In Ten Days, Linda Secrest Will Likely Know Whether The Supreme Court Will Grant Her A New Fosamax® ONJ Trial

As I mentioned here on May 5, I don’t hold much hope for Mrs. Secrest. Here’s a link to the Supremes’ docket sheet, on the Secrests’ petition.

I think the Supremes will leave the decision of the Second Circuit undisturbed. I expect they will deny cert. without an opinion. I’d expect it to be part of a long list of no cert. dispositions, by the Court.

In fact, Merck seems pretty confident: Whitehouse Station has waived its right to brief the court on the reasons why it might feel the Second Circuit’s decision — upholding the able trial Judge Keenan’s summary judgment for Merck — was correct. Here’s a bit from Law 360, as to what the appeal is all about — do go read it all:

. . . .The physician at issue, Dr. Lawrence Epstein, testified in a deposition in 2008, before Merck filed a summary judgment motion, that he had not known Secrest was taking Fosamax in 2004 and 2005, after she had started seeing another doctor.

When he was deposed again in 2011, after the motion was filed, he said he had known about Secrest’s Fosamax use during those two years, and that he would have advised Secrest to stop taking the drug if Merck had warned him of the jaw-related risks.

“If the Second Circuit had applied the more expansive standard of the Seventh Circuit, it would have determined that Dr. Epstein’s second deposition was merely a conflicting deposition, not a sham,” Secrest’s petition states. . . .

We will let you know how the May 30 Supreme Court Conference session on this one turns out — but I’d be very surprised if they grant Mrs. Secrest a hearing, or any sort of remand for new determinations on this trial record.

All of that said, though — I do think the Seventh Circuit’s formulation of the test more reliably comports with our long-standing notion that issues of fact (and credibility) should be left in the hands of a jury to decide. I suppose it is possible here, that Judge Keenan (who sat through the whole trial with the jurors) found Dr. Epstein’s statements so lacking in credibility that he decided no reasonable juror could rely on either version of the doctor’s testimony, and thus took the matter out of the jury’s hands, altogether.

2013 Thesis: Merck’s Stock Is Almost Certain To Rise — Through At Least The End Of Year

There will be dips, and there is always the remote possibility of some vast disaster hitting Merck’s sales line in 2013. That much must be said at the outset. But it would have to be a more than 10 per cent real decline, to matter this year¹. Why? Well, because Merck is pulling some non-operating financial levers, and very adroitly so, at the moment.

In sum, I’ll conservatively predict an overall three to six per cent Merck NYSE stock price increase, net of everything else, by year end 2013. This will be true, I predict, even if not all its expected 2013 “in the pipeline” FDA approvals materialize.

With all the financial engineering now being laid into Merck’s second half of 2013, it is hard to see how the stock won’t — in general — rise more often (and in greater amplitudes) than it sinks. It is likely that some $10 billion worth of Merck’s common stock will go back into its treasury account during 2013, decreasing outstandings. It is also highly likely that Merck will bring home a like amount of cash, from overseas, at near-nil tax rates, and thus pay off most of the debt it issued last week. [Of course, not one for one (many of the trauches are multi-year) -- but the cash returned is fungible, and will decrease interest expense -- and soon.] Thus, every penny it doesn’t spend on taxes (for repatriating dividends) will fall right to the EPS line, and be levered with a debt reduction effect.

And that EPS line will garner the benefit of a smaller denominator — over 12 per cent fewer outstanding shares over the life of the buyback, which will concentrate Merck’s reported earnings over a smaller base of shares. This EPS levering will begin slowly, as the share equivalents are counted on 360 days outstanding as a linear average, in a year — but the share count will drop significantly in the back half of 2013, if Merck gets started repurchasing shortly. [And remember, Merck's dividend is nearly a riskless almost 4 per cent cash return, every year, on each share.]

Now, on top of all of that (the factors within Merck’s control), we will see an “out of Merck’s control” knock-on effect. That knock on effect will appear, as many of the investment banking houses (through their buy side analysts) shortly start increasing their 12 month targets, for Merck’s NYSE stock price, even if sales of Januvia^® remain fairly underwhelming through all of 2013. They will do so, because they know that the above financial structuring steps will net, net actually increase Merck’s unrestricted cash flows, by year end (and very tax efficiently so), and in perpetuity. UPDATED: Here is a list of bankers, from which I’d expect we will see increased 12 month NYSE price targets — as each of them were underwriters of Merck’s debt last week, and each of them undoubtedly have clients holding Merck stock, even if the smallest among them don’t hold Merck stock directly as a firm. The names cover all of Wall and Broad: BNP PARIBAS, Deutsche Bank Securities, J.P. Morgan, Morgan Stanley, BofA, Merrill Lynch, Citigroup, Credit Suisse, Goldman, Sachs & Co., HSBC, RBS, UBS Investment Bank, Drexel Hamilton, Santander, SOCIETE GENERALE, Standard Chartered Bank, SMBC Nikko, US Bancorp, Wells Fargo Securities and The Williams Capital Group, L.P. [End, updated portion.]

