Zeneca/Astra merger will cost companies over pounds 3.8bn

All-share deal will create world's third-biggest drugs group Merger will mean 6,000 jobs cut, including 1,000 in the UK Speculation on a counter- bid pushes Zeneca shares up
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The Independent Online
THE pounds 48bn merger between Zeneca and its Swedish rival Astra will cost the two pharmaceutical companies more than $6bn (pounds 3.8bn) over the next 10 years and will involve axeing 6,000 jobs, including 1,000 in the UK.

News of the huge costs came as the two companies yesterday confirmed details of Europe's biggest merger, which will be an all-share deal, to form AstraZeneca, the world's third-largest drug group with sales of around pounds 10bn. Zeneca will be the dominant partner with 53.5 per cent of the new company.

According to the merger documentation, AstraZeneca faces bills of around $5bn over the next 10 years due to the cancellation of a US distribution contract between the Swedish group and the American giant Merck. Under the terms of the agreement, terminated in June, Astra would have to pay Merck $740m in compensation if it was to merge with a rival. Merck would also receive $950m over a longer period and $3.3bn in 2008 to relinquish the rights to sell Astra's products in the US.

In addition to the Merck payment, the two companies said they would make a $1.2bn merger provision in the first year to cover reorganisation costs. Around $1bn would go to pay for 6,000 redundancies across the group's 55,000 workforce.

Sir David Barnes, Zeneca's chief executive, declined to say where the job losses would fall, but hinted that there were overlaps in the two companies' administrative and research staff. Fewer than 1,000 jobs would go in the UK, probably in Zeneca's pharmaceutical division headquarters near Manchester and in Astra's operations in Nottingham and Kings Langley.

Dr Tom McKillop, Zeneca's chief executive-designate, is to become chief executive of the merged entity. Percy Barnevik, the chairman of Investor, the investment group of the Wallenberg family, will be non-executive chairman, while Sir David Barnes and his Astra counterpart Hakan Mogren will be joint executive deputy chairmen.

Dr McKillop said the two companies had a "perfect commercial and cultural fit". The merger pools together a number of high-sales drugs such as Losec, Astra's anti-ulcer blockbuster, Zeneca's Novaldex, an anti-cancer treatment, and Zestril, a hypertension medicine. AstraZeneca would be the market leader in anaesthetic drugs and the number two in tumour treatments, with leading positions in gastrointestinal and cardiovascular drugs.

The announcement triggered a sharp rise in Zeneca's shares, which ended the day pounds 1.91 higher at pounds 27.11on mounting speculation of a counter-bid by Glaxo Wellcome or SmithKline Beecham, the other two UK drug giants.

However, industry insiders dampened the speculation, noting that SB and Glaxo would be unlikely to pay a premium to buy a medium-sized company with a thin drug pipeline such as Zeneca. They said that the UK companies would also be deterred by the political storm which would follow the inevitable job losses.

The reorganisation would yield annual savings of $1.1bn a year with two thirds of the benefits set to come through two years after the completion of the merger. Sir David said hedid not envisage any anti-trust problems and he expected the merger to be approved by the European and US authorities by the first half of next year. The two companies had been in merger talks since September and the deal was clinched last weekend at a country hotel in East Anglia, he added.

City analysts said that the deal made sense, given the two companies' complementary drug portfolios. However, they cautioned that the merger was largely a defensive move, driven by the desire to achieve critical mass to compete with world leaders such as Merck and Glaxo.

Both Zeneca and Astra face patent expiries on Zestril and Losec, their two blockbusters, in 2001. They were also considered too small to drive through the huge research sales expenditure required to survive in the pharmaceutical market.

" Neither of them wanted to be swallowed up by a bigger rival. Now they are big enough to compete, even though they are slightly weak in the US," said Nick Woolf, an analyst with BancBoston Robertson Stephens.