) recently announced that they have amended certain terms related
to their partnership deal.
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
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
ASTRAZENECA PLC (AZN): Free Stock Analysis
MERCK & CO INC (MRK): Free Stock Analysis
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