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Ciba-Geigy and Sandoz to merge into pounds 40bn giant

Pharmaceutical fusion: Biggest merger in history will create `Novartis', the world's second-largest drugs group, while bid spotlight turns on Zeneca

Ciba-Geigy and Sandoz of Switzerland rocketed into the record books yesterday after unveiling a pounds 40bn merger plan to create the world's second- largest drugs group. If completed, the deal would easily be the largest merger on record, but is likely to spell job losses in the UK.

The companies warned that around 10 per cent of the combined workforce, or 13,000 people world-wide, could be sacked. This may have implications in the UK, where the two companies have 6,000 staff.

The new company, to be called Novartis, would rank second only in market share to Glaxo Wellcome, itself the creation of a pounds 9.3bn takeover last year. The deal will be scrutinised closely by competition authorities in Europe and the US.

News of the merger affected pharmaceuticals shares across Europe as dealers expected it to trigger another wave of consolidation in the pharmaceuticals industry. Before a lull in the recent merger mania, around $80bn of deals have been done in the industry in the past three years. Shares in Zeneca of the UK and Schering of Germany rose sharply yesterday. Both are seen as vulnerable to takeover due to their relatively small size compared with the emerging industry giants. Meanwhile, there were falls for potential predators, such as Roche, a Swiss rival to Ciba that has long been tipped as a bidder for Zeneca, and Glaxo Wellcome.

The recent wave of consolidation has come in the wake of the decelleration in the drugs market in the 1990s in the face of increased governmental and consumer attempts to reduce ballooning health-care budgets. This has increased the pressure on companies to cut costs. Ciba and Sandoz said their merger would release SFr1.8bn (pounds 1bn) in synergy benefits over three years, with half coming in the first 18 months.

Peter Laing, an analyst with Salomon Brothers, said the latest deal showed that "consolidation in the industry hasn't gone away and the pressure to cut costs hasn't gone away. So I don't think this will be the last."

Middle-sized companies such as Novo of Denmark, Sanofi of France and Schering would all be wondering where their future lay, he suggested. By the end of the century, the top 10 drugs companies would each command world-wide market shares of between 5 and 10 per cent, rather than the 3 to 4 per cent typical now, he forecast.

Novartis would have had annual sales of SFr36bn (pounds 20bn) had it been in existence last year, but Ciba-Geigy plans to split off its speciality chemicals division and Novartis will divest its construction chemicals business, leaving turnover of SFr26bn. The new company will focus on pharmaceuticals and agrochemicals, where it will lead the world market.

Sandoz shareholders will receive 55 per cent of the new company's shares and Ciba shareholders 45 per cent. Ciba's chairman, Alex Krauer, will become Novartis chairman and Sandoz chief executive, Daniel Vasella, is to be head of the executive committee. Both companies yesterday announced profit increases for 1995. Ciba Geigy's net profits rose 13 per cent to SFr2.16bn, while Sandoz grew 18 per cent to SFr2.04bn. Based on 1995 figures, Novartis would therefore have net income of SFr4.2bn and a dowry of SFr15bn in cash and marketable securities.

The merger was welcomed by analysts, who highlighted the complementary nature of the two companies' product areas. However, they pointed out that Ciba, for one, may have been pushed to pursue a deal as two of its five most promising new drugs are facing problems. Selfotel, a treatment for strokes, has been withdrawn after poor clinical results last year and Hirudin, an anti-blood clotting drug, may have to be abandoned if results out this month do not live up to expectations.

Novartis expects to have strong positions in seven therapeutic areas, Ciba-Geigy and Sandoz said. Most of the group's top 10 products are expected to achieve double-digit growth. They include Voltaren, Ciba's arthritis and rheumatism treatment, which achieved sales of SFr1.5bn last year, and Sandimmun/Neoral, which notched up SFr1.4bn.

In the UK, the two groups are better known for consumer brands such as Lypsyl, Savlon and Nicotinell, the anti-smoking patches, which are all part of the Ciba portfolio, and Sandoz's Ovaltine. The Ciba workforce in the UK looks the more vulnerable to any job cuts. The company has seven manufacturing sites employing around 4,500, compared with Sandoz's 1,500 employees in the UK.

The Transport & General Workers Union, which has a substantial membership at the two companies, said it expected job losses.

Top 10 Novartis drugs Product Disease area 1 Voltaren Inflammation, pain 2 Sandimmun/ Neoral Transplants 3 Tegretol Nervous system 4 Nitroderm TTS Cardiovascular 5 Leponex/ Clozaril nervous system 6 Zaditen Inflammation, respitory 7 Estraderm Hormone replacement 8 Lamisil Dermatology 9 Cibacen/ Lotensin Cardiovascular 10 Parlodel nervous system