Thursday, October 14, 2010

Wells Fargo Analyst: A "Win For JNJ" Worth 4 to 7 Percent EPS Boost, Annually 2011-2014

As ever, Ed over at Pharmalot has some solid color, on the morning's Merck announcement, thus:

. . . .[A]n arbitration win for J&J could boost its earnings by anywhere from four to seven percent, if J&J chooses to sell the drugs itself. . . .

If a win is worth a 4 to 7 percent of J&J EPS upside (i.e., no more 60 percent distributor's margin paid to Merck outside the US) -- then the downside impact, to Merck's EPS (of losing that distributor's margin, on perhaps a $4 billion twin-franchise in 2011 and beyond) would likely be similar, as a percentage. True, Merck could reduce expenses (i.e., mostly fire European and rest of world arthritis salespeople), and J&J would need to add them (or cut a deal with a Euro-zone major pharma player, to distribute the pair of blockbusters), but I think an at least 10 percent EPS hit is possible, in 2011 -- if Merck loses.

It was earlier estimated that Merck would lose five percent of its stock price, if Merck lost the arbitration. While I think that prediction is overly rosy, even that is no small number. I suspect a loss would gouge out more like 15 percent of Merck's stock price -- as the 60 percent payout it currently sees on Remicade®/Simponi® is clearly much higher than Merck's overall average margin of call it 28 percent, on the merged operations' products.

In short, buckle up -- as even a negotiated settlement will very-likely bode ill, for Merck's 2011 revenue (and beyond, its EPS). We'll keep you posted.

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