Celltech Chiroscience will be the UK's largest biotechnology company and the largest pharmaceuticals company after AstraZeneca, which is valued at pounds 45bn.
The all-paper deal follows the merger last month of cash-strapped biotech tiddlers Proteus and Therapeutic Antibodies. However, it is unusual in that unlike their peers, Celltech and Chiroscience have strong balance sheets and no apparent need to merge.
Dr John Padfield, Chiroscience's chief executive said the merger was driven by both companies' need for critical mass. "There's an arms race in drugs discovery and size matters," he said.
Peter Fellner, Celltech's chief executive who is to retain his role in the new group, said: "We will now be competing with some parts of what a major pharmaceutical company does, and our drug development pipeline will be equivalent too."
Celltech's strengths are in molecular biology and Chiroscience's is in its gene-based technologies.
Dr Padfield is leave the group on completion of the deal to join the board of Nycomed Amersham.
The discussions which led to yesterday's announcement began after John Jackson, Celltech's chairman who is to retain his role in Celltech Chiroscience, unexpectedly bumped into Chiroscience chairman Hugh Collum, who becomes deputy chairman, at breakfast in a London hotel last autumn.
Based on Celltech's closing price of 472.5p and market capitalisation of pounds 365m, the deal values Chiroscience at pounds 331m, or 293p per share, an 18.3 per cent premium to Monday's closing price of 259p. Chiroscience shareholders will receive 62 Celltech shares for every hundred Chiroscience shares.
The principal benefit of the merger will be the capability of the enlarged scientific base of 400 research staff to handle larger drug discovery projects. In addition, the broadened portfolio of drugs in development minimises the groups' dependence on the success of any one drug. The group said there would be few redundancies.
Analysts said Chiroscience stood to gain more from the deal because it had few premium products in its development pipeline to follow up Chirocaine, its anaesthetic formulation expected to reach the market by year-end.
Yesterday the group announced marketing agreements with Purdue Pharma and Abbott Laboratories, both US-based pharmaceuticals groups, to distribute Chirocaine in the US and Europe respectively. Celltech Chiroscience said its challenge now was to attract young, creative scientists who were traditionally flocked to smaller, entrepreneurial companies.
However, Mr Jackson hinted the days of the small biotech company were coming to a close and the group would be considering making acquisitions. "In a lot of boardrooms people will be thinking about doing deals now," he said. "People have been saying something was going to happen for several years. Until now, there's been almost a paralysis."
Outlook, page 19