Monday, 1 March 2010
AstraZeneca today announced that, under the provisions of the agreements relating to the restructuring of the AstraZeneca and Merck joint venture in the United States, AstraZeneca has notified Merck that it will exercise the First Option related to the relinquishment of Merck’s rights over the products not covered by the Partial Retirement (which occurred in March 2008), other than Nexium and Prilosec and the right to receive contingent payments in respect of the authorized generic version of felodipine. Products covered by the First Option include Entocort, Atacand and Plendil, and certain products still in development, including Brilinta, AZD3355, AZD6765 and AZD2327. AstraZeneca expects to consummate this option in April 2010, which will result in the payment to Merck of the Appraised Value of $647 million. As previously disclosed, in accordance with the Agreements, in 2008 a third party appraisal resulted in a calculation of the Appraised Value, being the net present value of the future contingent payments in respect of all agreement products not covered by the Partial Retirement, other than Prilosec and Nexium. Upon consummation of the First Option, contingent payments will cease on the products covered by the First Option. AstraZeneca made contingent payments in respect of the products included in the First Option of $47 million in 2009. Merck’s continuing contingent payment interest in respect of the authorized generic version of felodipine is the result of Ranbaxy Pharmaceuticals, Inc. becoming the exclusive US distributor of this product. Such contingent payments will continue for the duration of this arrangement.
Under the Agreements a Second Option exists whereby AstraZeneca has the option to repurchase Merck’s interests in Prilosec and Nexium in the US. Now that AstraZeneca has exercised the First Option, the Second Option is exercisable by AstraZeneca in 2012, or in 2017, or if combined annual sales of the two products fall below a minimum amount. AstraZeneca’s consummation of the Second Option will end the contingent payments in respect of Prilosec and Nexium and will effectively end AstraZeneca’s relationship with, and obligations to, Merck (other than some residual manufacturing arrangements). The exercise price for the Second Option is the net present value of the future annual contingent payments on Prilosec and Nexium as determined at the time of exercise. AstraZeneca made contingent payments in respect of Prilosec and Nexium amounting to $726 million in 2009.
AstraZeneca Accounting Treatment of First Option
Consummation of the First Option will give rise to additional amortisation expense, associated with intangible assets related to relief from contingent payments to Merck for products covered by the First Option, in the range of $10 million to $45 million per annum charged to Cost of Goods Sold (COGS), with escalation to the higher amounts dependent on the launch status of the covered pipeline compounds. A further amortisation expense of around $60 million per annum will be charged to SG&A, related to the ability to exploit these products and to exploit other opportunities in the Cardiovascular and Neuroscience therapy areas that AstraZeneca was previously prevented from doing by Merck’s interest in these products. For the purposes of calculating Core financial measures, the Company will exclude only the amortisation expense related to therapy area intangibles (i.e., that charged to SG&A) from the Core financial measures calculations.
Further details on the AstraZeneca arrangements with Merck, including details of the previous termination arrangements completed in March 2008, can be found in AstraZeneca’s Annual Report and Form 20-F Information for 2008, pages 144-146.
AstraZeneca is a global, innovation-driven biopharmaceutical business with a primary focus on the discovery, development and commercialisation of prescription medicines. As a leader in gastrointestinal, cardiovascular, neuroscience, respiratory and inflammation, oncology and infectious disease medicines, AstraZeneca generated global revenues of US $32.8 billion in 2009. For more information please visit: www.astrazeneca.com.
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