Afterall, even if Merck pays somewhat higher prices, on the NYSE, for these repurchased shares (due in part to the conflicted interests the investment bankers now have — to get their Merck shares, and those of their clients, repurchased at marginally higher prices) — Merck’s tax benefit will very likely still outstrip the increase in Merck’s NYSE quoted price per share. That is, I don’t expect that Merck’s NYSE price will increase by more than the tax rates — on a percentage basis — had Merck repatriated the same amount of offshore cash, using a strategy that required Merck to pay “full-freight” federal income taxes.

In short, the (would-be) Masters of the Universe on Wall Street are lining up, all with powerful incentives to drive Merck’s stock price north — almost without regard to how Merck’s operating business fundamentals pan out in the back half of 2013. So, even a slightly better than expected performance from any of the operating businesses, in 2013, will magnify the effect of all the above financial manuevering.

My advice? Do not go short on Merck in the rest of 2013 — or buy puts — unless you plan to buy and hold a multi-year position.

The scenarios for sustained NYSE price declines, at Merck — are all but evaporating, even if currencies take another 7 or 8 per cent from the global sales line – by year end. You’ve been warned. Know that Merck’s stock is over 75 per cent held by large institutional investors, and they’ve figured all of this out, as well. They will sell a little, as the stock rises, and buy a little more, if the stock dips. This is essentially a downside protection structure for Merck’s common stock.

<sup>~~~~~~~~~~~~~~~~~~~~
1. I expect the same effects will appear at Apple in 2013 through 2014 — only in even larger proportions — as its benefits from the same strategies will be proportionately-larger, than Merck’s. Just FYI — of course, do your own diligence here — but know that I’ve been a bear on Merck for quite a while. For 2013, I am now a bull.</sup>

Merck CFO To Talk About “What’s Next” — At UBS In Manhattan Monday Morning

Assuming I am not stuck in meetings (or attending to other duties), I’ll tune in — at least for the replay, at day’s end. My guess is that he’ll offer a little local color on the largest single takedown debt deal in Merck’s history, just completed this past week. UBS Investment Bank was a co-lead underwriter, on the 2016, 2018 Floating Rate, 2023, and 2043 Notes (see the prospectus cover page, bottom table — tombstone lineup).

I’ll also point out, in passing, that all the underwriters had a significant conflict of interest last week. That is so, because Merck intends to use the bulk of the $6.5 billion borrowed to buy-back its own common stock. So, it is true that the underwriters — UBS included — were essentially raising the money, from their clients. . . to help pay themselves, as they run (and, in various combinations, from time to time actually sell Merck back some of the bankers’ own Merck stock-holdings — and their clients’ holdings, of Merck common stock) — all as the massive Merck $16.5 billion stock buyback program steams out of the roundhouse.

Thus, they are all “conflicted-interest” underwriters, but largely exempt from the special rules applicable to conflicted-interest underwriters – since Merck’s paper is high-end investment grade, and comes from a seasoned issuer. [See the prospectus quote below.]

I bet Peter Kellogg won’t mention any of that — but feel free to register, and listen in, yourself. 

That said, I don’t expect any major news on the overall business fronts, given that the Womens’ Health lead just presented last week at another conference, and had little new to say — and nothing of a materially-new nature. Here’s the prospectus disclosure I mentioned above (page S-23), folowed by the EON notice, announcing the UBS conference:

. . . .We expect that a substantial portion of the net proceeds from this offering will be used to repurchase our common stock through one or more of the underwriters. Accordingly, affiliates of one or more of the underwriters will receive more than 5% of the proceeds of this offering, not including underwriting compensation. As a result, such underwriters will have a “conflict of interest” as defined in Rule 5121 adopted by FINRA. Consequently, this offering will be conducted in accordance with Rule 5121. No underwriter having a conflict of interest will confirm sales to accounts over which discretionary authority is exercised without the prior written consent of the account holder. In accordance with Rule 5121, a “qualified independent underwriter” is not required because the notes offered are investment grade rated, as that term is defined in Rule 5121. . . .

