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Astra, Merck restructure
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June 19, 1998: 11:12 a.m. ET
Swedish drug firm will gain control of joint venture; Merck will get billions
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NEW YORK (CNNfn) - Sweden's Astra AB and Merck Co. of the U.S. said Friday they have agreed to restructure their joint venture, Astra Merck Inc., under terms that will cede effective control of the partnership to the Swedish pharmaceutical firm while pumping a revenue stream into Merck's development pipeline.
Astra and Merck, the number one U.S. drugmaker, began their collaboration in 1982. But it wasn't until 1994, when Merck gave Astra half of its U.S. business, that the drug makers launched their joint venture.
The relationship has been acrimonious ever since, due mainly to the runaway success of Astra's Prilosec, a popular drug used to treat ulcers and heartburn. Under the terms of the partnership, Merck has shared the profits from sales of Prilosec, known as Losec outside the U.S.
Under the restructuring, Astra Merck's business will be combined with Astra's wholly owned subsidiary, Astra USA Inc., in a new limited partnership to be called Astra Pharmaceuticals LP. Astra will have managerial control and voting rights. In 2008, Astra will acquire the right to buy out Merck's equity stake in the company as well.
The deal is expected to contribute to Astra Group net earnings beginning in 2000, after an initial dilution. Astra Pharmaceuticals anticipates annual cost savings of about $100 million beginning in 2000.
The cash buyout, the companies said, will be based on a multiple of the prior three-year average of pre-tax income earned by Merck for all products, except Prilosec and perprazole.
The total sum, Astra said, will be no less than $4.4 billion in 2008. But some analysts believe the deal ultimately could reap revenues for Merck in the range of $7 billion to $10 billion.
Should Astra find a merger partner -- a possibility left open in the restructuring -- Merck will forfeit its right to revenues generated by the combined companies' new products. Instead, Merck will receive a one-time payment of $675 million to $1.5 billion.
Merck will continue to receive ongoing revenue and income from sales of current and pipeline Astra Merck products and certain Astra USA products for at least 10 years. Astra will loan Merck $1.4 billion at closing.
Merck, based in Whitehouse Station, N.J., has been looking to focus on its core operations and develop new drugs as it faces the expiration of several important patents in the next few years.
Drugs for eating-related ailments
Almost two-fifths of Merck's sales are from drugs used to treat ailments associated with eating habits. Merck's medicine cabinet includes Zocor and Mevacor, two leading anti-cholesterol drugs, the hypertension drugs Vasotec and Prinivil, and newer products such as Crixivan, used in AIDS treatment, and Propecia for male baldness.
For Astra, the restructuring effectively sounded a death knell on a joint venture that proved to be a blunder, analysts said. When it signed on with Merck in the 1980s, Astra saw the move as a way to tap into the lucrative and fast-growing U.S. drug market. But as things turned out, the blockbuster success of Astra's own Prilosec drug made the venture seem a lopsided proposition at times.
Hemant Shah, an analyst with HKS & Co., called the transaction "a second best for Merck," giving the U.S. firm revenue for internal development. But Shah cautioned against seeing the windfall as Merck's salvation.
"They have to come up with blockbuster drugs," he said. Shah also questioned whether Astra could afford to pay Merck the giant sums cited by some analysts.
"I think there's no way Astra can take on a big debt to buy out Merck outright," he said.
Merck had $23.6 billion in sales in 1997. But it has recently refocused on beefing up its internal development and strengthening its core businesses. Last month, Merck sold its stake in a venture with DuPont Co. back to DuPont for $2.6 billion.
Astra, with operations in 45 countries, reported revenues of $5.9 billion in 1997. Astra Merck had 1997 sales of $2.3 billion. Astra USA, located in Westborough, Mass., markets hospital products in the U.S. Among the products currently in its pipeline are Toprol-XL, a beta-blocker used to treat heart ailments, and Pulmicourt Turbuhaler, an anti-asthma agent.
American depositary receipts of Astra (A) were up 1/4 at 20-3/4 Friday morning while Merck (MRK) stock climbed 1 to 129-7/8.
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