"Beefier" Risk Factor on Remicade/Simponi Fight -- Filed With SEC, Overnight. . . .

Overnight, Schering-Plough, likely in response to an SEC comment requesting that it do so, has also beefed up the "Risk Factor" disclosure related to the pending arbitration proceedings involving Johnson & Johnson's subsidiary Centocor, and the reversion of Remicade/Simponi distribution rights outside the United States.

At the outset, let me mention that the merger proxy risk disclosure makes very little (nothing, actually!) of the fact that the parties failed to capitalize the leading capitalized "C" in the term "change of Control" (in the fifth line of Section 8.2(c) of that link) -- when, arguably, it mattered most to do so. I have previously, and repeatedly, explained why I think J&J and Centocor will make some hay out of this decision, by both parties, not to use a defined term, inside the very clause that is now in dispute. [For easy reference, I have made that particular small "c", in Section 8.2, as recited by Schering-Plough's risk factor, below, stand-out as bright red ink. Do look for it.] To hear Schering-Plough explain Centocor's likely position below, one would think it hasn't dawned on Schering's lawyers that this troublesome failure to use a defined term would have any import. [More likely it is a "pay no attention to the little man behind the curtain" moment -- a la the throne-room scene from the Wizard of Oz.]

In any event, the companies' preliminary merger proxy was also declared effective last night. That means Merck and Schering-Plough may officially begin to solicit shareholder votes with this document. Each of the companies, Schering-Plough and Merck, will likely amend it repeatedly in the coming weeks and months, as developments occur. The trick is finding the amended portions -- to keep track of what the companies think are the "material changes" to the prospects for the merger, or the companies, more generally.

This morning, I am struck by the below additions (in dark green lettering) to the Remicade risk factor (beginning on page 20 of the Form S-4, as amended), as much for what they say, as what they don't say:

. . . .An arbitration proceeding commenced by Centocor against Schering-Plough may result in the combined company’s loss of the rights to market Remicade and golimumab [known as "Simponi" in the United States]

A subsidiary of Schering-Plough is a party to a Distribution Agreement with Centocor, a wholly owned subsidiary of Johnson & Johnson, pursuant to under which the Schering-Plough subsidiary has rights to distribute and commercialize the rheumatoid arthritis treatment Remicade and golimumab, a next-generation treatment, in certain territories. By its terms, the Distribution Agreement may be terminated by a party if the other party is subject to a “Change of Control” as defined in the Distribution Agreement.

Under Section 8.2(c) of the Distribution Agreement, “If either party is acquired by a third party or otherwise comes under Control (as defined in Section 1.4 [of the Distribution Agreement]) of a third party, it will promptly notify the other party not subject to such change of control. The party not subject to such change of control will have the right, however not later than thirty (30) days from such notification, to notify in writing the party subject to the change of Control of the termination of the Agreement taking effect immediately. As used herein ‘Change of Control’ shall mean (i) any merger, reorganization, consolidation or combination in which a party to this Agreement is not the surviving corporation; or (ii) any ‘person’ (within the meaning of Section 13(d) and Section 14(d)(2) of the Securities Exchange Act of 1934), excluding a party’s Affiliates, is or becomes the beneficial owner, directly or indirectly, of securities of the party representing more than fifty percent (50%) of either (A) the then-outstanding shares of common stock of the party or (B) the combined voting power of the party’s then-outstanding voting securities; or (iii) if individuals who as of the Effective Date [April 3, 1998] constitute the Board of Directors of the party (the ‘Incumbent Board’) cease for any reason to constitute at least a majority of the Board of Directors of the party; provided, however, that any individual becoming a director subsequent to the Effective Date whose election, or nomination for election by the party’s shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a person other than the Board; or (iv) approval by the shareholders of a party of a complete liquidation or the complete dissolution of such party.”

Section 1.4 of the Distribution Agreement defines “Control” to mean “the ability of any entity (the ‘Controlling’ entity), directly or indirectly, through ownership of securities, by agreement or by any other method, to direct the manner in which more than fifty percent (50%) of the outstanding voting rights of any other entity (the ‘Controlled’ entity), whether or not represented by securities, shall be cast, or the right to receive over fifty percent (50%) of the profits or earnings of, or to otherwise control the management decisions of, such other entity (also a ‘Controlled’ entity).”

On May 27, 2009, Centocor has intitiated delivered to Schering-Plough a notice initiating an arbitration proceeding to resolve the parties' dispute over whether, as a result of the proposed merger between Schering-Plough and Merck and its subsidiary would undergo a change of control that would permit Centocor is permitted to terminate the Distribution Agreement and related agreements. Please see “Legal Proceedings Related to the Transaction” beginning on page 93.

As part of the arbitration process, Centocor will likely take the position that it has the right to terminate the Distribution Agreement on the grounds that, in the proposed merger between Schering-Plough and Merck, Schering-Plough and the Schering-Plough subsidiary party to the Distribution Agreement are (i) being “acquired by a third party or otherwise come[ing] under ‘Control’ (as defined in Section 1.4) of a third party” and/or (ii) undergoing a “Change of Control” (as defined in Section 8.2(c)).

Schering-Plough is vigorously contesting, and the combined company will vigorously contest, Centocor’s attempt to terminate the Distribution Agreement as a result of the proposed merger. However, if the arbitrator were to conclude that Centocor is permitted to terminate the Distribution Agreement as a result of the transaction 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. . . .

[Continuing, at Page 95:]

. . . .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. . . .

Finally, it is clear from the most-recent changes above (see the sentence in green above which begins "On May 27, 2009. . .") that the arbitration proceeding hearings, before a panel of arbitrators, have not yet formally begun -- note the change to the language -- "delivered a notice" rather than "initiated" an arbitration proceeding. The sentence would read "a panel of arbitrators has set a schedule for discovery and hearings. . ." or some such, were the matter that far along. And it is not, apparently. So that -- again -- calls out for The Little Engine that could MIGHT" graphic, at right.