[snip]

. . . .Peter N. Kellogg, executive vice president and chief financial officer, Merck, is scheduled to present at the UBS Global Healthcare Conference in New York City on May 20, 2013 at 10:30 a.m. EDT. Investors, analysts, members of the media and the general public are invited to join a live webcast of the presentation at: http://www.merck.com/investors/events-and-presentations/home.html. . . .

As to the UBS $50 stock price target — we will see whether UBS analysts offer an upward revision, after the talk. I’ll let you know, if they do. It is absolutely true that all these debt underwriters now have a powerful incentive to increase their price targets, on Merck common stock — and thus (they would hope) increase the price at which Merck buys back the common stock they hold, and the stock their clients hold. Do stay tuned.

I’ll offer some analysis of what FINRA rules — 5121 in particular — will mean, in terms of Merck’s likely NYSE mid-term price trend, tomorrow morning, over my Sunday morning coffee.

“Down Under”; Not Done — Vioxx® Class Action Not (Yet) Settled: Federal (Australian) Judge

Just exactly one month ago, I mentioned that I thought the Australian class action settlement of the Vioxx^® claims, filed there — was in danger of not being approved by the able judge overseeing the case.

This morning, Sydney time (Thursday EDT US), the judge formally rejected the aggregated $504,000 settlement — for all 1,700 potential claimants — saying it did not adequately take into account how individual circumstances might change payouts. [A sincere hat tip here, to that gent Ed Silverman, over at Pharmalot, for alerting me to this.]

Here’s the operative bit, from the online Sydney Morning Herald “Business Day” section — but do go read it all:

. . . .The parties last month reached a $540,000 settlement, subject to Federal Court approval, which would have resulted in the proceedings being dismissed and the matter finalised, meaning no future claims could be brought against Merck over the drug.

Justice Christopher Jessup on Friday refused to approve the settlement. He said the agreement did not take into account individual circumstances and may not be fair to those who had a stronger case against the drug company. . . . “I don’t just consider myself to be a street sweeper,” he said.

“I want to know what’s really lying around and whether people’s interests or rights are being affected. . . .”

We will keep you posted.

However, this likely means Merck, or MSD Australia, more precisely, will have to both put more money on the table — and set up a matrix which awards multiplier amounts (or reduction factors), depending on various medical conditions/events, in individual claimants’ cases. That matrix will take time to negotiate, and new notices will need to be prepared and sent out. After all this, the same judge will be asked to approve (or diapprove) the renegotiated settlement terms.

And so — Vioxx is not going to be entirely in Whitehouse Station’s rear view mirror in 2013, after all — it would seem.

New Appearance, In A Leading Role: BNP Paribas Is Lead Book-Running Manager Of Merck’s $6.5 Billion Debt Deals

While the lineup — on down the tombstone/card — of Merck’s underwriters contains all the usual names, CFO Peter Kellogg’s choice of BNP Paribas Securities Corp. as the book-running lead suggests one of two things: (1) BNP Paribas offered “loss-leader” style-pricing to win the lead role, or (2) Merck is sending a message to the usual line-up of bankers – that their roles will not always be assured.

These sorts of huge traunche debt deals are — when issued by high-end, stable, seasoned issuer credits like Merck (and Apple) — essentially a license to print money, at the investment banks granted lead or co-managing roles.

The fee income (on commissions) is the first (smallest) piece, and on a deal of this size, the incremental work is tiny — compared to the size of the fee. But the real money is made in the after-market, as the investment bankers may engage in various “market stabilization” activities for several weeks after yesterday’s initial sale. “Stabilization” includes profiting handsomely on the aftermarket positions — as the banks may be both bookmakers, and traders, during this time frame.

From the overnight pricing sheet, filed with the SEC after 10 PM EDT last night — where to call to get a prospectus:

. . . .BNP Paribas Securities Corp. toll free at 1-800-854-5674, Deutsche Bank Securities Inc. toll-free at 1-800-503-4611, J.P. Morgan Securities LLC collect at 1-212-834-4533 or Morgan Stanley & Co. LLC toll-free at 1-866-718-1649. . . .

We will — as ever — keep you informed, but the other thing that’s clear from yesterday’s selection of BNP Paribas is that it was not undertaken to win favorable equity analyst coverage. Why? Because the investment house doesn’t follow Merck, on the equity side. Now you know.

