Simponi's EMEA "Approvable" Recommendation Likely to Sharpen JNJ's Abritration Focus

Simponi, a Centocor drug, has received the equivalent of an FDA "Approvable Letter" from the European Medicines Agency. This is good news for Johnson & Johnson unit Centocor. If Schering-Plough is able to convince a panel of arbitrators that it should retain the European rights to Simponi (or settle with J&J on favorable terms), this will also be good news for it. But that outcome (even, apparently, in the views of Schering-Plough and Merck, themselves -- given the beefed-up "Risk Factor" disclosure about the matter, of just yesterday, in an official SEC filing) is, at the moment, far from clear -- per Reuters updated story, this morning:

. . . .Johnson & Johnson and Schering-Plough Corp's once-monthly drug Simponi has been recommended for approval in Europe to treat moderate to severe rheumatoid arthritis, the companies said on Friday.

Decisions by the European Medicines Agency are normally endorsed by the European Commission within a couple of months. . . . .

The drugs are proving a high-stakes bone of contention in Merck & Co's planned $41 billion purchase of Schering-Plough, because Merck has said it will inherit overseas rights to the drugs.

Under an earlier marketing deal with J&J, Schering-Plough is obliged to return overseas rights to J&J if control of Schering-Plough changes.

Merck is slated to buy Schering-Plough later this year. But the deal was structured as a "reverse merger," meaning Schering-Plough technically would acquire larger Merck even though Merck is paying it $41 billion.

The strategy would allow Schering-Plough to claim it is a continuing enterprise and therefore has not undergone a change in control that would force it to give up overseas rights to the two arthritis drugs.

J&J has exclusive rights to sales in the United States. Schering-Plough has rights in most other markets.

Schering-Plough said in a filing last month J&J would seek to arbitrate an end to their drug partnership in the wake of the planned merger with Merck. . . .

This certainly means there will soon be much more to fight over -- previously, the EU approval was seen as likely, but no one could reliably predict when the pan-European revenue stream would begin. Thus, assigning a value to the rights was a fuzzy proposition. Everyone agreed it was north of $1 billion, but how far north? Now, in the next few months, we are likely to get a sharpened sense of just how much is really at stake, here -- in the single largest market for which Schering-Plough still arguably may retain its right to sell this very, very high margin drug (along with, and as a follow-on, to Remicade).

As ever, stay tuned -- but I actually think this increases the chance that Schering-Plough and Merck agree to a very generous (to William Weldon's team) royalty-sharing arrangement with JNJ/Centocor, in order to secure at least some portion of this Euro-revenue, with certainty. Even though -- as I've said before -- an "all or nothing" outcome isn't terribly likely in most arbitrations, I think these numbers are just too high for Dick Clark to be willing to simply roll the dice -- potentially seeing "snake eyes" come up -- and lose it all.