Monday, February 28, 2011

Merck Confirms That IF It Loses J&J Arbitration -- It Will Record Multi-Billion Dollar Impairment Charge

I found this new disclosure (not present in the last Form 10-Q) in Merck's just-filed SEC Form 10-K (at page 31) pretty interesting -- especially in view of the fact that (at page 61) Merck indicated it had written down the values of the Vorapaxar program (by over $1.7 billion) in early 2011. These sorts of non-cash charges erase vast swaths of shareholders' equity, even though (often, like Vorapaxar) only a tiny portion is cash-based.

In contrast though, a J&J arbitration loss would likely involve over $10 billion in cash losses, over just the next three years. Ouch.

In any event, here is the quote:

. . . .Sales of Remicade and Simponi in 2010 were $2.7 billion and $97 million, respectively. An unfavorable outcome in the arbitration would have a material adverse effect on the Company’s financial position, liquidity and results of operations. In addition, the Company would be required to record a material, non-cash impairment charge with respect to the termination of those marketing rights.

Finally, 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 Company. . . .

As you can also readily see there is also a hint of settlement of the J&J arbitration, at page 31 of the SEC Form 10-K. We'll keep you posted.

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