Moody’s Cited Merck’s Debt For Not Being Guaranteed By MSD — But That’s What Makes Merck’s Repatriation Tax-Free

Yesterday, Moody’s dropped Merck’s debt ratings by one notch. Yawn. Merck is still firmly at the higher end of investment grade. [My backgrounder here, on all of that to and 'fro.] Moody’s took special note of the fact that MSD – Merck’s primary non-US subsidiary – would not be on the hook for Merck’s upcoming debt issuances.

Today, Merck priced a $6.5 billion series of six debt traunches. None of the traunches is guaranteed by MSD. Why?

Because Merck intends to use the $6.5 billion borrowed — ultimately — to acheive a repatriation of MSD’s foreign net cash earnings, free from United States federal income taxation (on deemed dividends), that’s why.

By preventing (disallowing, actually) Merck’s “controlled foreign corporation” (MSD) from backstopping today’s debt issuances, Merck created a “US shareholder-only” obligation, in the language of applicable federal income tax regulations.

Merck will now ultimately fund the first large chunks of its stock buyback from the debt issued today, then use the MSD permanently-parked foreign net cash earnings to repay the non-guaranteed debt. Under several convoluted IRS memos, if Merck stirs its stock-buyback/debt issuances/debt repayment soup “just absolutely perfectly” [in Martha Stewart's affected New England clenched teeth accent, no less!] — it will not have to pay federal income taxes on any part of these transactions. And it will have reduced the foreign net cash earnings it is presently holding through MSD second-tier subs (in Europe and Japan, primarily).

[To immensely over-simplfy a long series of intervening steps, here -- if MSD (with its own cash) pays off parent US Merck's debt -- when it is not contractually "on the hook" for it, IRS memos declare it is not a dividend ordered by the parent, US Merck -- and thus it is not taxable as part of Merck's repatriated earnings. If on the other hand, US Merck were to nakedly order MSD to send the cash home to pay an obligation MSD had backstopped anyway, that is plainly a "deemed dividend", in IRS speak.]

So — again — we see that Moody’s knee-jerk reaction was simply ill-advised, and ultimately will mean nothing. The other debt rating agencies have put Merck on watch, but havn’t downgraded it — presumably because their analysts understand that bringing home foreign net cash earnings, tax free, is a good thing for both the Merck debt-holders, and the Merck common stockholders. Here’s a bit from Merck’s “Red Herring” 424(b) debt prospectus, filed this morning, with the SEC (at pages S-3 and S-5)

. . . .The notes are obligations exclusively of Merck and not of our subsidiaries, and payment to holders of the notes will be structurally subordinated to the liabilities of our subsidiaries.

The notes are not guaranteed by any of our subsidiaries and therefore the notes will be structurally subordinated to all existing and future secured and unsecured indebtedness and other liabilities of our subsidiaries. The indebtedness of our subsidiaries totaled $6.7 billion as of March 31, 2013. In addition, as of March 31, 2013, certain of our subsidiaries also guaranteed $6.3 billion aggregate principal amount of our existing indebtedness. Our obligations under the notes will be structurally subordinated to guarantees by our subsidiaries of our indebtedness. We also guarantee indebtedness of our subsidiary Merck Sharp & Dohme Corp. (“Old Merck”), including $6.2 billion aggregate principal amount of its outstanding debt securities (which is part of the $6.7 billion of indebtedness of our subsidiaries referred to above). Therefore the notes will be structurally subordinated to Old Merck’s obligations with respect to those debt securities, and our guarantee of those debt securities will rank pari passu with the notes. The terms of the notes and the indenture do not preclude our subsidiaries from incurring debt or other liabilities or providing guarantees that will be structurally senior to the notes. . . .

We intend to use a substantial portion of the net proceeds of the offering to repurchase our common stock. . . .

Apple is doing it — Merck is doing it. And Moody’s doesn’t get it (at least as to Merck). But that’s all okay. The world will soon move on. Something new tomorrow, here.

A Big Chunk Of Whitehouse Station’s Move To Summit Underway: Animal Health (Legacy S-P)

All of this was lined out as “in the works” last year, but it is now underway, in earnest.

Do go read all of last night’s NJ Biz article — but here’s a bit:

. . . .Merck Animal Health will employ 300 people at a 145,000 square-foot building at the company’s Morris Avenue campus. The realignment of Merck’s animal health division, a global operation with more than 6,000 employees in 50 countries, is part of ongoing restructuring the New Jersey pharmaceutical company. . . .

Lt. Gov. Kim Guadagno, who attended the event, said the company’s decision to locate animal health operations — previously based in the Netherlands — in New Jersey is a boost for the state. . . .

