Merck says Astra deal ups earnings without risk
Friday June 19, 7:48 pm Eastern Time
By Ransdell Pierson
NEW YORK, June 19 (Reuters) - Merck & Co. Inc. (MRK - news) said Friday the restructuring of its joint venture with Swedish drug group Astra AB (ASTRa.ST) will enhance earnings because Merck will share in the revenues but not the costs of Astra's U.S. product sales.
At a briefing, Merck Chief Financial Officer Judy Lewent said the New Jersey-based company will get a percentage of Astra's U.S. revenues based on the product and the level of sales. The exact percentage was not disclosed.
Astra said the restructuring would dilute its earnings by nil to five percent in 1998 and 1999, and be accretive to earnings by more than five percent starting in 2000.
In the restructuring, the operations of the joint venture, Astra Merck Inc., will be combined with Astra USA Inc. unit in a new limited partnership, named Astra Pharmaceuticals LP. Astra will have management control as the general partner in the new limited partnership.
Merck will receive revenue for at least 10 years based on sales of current products in the Astra Merck portfolio and those now in its development pipeline as well as certain Astra USA products.
''The restructuring allows Merck to participate in Astra's sales growth without having to contribute toward Astra's expenses -- including research and development, sales and marketing and advertising,'' Lewent told Reuters.
''So we ride with the successful products without having any downside risk from expenses,'' said Lewent, who declined to speculate just how accretive earnings from the deal would be for Merck.
Astra will have the right to buy out Merck's interest in the drugs in the years 2008, 2012 or 2016, except Merck's interest in the ulcer drug Prilosec and perprazole -- another ulcer drug now in Phase III clinical trials. That interest will continue until 2017 if the ulcer drugs' combined sales stay above a specified level.
The cash buyout will be based on a multiple of the prior three-year average of pre-tax income received by Merck for all products except Prilosec and perprazole, but will be no less than $4.4 billion in 2008.
Prilosec, sold under the brand name Losec outside the United States, was the world's biggest-selling drug in 1997 with global sales of over $4 billion.
It accounted for over 90 percent of Astra Merck's 1997 sales of $2.3 billion, making Prilosec the crown jewel of the joint venture. Astra has called perprazole a ''better'' drug which it plans to launch
before Prilosec's expected U.S. patent expiration in 2001.
Astra will also grant Merck a 40-year, $1.4 billion cash loan at the closing of the restructuring scheduled for July 1.
Lewent said she is still comfortable with analysts' estimates that Merck will earn $4.28 to $4.39 a share for 1998 on a diluted basis.
She said the loan from Astra carries a coupon rate of 6 percent and is ''not a primary driver'' in Merck's projected accretive benefit from the deal.
Carl-Gustaf Johansson, executive vice president of Astra AG, will become chief executive of Astra Pharmaceuticals LP.
He said Friday the U.S. operation will be his parent company's largest unit, representing 40 percent of total worldwide Astra AG sales.
''I think that will rise to 50 percent within two years because the U.S. is such a fast-growing market,'' he told Reuters after a New York meeting with analysts.
Johansson said he began negotiating the deal announced Friday in 1996 with Merck's Lewent, adding he had wanted to buy out Merck's interest ''as soon as possible'' but would have to wait years longer under terms of the restructuring.
Johansson, however, called the arrangement a ''win-win'' deal for both companies. He said the Astra U.S. unit now has ''management freedom'' and a sales force of 2,200 eager to flex its ''marketing muscle.''
Steve Lisi, a New York drug analyst for Mehta Partners, said while the deal was ''fair'' for both companies, it was particularly auspicious for Merck.
''It gives Merck access to almost all Astra products and to everything that is developed in Astra's pipeline by that time, which could prove to be enormous cash flow if the pipeline proves robust,'' Lisi said.
He added Merck had hedged its bets well by also ensuring that it receives a multibillion dollar payoff when the partnership is dissolved years down the road.
((New York Newsdesk 212 859-1736).
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