Outlook: Astra/Zeneca

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The Independent Online
WITH THE formal documents about to be sent to shareholders, and a quite literally voluminous SEC filing out with the printers, is Glaxo Wellcome, or anyone else for that matter, about to spoil Zeneca's planned merger with Astra? Anything is possible and certainly the story has been doing the rounds in the stock market for the last few days. But here's why it also seems rather unlikely.

It is a little known fact that Zeneca has been planning its merger with Astra for nearly three years now. First contact was made in 1996, but Astra's joint venture with Merck, which in practice means that Merck is entitled to market all Astra's products in North America, proved a big stumbling block. Astra finally disentangled itself from this arrangement in the summer, opening the door for serious negotiations with Zeneca.

This is scarcely a marriage made in heaven, as this column has pointed out before. Both companies face a big patent expiry problem over the next few years, and after the recent welter of big pharmaceutical mergers, there is a suspicion of the last two left on the dance floor about this get together. Even so a good enough case can be made for doing this deal. Perhaps most significantly, the merger catapults Zeneca to the number three position in the world in terms of number of big selling products - that is drugs with sales of more than $500m a year. Such products are also the most profitable, so it pays to be in this position.

The two companies are surprisingly similar in terms of culture and outlook, having both been created by organic growth alone. And if you have to do a cross border European merger, a Swedish partner probably fits better with the British temperament and way of doing things than many of the alternatives.

None of this is going to deter rivals, of course, but the question is where realistically are these alternatives going to come from? Roche could be considered a reasonable partner for either company, but few institutional investors in Britain would want to take Roche paper, and at $50bn, Zeneca would be too large a cash bid for the Swiss drug maker.

That leaves the wily Sir Richard Sykes, chairman of Glaxo Wellcome. He'd probably do it if he thought he could get away with it, though it would for ever close the door on his more favoured target, SmithKline Beecham. Regrettably from his point of view, the cost cuts he'd have to push through in R & D and marketing in order to justify the price almost certainly rule him out. Any such "buy to close" transaction would surely be politically unacceptable. In other words Zeneca can probably bank on its merger with Astra going through uninterrupted by gate crashers. Whether the get together lives up to its extravagant promises is another matter altogether.