December 9, 1998
Zeneca Group, Astra Unveil
Merger Valued at $31 Billion
By STEVEN LIPIN and STEPHEN D. MOORE
Staff Reporters of THE WALL STREET JOURNAL
Zeneca Group PLC of Britain and Swedish pharmaceutical
concern Astra AB announced a merger pact valued at about $31
billion, a deal that would create a European drug giant from two
middle-tier players.
The stock swap would be the largest deal involving two European
companies and is the latest in a spate of pharmaceutical mergers in
Europe.
The companies Tuesday confirmed they
were in advanced discussions concerning
a "merger of equals" after reporters for
The Wall Street Journal broke the news
that the two companies were close to a merger in the Journal's
interactive edition, on Dow Jones Newswires and on CNBC
television.
Percy Barnevik, a well-known Swedish industrialist who is
chairman of Astra's biggest shareholder, holding company
Investor AB, was nominated as chairman of the new company. He
said AstraZeneca will have a strong base for expansion, particularly
in research, development and geographical reach.
The companies estimate annual pretax cost savings from the
merger at $1.1 billion, to be achieved three years after the merger
has been completed. About 6,000 job losses world-wide are
expected in that period, Zeneca said.
Astra and Zeneca, From A to Z
Headquarters
Stockholm
London
CEO
Hakan Mogren
Sir David Barnes
1997 Sales-a
$5.54 billion
$8.57 billion
1997 Net
income-a
$1.25 billion
$1.21 billion
Employees
22,206
32,100
Main operations
Prescription drugs
Prescription drugs,
agrochemicals, specialty
chemicals
Main products
-- Seloken, Plendil and
Atacand,
cardiovascular drugs
-- Zestril and
Tenormin, heart drugs
-- Pulmicort
Turbuhaler, asthma
drug
-- Nolvadex and
Zoladex, cancer drugs
-- Losec, ulcer drug-b
-- Dipravan, anesthetic
-- Xylocaine, local
anesthetic
-- Amistar, fungicide
a-Converted to U.S dollars from local currency at current rate
b-Known as Prilosec in U.S.
Source: The companies
Under the terms of the proposed merger, Astra shareholders will
have 46.5% of the enlarged issued share capital of AstraZeneca
and Zeneca shareholders will have 53.5%. The deal's implied value
of $31 billion is based on market capitalization of Astra's
shareholder stake.
Before share trading was halted pending news from the
companies, the two companies' American depository receipts
soared on the news reports. In New York Stock Exchange trading,
Astra's ADRs changed hands at $21.875, up $3.625, or 20%,
while Zeneca changed hands at $45, up $4.25, or 10%, from
Monday's close.
A combined Astra and Zeneca would have pro forma 1997 total
sales of about $14 billion and prescription-drug sales of $8.3
billion, which represent a 3.4% share of the world market.
But taking into account a restructuring of Astra's joint venture
with Merck & Co., the merged companies' annualized drug sales
could be between $10 billion and $11 billion, which would make
it one of the five biggest global drug companies.
Complementary Products
Analysts said that Astra and Zeneca are well matched in terms of
the main diseases they target and products the companies currently
have on the market. Astra's ulcer medicine Losec, known as
Prilosec in the U.S., will be the world's best-selling prescription
drug this year.
Zeneca is best known for cancer medicines, which account for
about one-third of annual revenue of its drug division. Both
companies also are active in anesthetics and treatments for
respiratory and cardiovascular diseases.
They also share a strategic weakness: U.S. patent protection will
lapse on the best-selling drugs of both companies during 2001.
Those patent expirations -- and the advent of generic competition
for Astra's Losec and Zeneca's flagship heart medicine Zestril -- are
expected to send sales of both companies tumbling in 2002.
"On the surface, these companies are going to try to use the old
equation that one and one will equal three or more,'' said Neil
Sweig, a pharmaceuticals analyst at Southeast Research Partners.
Citing expiring patents and the dilutive effect on Astra's earnings
from unwinding the Merck joint venture, Mr. Sweig said "much
more will have to be proven for these companies to equal more
than two.''
Future Management
Structurally, the managements and boards of Zeneca and Astra
will be combined equally. Tom McKillop, a 54-year-old former
research executive, was tapped this year to become Zeneca's new
chief executive in a planned management shuffle next year. He is
expected to be chief executive of the combined company, which
will be based in London.
Hakan Mogren, Astra's chief executive, was nominated as deputy
chairman along with Sir David Barnes.
But given the size of the giants of the industry, some analysts
cautioned that the Astra-Zeneca union could attract its own
suitors. Astra's research and marketing acumen in respiratory
medicines, and Zeneca's strong global position in cancer therapies,
would fit nearly as well within most major drug companies as they
would with each other. Astra's size wouldn't necessarily dissuade
potential suitors such as Swiss giants Novartis AG and Roche
Holding Ltd., analysts said.
And Glaxo Wellcome PLC was believed to have given serious
thought to a bid for Zeneca three years ago before shifting its
attention and gobbling up Wellcome.
Unwinding Astra's Merck Ties
Besides intensifying pressure on mid-size European drug
companies -- from Germany's Bayer AG and Schering AG to
Novo-Nordisk AS of Denmark -- a Zeneca-Astra merger would
accelerate payments to Merck as part of Merck's longstanding
relationship with Astra. The merged company will pay Merck a
lump sum of about $740 million as well as about $950 million,
representing the value of future drug discoveries.
Astra removed a major stumbling block to serious matchmaking
earlier this year by restructuring a strategic alliance with Merck.
Under an accord dating from 1982, a jointly owned sales affiliate
called Astra Merck Inc. marketed most Astra products in the U.S.
and had first crack at U.S. rights to any new drug discovered by
Astra's labs.
Mr. Mogren fretted that potential merger partners would be put
off by the prospect of handing Merck 50% of potential U.S.
profits on all new Astra drugs. So, in June, Astra and Merck agreed
to a multibillion-dollar restructuring plan that brought Astra
immediate management control over the U.S. sales affiliate, as well
as the right to buy out Merck's remaining 50% interest as early as
2008.
Mr. Sweig said Astra's problems "will be passed onto a new, larger
entity that will be able to bear the brunt of the problems more
easily. But it could also overwhelm Zeneca."
Expected Focus
Some analysts expect Astra and Zeneca to narrow their focus
exclusively to pharmaceuticals and sell Zeneca's agrochemicals
division, as well as a specialty chemicals unit that Zeneca
management put on the block late last month. Zeneca was spun
off from Imperial Chemical Industries of Britain in 1993.
The $35 billion-a-year agrochemical industry also is undergoing
rapid consolidation; Zeneca's business, which ranks fourth
world-wide, could fetch up to $5 billion in an international
auction, analysts said.
Talks between the two sides came amid a flurry of European
mergers within the drug industry. Only last week, Germany's
Hoechst AG of Germany and Rhone-Poulenc SA of France agreed
to combine their pharmaceutical and agrochemical operations in a
new, equally-owned company which would rank as the world's
biggest drug company, as well as the No. 1 agrochemicals
concern. Two days later, Sanofi SA and Synthelabo SA announced
a merger valued at more than $10 billion.
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