it moves the stock price on the NYSE.

Here is a snip, from the Bloomberg item -- do go read it all:

. . . .Merck, of Whitehouse Station, New Jersey, is in second-stage testing on its immune therapy, lambrolizumab, in melanoma. If successful, the 500-patient trial may be large enough to gain approval from U.S. regulators without completing the usual required third-stage of testing, putting it in a virtual dead heat with Bristol’s nivolumab in melanoma. . . .

We will keep the readership posted. PS: I've updated the graphic -- to include the MRL science crew's nomenclature joke, for MK-3475. It's the target, indeed!

Even As US Drug Spending Fell -- For The First Time In A Half-Century

. . .Medical treatment/drug decision making waste still proliferated.

Do go read all of this fine article from the Memphis (Tennessee) Business Journal, but the papers nationwide were full of the news that -- for the first time in decades, prescription drug spending declined in the United States in 2012. That is due to the rise of generics, and health care reform -- the ACA of 2010 -- beginning to kick in (as well as, to a lesser extent, the still-slow to recover economy).

Even though this is good news, we must not lose sight of the fact that -- especially among the nation's poorest patients -- those receiving Medicaid -- we still waste nearly $56 billion a year. And that is money that could be used to improve care, for all Medicaid recipients, in a more effective manner.

Do go read Cole Epley's article -- but here is a bit:

. . . .Per capita costs related to wasteful prescription spending totalled $1,623 in Mississippi, which led the nation in terms of per capita costs; Mississippians also earn the lowest per capita personal income of all 50 states, according to data from the U.S. Department of Commerce and the Bureau of Economic Analysis. [Arkansas wasted $1,442 per person per year, and Tennessee wasted $1,434 per person per year -- also among the nation's most-poor states. . . .]

Express Scripts defined waste as "extra medication-related spending that provided no additional clinical benefit." Data suggested $55.8 billion was spent on high-priced medications when more cost-effective generics could have been used, for instance. . . .

"Our nation pays a huge price for bad medication-related decisions, and it is clear that the price is even more costly for those at the lowest end of the economic spectrum," Steve Miller, chief medical officer at Express Scripts, said in a release. The data showed per capita costs were the highest in the Southeast. . . .

We will keep you posted on the trendlines -- as Obamacare takes hold here in 2013. And to tie this back to Merck, I'd think specifically about Vytorin^®, and newly-approved Liptruzet^® when I think of expensive branded drugs which are providing no demonstrated additional clinical benefit.