AstraZeneca and Merck agree to amend second option

AstraZeneca today announced that AstraZeneca and Merck have agreed to amend certain provisions of the agreements relating to the companies’ arrangements in the United States.

AstraZeneca believes that the amendments provide a greater degree of certainty to the valuation of the Second Option that is preferable to the previous arrangements and, barring unforeseen circumstances, the company now intends to exercise the Second Option in 2014.

The principal areas covered by the amendments are a change in the timing for AstraZeneca to exercise the Second Option, and agreement on the valuation methodology for setting certain aspects of the option exercise price.

Under the amended agreement, the companies have agreed that Merck will grant to AstraZeneca a new Second Option exercisable by AstraZeneca between 1 March 2014 and 30 April 2014, with closing on 30 June 2014. The options exercisable in 2017 or if combined annual sales fall below the minimum amount also remain available to AstraZeneca.

In addition to this revised timing for the Second Option, the companies have also reached agreement on the valuation methodology for setting certain components of the option exercise price for a 2014 exercise. In lieu of third-party appraisals, this valuation for a 2014 exercise is now a fixed sum of $327 million, based on a shared view by the companies of the forecasts for sales of Nexium and Prilosec in the US market. The agreed amount payable on 30 June 2014 is subject to a true-up in 2018 that replaces a shared forecast with actual sales for the period from closing in 2014 to June 2018.

In addition, the exercise price of the Second Option also includes a multiple of ten times of Merck’s average 1% annual profit allocation in the Partnership for the three years prior to exercise. AstraZeneca currently expects this amount to be around $80 million.

The component of the exercise price of the Second Option that includes the net present value of up to 5% of future US sales of Vimovo, with the precise amount dependent on an annual sales threshold that has not yet been achieved and the timing of the option exercise, will continue.

Under the amendments, if AstraZeneca exercises in 2014, Merck’s existing rights to manufacture Nexium and Prilosec would cease upon closing.

This amended Second Option arrangement has no impact on AstraZeneca’s Core financial guidance for 2012, which will, in accordance with normal practice, be reviewed in conjunction with the announcement of the Second Quarter and Half Year Results on 26 July 2012.

Further information on the AstraZeneca arrangements with Merck, including the history, and details of the previous termination arrangements completed in March 2008 and in April 2010, can be found in the AstraZeneca 2011 Annual Report and Form 20-F Information for 2011, pages 181-183.