Amersham merger creates world leader

Amersham International is merging with Nycomed of Norway to create the world's leading supplier of diagnostic imaging agents, which have a diverse range of medical uses from X-rays to scanners. The deal comes just three weeks after Amersham, the first company to be privatised by Margaret Thatcher in 1982, announced the merger of its life sciences division with that of Swiss drugs group, Pharmacia & Upjohn.

The new company, Nycomed Amersham, which at yesterday's share prices is valued at over pounds 2bn, will have combined sales of pounds 1.5bn and operating profits of pounds 244m, of which pounds 90m is accounted for by Amersham. The all- paper deal takes the form of an offer for Nycomed by higher rated Amersham - which will leave Amersham shareholders with 47 per cent of the combined group.

Though shares in both Amersham and Nycomed gained strongly in early trading, concerns that annual cost savings will be eroded by fierce competition in Nycomed's core US X-ray imaging market and uncertainty over renewal of two key contracts tempered Amersham's initial 255p hike. Amersham's shares closed 87.5p higher at pounds 16.82p while Nycomed's shares climbed 23 per cent to 132.5 kronas.

Bill Castell, Amersham's chief executive who becomes chief executive of the new group, said Nycomed added potentially exciting areas of MRI and Ultrasound imaging to its own world-leading position in the radioactive sector. "We now have the clout to offer radiological departments an entire range of products," he added. Trond Jacobsen, a director of Nycomed, estimated that the market for Ultrasound imaging agents could be worth pounds 1bn by 2001. "There is a wonderful base of equipment which can use our agents. Most doctors already have ultrasound machines."

The new group will have 30 per cent of the pounds 3bn world imaging market, leading Bracco (half-owned by Germany's Merck) with 21 per cent, the US's Mallinckrodt with 15 per cent and Germany's Schering with 14 per cent.

Mr Castell said that Nycomed's investments in Shanghai and Latin America positioned the enlarged company in new and fast growing markets. Merging administration, sales and marketing and the loss of around 300 jobs, including around 100 from the UK, from a combined workforce of 11,600 offered scope to save at least pounds 40m a year to 2000, with half realised by December next year. Amersham, which is changing its year end from March to December, will make a pounds 50m exceptional provision in its next nine month figures and is also paying a special dividend to Nycomed shareholders.

Analysts agreed that the deal made strategic sense and would be earnings enhancing, though numbers were complicated by the change in year end, pounds 80m cost savings from restructuring at Nycomed following last year's profits warning and the inclusion of the Pharmacia business.

Nigel Barnes, pharmaceutical analyst at Merrill Lynch, said: "This makes an enormous amount of sense given both companies are in the imaging markets. There are synergies too though not great overlap since the new group will be in four different imaging markets." James Dodwell at BZW expects the merger to add around 85p to earnings and is looking for 105p earnings and pre-tax profits of pounds 240m for the year to December 1998.

However, several analysts said privately that competition in Nycomed's mature X-ray imaging business - over 80 per cent of its pounds 154m profits last year - could erode cost savings. Following its blocked merger with generic drug group Ivax last year, Nycomed lost share to rivals who were discounting prices by up to 60 per cent.

Though Mr Jacobsen said that the discounting is levelling off, the key test will be whether, or on what terms, two of Nycomed's US contracts worth 15 per cent of Nycomed's sales are renewed.

There were also concerns that following the merger some 88 per cent of the group's profits will be earned overseas. The group, which is considering paying foreign income dividends, said that if sterling continued at current levels, pro-forma profits would be cut by pounds 30m.

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