The partnership between the companies dates back to 1982 when AstraZeneca and Merck entered into an agreement related to the commercialization of a few AstraZeneca products in the US. As per the terms of the agreement, AstraZeneca makes contingent payments to Merck on the sales of certain products in the US.
The agreement had two embedded options. In 2010, AstraZeneca exercised the first option and acquired Merck’s interests in products covered by the first option in lieu of $647 million. Products covered by the first option included Entocort, Atacand, Plendil, Brilinta and the authorized generic version of Plendil (felodipine).
Terms of the Amended Agreement
As per the amended agreement, AstraZeneca will not exercise its option to repurchase Merck’s interests in Prilosec and Nexium in the US in 2012. The agreement provides AstraZeneca with a new option to do so anytime between March 1, 2014 – April 30, 2014. According to AstraZeneca, with the amendment of the agreement it is more likely to exercise the option.
AstraZeneca and Merck also agreed upon the price of the option in 2014. The exercise price for the second option is the sum of Merck's interest in Nexium and Prilosec at the time of exercise ($327 million), the net present value of up to 5% of Vimovo’s future US sales and 10 times Merck’s average annual 1% profit allocation in the partnership for the prior three years (estimated to be $80 million by AstraZeneca).
AstraZeneca can repurchase Merck’s interests in Prilosec and Nexium in the US by exercising the second option. This option can now be exercised by AstraZeneca in 2014, or in 2017, or if combined annual sales of the two products fall below a minimum amount. According to an agreement, entered in September 2010, AstraZeneca is liable to pay a percentage of expected Vimovo sales as part of the price when the second option is exercised.
Both AstraZeneca’s and Merck’s guidance for 2012 remains unaffected by the amendment of the agreement. Merck had expected that AstraZeneca would exercise its option to repurchase Merck’s interests in Prilosec and Nexium in the US in 2012.
Therefore, the amendment of the deal is a positive for Merck. The extension of the deal is expected to add approximately $200 million to Merck’s revenues and approximately 3 – 5 cents per share to its 2012 earnings. The incremental revenue will partially offset the negative impact of the Singular patent expiration, EU pricing pressure and US health care reform.
We currently have a Neutral recommendation on AstraZeneca and Merck. Both the companies carry a Zacks #3 Rank (short-term Hold rating).
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