Tuesday, June 11, 2013

Will Merck Now Book A Material Impairment Charge -- In Q2 2013 -- Due To Apotex's Generic Nasonex® Win?


I'll have a graphic here in a minute, but this is from Merck's latest SEC Form 10-K -- at page 50.

. . . .If the Nasonex intangible asset is determined to be impaired, the impairment charge could be material. As a result of the unfavorable U.S. District Court decision, the Company evaluated the Nasonex intangible asset for impairment and concluded that it was not impaired. U.S. sales of Nasonex were $597 million in 2012. Worldwide sales of Nasonex increased 5% in 2011 to $1.3 billion, including a 1% favorable effect from foreign exchange. The sales increase was driven largely by volume growth in Japan and Latin America, partially offset by volume declines in the United States. . . .
We will wait a few weeks to see whether Merck's audit firm will allow it to delay any charge until the US Supreme Court denies all of Merck's remaining avenues of appeal, before booking an impairment charge. But with this speedy a "no" vote, at the appellate level, both the company's internal audit staff, and Price Waterhouse Coopers will need to rethink the mix of information on whether the Nasonex® patent assets are "impaired".

An alternative approach would be to estimate the low end of the erosion in value, and book that charge this quarter (recognizing that an addition, of about the same size, to that chage may be needed, later). For example, Merck could book about 50 per cent of the annual US sales of Nasonex this quarter (or around $290 to $300 million), as a charge -- pending any additional appeals -- then add to the charge in late 2013, when final outcomes are known. And when Apotex's sales trend/trajectory is better defined.

To be clear, the largest portion of the coming charge will be non-cash -- as an impairment to the carrying value of the patents -- but at least a small portion of it will be a cash charge. Net, net -- it shouldn't move Merck's NYSE price by much, at all. And, yes -- this also goes into the "Thanks, Fast Fred!" file. Do stay tuned.

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