European Drug Companies To Merge
In the second biggest pharmaceuticals merger ever, Britain's Zeneca and Sweden's Astra confirmed Wednesday that they are joining forces to form a new company called AstraZeneca. The company will have a market capitalization of $67 billion.
Zeneca (ZEN-LS) shares surged as much as 10 percent on the news. But investors were quick to say this is not so much because the market thinks this is a great match, but rather, that Zeneca has now made itself an effective bid target.
"Someone muttered in my ear that Roche Holdings [in Switzerland] is interested [in Zeneca]," said John Hatherly, chief analyst at the U.K. fund manager M&G Group Plc. Another potential suitor is widely thought to be Britain's Glaxo-Wellcome (GLXO-LS), which held talks with SmithKline Beecham (SB-LS) last year. Those talks fell apart in February. "The feeling is that this isn't the end of the story," Hatherly said.
Although the companies are calling the deal a merger of equals, some others are viewing the transaction as a Zeneca takeover. Britain's third-biggest drug maker will own 53.5 percent of the combined group and will make an offer for all of Astra's shares in a deal worth $34.6 billion.
Astra shareholders will receive, for each Astra A share or Astra B share, 0.54045 AstraZeneca shares. That's a 12 percent premium over Tuesday's closing price of Astra's class a shares, and a 16 percent premium over Astra's B shares. The merged company will be based in London and will be listed in the U.K., Sweden, and New York.
The merged company will generate an annual $1.1 billion in annual pretax cost savings starting in the third year of the merger. A big chunk of that savings will come from joint job cuts of 6,000 around the world.
AstraZeneca would have had pro forma 1997 pharmaceutical sales of $11.5 billion, total sales of $15.9 billion, and pretax profit of $3.5 billion. The combined 1997 pharmaceutical R&D spending would have been $1.9 billion, making it the industry's third largest.
Tom McKillop, currently the chief executive of Zeneca's pharma division, will become the chief executive of the merged company. In a statement, he said Zeneca and Astra are "a perfect fit in terms of highly complementary product portfolios as well as sales and marketing organizations." He also said the two companies have a similar management philosophy.
But M&G's Hatherly is skeptical. "People aren't sure how their managements will get along. People don't speak highly of Astra's chief executive [Hakan Mogren]," he said. Hatherly said many in the market simply don't view the two companies as natural partners.
Certainly, both have a lot of catch-up to do in product development with the likes of pharmaceutical giants such as America's Merck and Britain's Glaxo-Wellcome. Both have formidable product lines and a huge stash of cash for research and development. Zeneca and Astra have boasted that together, they will have RD expenditure of $1.9 billion - making it the world's third largest in R&D terms.
In terms of market value, though, analysts say the combined company would still be a distant eleventh, behind American Home Products but ahead of Britain's SmithKline Beecham. Merck and Pfizer are, respectively, the biggest in the world based on market value.
AstraZeneca will focus its resources on five key therapeutic areas: gastrointestinal, cardiovascular, respiratory, oncology, and local and general anesthesia. Zeneca is the world's second-biggest maker of cancer drugs, after Bristol-Myers. It is known for its breast-cancer drug, Zoladex, while its newer products include Accolate, an asthma treatment, and Zomig, for migraines. Astra, meanwhile, needs new drug products because its Prilosec patents expire from 2001.
This latest mega-merger, which has set pharmaceutical shares on fire across European markets, comes on the heels of last week's tie-up news between Germany's Hoechst AG and France's Rhone-Poulenc SA. France's Sanofi SA also agreed to buy a rival, Synthelabo SA, for $10.4 billion in stock.
Written By Suzanne Miller