Amended SEC Merger Filing; Remicade/Simponi Arbitration Risks Disclosed. . . .

Schering-Plough (and Merck) just filed an amended merger proxy with the SEC. The putative date for the respective shareholders' meetings to approve is listed as August 7, 2009. I'll have more on that, in a few moments, but here is the latest on the arbitration with Johnson & Johnson (at page 94 of the amended filing):

. . . .The arbitration process involves a number of steps, including the selection of an independent arbitrator, information exchanges and hearings, before a final decision will be reached. The arbitration proceeding is expected to take place over the next 9 to 12 months and could continue after the merger has closed. Schering-Plough and Merck are fully prepared to arbitrate the matter and to vigorously defend Schering-Plough’s rights (and after the proposed merger has closed, the combined company’s rights) under the Distribution Agreement.

Although Schering-Plough and Merck are confident that the arbitrator will determine that Centocor does not have the right to terminate the Distribution Agreement, there is a risk of an unfavorable outcome. If the arbitrator were to conclude that Centocor is permitted to terminate the Distribution Agreement as a result of the merger and Centocor in fact terminates the Distribution Agreement following the merger, the combined company would not be able to distribute Remicade, which generated sales for Schering-Plough of approximately $2.1 billion in 2008, and would not have the right to commercialize and distribute golimumab in the future. In addition, due to the uncertainty surrounding the outcome of the arbitration, the parties may choose to settle the dispute under mutually agreeable terms but any agreement reached with Centocor to resolve the dispute under the Distribution Agreement may result in the terms of the Distribution Agreement being modified in a manner that may reduce the benefits of the Distribution Agreement to the combined company.

However, in spite of these factors:

▲ Any change or termination of the Distribution Agreement with Centocor is excluded by the merger agreement from the definition of “material adverse effect” both with respect to Merck and Schering-Plough and is excluded from the definition of “material adverse effect” in the credit agreements for the credit facilities entered into in connection with financing the merger.

▲ The estimated annual cost savings of $3.5 billion expected to be realized from the transaction annually after 2011 is not dependent on the retention of the rights to distribute Remicade and golimumab, although the loss of these rights would reduce the amount of sales expected to be generated by the combined company.

▲ The anticipated continued payment by the combined company of the current Merck dividend of $1.52 per share annually is not conditioned on the retention of the rights to distribute Remicade and golimumab. . . .

I, like Zack's equity research service before me, am highly skeptical about the Sch-Merck $1.52 EPS guidance, should Schering-Plough (then, new Merck) lose the arbitration, outright. More soon, but perhaps most importantly, it strikes me that this setting an aggressive date to approve the merger is designed to push the various anti-trust regulators to move quickly. In the U.S., that strategy more than occasionally pays some dividends. In the EU it may (and has, on other, albeit smaller deals) caused a "backlash" -- with the regulators asking for more and more detail.

We'll see.