Merck’s move of its animal health unit precedes a planned relocation of its corporate headquarters to Summit from the Whitehouse Station section of Readington by the end of 2015. Merck announced the move last year as part of a cost-savings plan. The pharmaceutical giant has announced several restructurings and work force reductions in recent years as it integrates with Schering-Plough, which Merck acquired in 2009. . . .

We will keep you apprised — but, yes, this is sad (although by no means unexpected) news, for our good friends in Oss.

Will “Drug Reimportation” Rise Anew — But This Time, By Another Name? Of “Moral Suasion” As Pricing Pressure?

Back in very early 2007, as Mr. Obama prepared for his first White House run, many of us gathered in Philadelphia to discuss practical ways to make United States health care delivery reform an important part of his manifold — and then still emerging — platforms.

Much talk centered around policies to liberalize drug reimportation rules, as it was clear that price disparities even between Canada and the US, meant that US patients were paying much more for the very same pills — made in the very same facilities, than our good neighbors to the North. [I'll spare you the intervening narrative, of all that transpired -- since that February weekend.]

Fast forward to 2013 — and pharma has largely taken reimportation off the table, by offering to kick in what started at $80 billion, and settled at around $100 billion, over ten years, to help close the donut hole. This is admirable — but it probably won’t be enough — as I’ve said since early 2008.

No, here in 2013, as Obamacare is being implemented, day by day, I think we are going to see a “back-door” form of loosened drug reimportation rules. It will initially appear in the form of direct “moral suasion” — on drug company pricing disparities — even within the (awfully named) “first world” economies (US, Canada, Japan and the euro-zone, for starters). And, it will escalate, to more formal measures — if need be.

Here is a bit of a good Reuters piece on it — updating the state of the play. Do go read it all — but I offer this bit, below, insofar as it mentions Whitehouse Station’s Januvia^® (until the end of Q1 2013, Merck’s largest seller), by name:

. . . .”Over the intermediate term it doesn’t look good for the industry. We will be facing enormous healthcare cost containment pressure in this country,” said Joel Hay, professor, pharmaceutical economics and policy at the University of Southern California. “Big pharma will then have less and less resources to plow back into research and development.”

It will mean less tolerance for wide variations in pricing for the same drugs. The wholesale U.S. price for a 100 milligram tablet of diabetes drug Januvia, the top-seller at Merck & Co, is $8.20, according to the company. The Common European Drug Database lists the same pill at $1.52 euros ($1.99) in Austria. . . .

There will be more — but I must tend to other responsibilities, right now.

And, BTW — Who Said Nerds Don’t Have A Subtle Sense Of Humor?

I can’t resist — I should have done a better job, on the graphic for the story below. So, here’s my second effort — enjoy:

More substance — later today. I’m out.

UPDATE On “Next-Gen” Melanoma Candidates: Merck’s Lambrolizumab (MK-3475), Courtesy Bloomberg

This morning, Bloomberg is reporting that Merck’s enrolling of a Phase II study on MK-3475, lambrolizumab (so named, as a dig at the most likely beneficiaries of the drug: gold-chain wearing, pot-bellied, high-multi-millionaire net-worth “Lamborghini-Lizards species“  — at risk of melanoma, due to their penchant for flashy top-down driving!. . . where was I? Oh, right.), may turn out to be bigger than just the usual science backgrounder news it appears to be at first blush.

Why?

Because, at 500 patients, and with breakthrough status at FDA — the Phase II 500 patient data just might be a large enough “n” to grant approvability, on that Phase II study, alone. IF the FDA accepts that argument, and that data is clearly, and appropriately powered, to demonstrate strong efficacy and safety. . . then Merck is essentially tied with BMS, and its nivolumab candidate, on timing. [As I had reported last month, Merck was about a year behind BMS, because Merck's initial safety study was too small to support direct NDA submission. It seems that is changing.]

This is materially good news for Merck. We will see if it moves the stock price on the NYSE.

Here is a snip, from the Bloomberg item — do go read it all:

. . . .Merck, of Whitehouse Station, New Jersey, is in second-stage testing on its immune therapy, lambrolizumab, in melanoma. If successful, the 500-patient trial may be large enough to gain approval from U.S. regulators without completing the usual required third-stage of testing, putting it in a virtual dead heat with Bristol’s nivolumab in melanoma. . . .

We will keep the readership posted. PS: I’ve updated the graphic — to include the MRL science crew’s nomenclature joke, for MK-3475. It’s the target, indeed!