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Another drug giant created
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December 9, 1998: 7:53 a.m. ET
UK's Zeneca and Sweden's Astra form $35 billion merger, Europe's biggest ever
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LONDON (CNNfn) - U.K. group Zeneca and Sweden's Astra are to merge in an all-stock deal worth about $35 billion that will create the fifth biggest pharmaceutical company in the world in terms of sales.
The deal is Europe's biggest-ever merger based on market capitalization.
Astra surged 13 percent to 170.5 Swedish crowns in Stockholm on the announcement while Zeneca jumped 4.4 percent to 2,630 pence in London.
The new drug giant will be called AstraZeneca and has a market capitalization of $67 billion based on closing prices Monday. Its sales will total $15.9 billion.
Sutherlands pharmaceutical analyst Sally Bennett said, "Without a doubt, it makes the company one of the strongest in the world. Zeneca was number 21 before this. It makes a European player that can compete with the biggest U.S. players."
Banque Paribas analyst John Reeve said the deal would help both companies when their drug patents expire in 2001 and that the combination makes sense in the current environment.
"Astra and Zeneca have been prime candidates for many months, indeed years. They're mid-size companies in the industry, they need more scale and they're operating in an industry which has seen massive consolidation."
"The two companies are complimentary," he added.
Astra's ulcer medicine Losec, known as Prilosec in the U.S., is one of the world's best-selling prescription drugs. Zeneca is best known for cancer medicines.
Some analysts think another bid could come forward for Zeneca, possibly from Glaxo Wellcome or American Home Products.
But Zeneca chief executive Sir David Barnes said he did not expect to see an offer, given Zeneca's size and the way the company complemented Astra.
"It would be a big reach for anybody," he said. "I don't expect there to be another interloper. I don't expect to find a better fit for Zeneca shareholders."
Sutherlands' Bennett agreed that another acceptable bid was unlikely, particularly given the recent tarnished track record of many attempted pharmaceutical mergers.
"It could open the way for other people to come up with a bid but I think the fit for these two companies is good," she said.
"You have to caution that we have seen two big mergers fail this year. AHP and Monsanto and Glaxo and Smithkline Beecham couldn't get it together."
Zeneca (ZEN) shareholders will hold 53.5 percent of the new company. Astra shareholders will receive 0.5045 AstraZeneca shares for each Astra A or B share they hold.
The two companies expect the merger will generate annual pre-tax cost savings of $1.1 billion after the third year. Some 6,000 jobs will be cut over the three years.
Of AstraZeneca's $15.9 billion total sales, drug sales will account for 67 percent. Profit before tax amounts to $3.5 billion.
The new company's $1.9 billion research and development spending is third highest among drug firms.
Barnes acknowledged that the two companies held a number of key patents that expired over the next two years. But he said other products would replace them.
"I see a slowing in the rate of growth, he said. "But we have 55 new compounds under development. That is a very powerful portfolio."
The announcement comes a week after Germany's Hoechst France's Rhône-Poulenc confirmed they would merge their pharmaceuticals and agrochemicals businesses to create Aventis, the third-biggest drug company with $20 billion in annual sales.
And two days later, Sanofi and Synthelabo announced a merger to create a drug company with more than $6 billion in sales.
The wave of pharamaceutical mergers has been driven by the huge research and development costs involved in the industry. On average, a drug costs between $350 million and $500 million to develop and has annual sales of $265 million.
Pressure to merge is particularly acute in Europe, whose drug companies are much smaller than those in the United States.
AstraZeneca will be listed in London, Stockholm and New York, with its headquarters in London.
Percy Barnevik, a Swedish industrialist who is chairman of Astra's biggest shareholder, Investor AB, will be chairman of the new company. Tom McKillop who was to become Zeneca's new chief executive next year, will be CEO. Hakan Mogren, Astra's chief executive, will become vice chairman of the new company.
Astra has a joint venture in the United States with Merck. AstraZeneca will pay Merck a lump sum of $740 million and about $950 million for a future option to buy out Merck's remaining interest in drug products.
The companies said the merger would not affect Zeneca's agrochemicals business or its specialty chemicals business, which it is planning to sell.
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