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Tuesday, December 1, 1998 Published at 16:05 GMT

Business: The Company File

Europe's blockbuster drug deal


European pharmaceutical giants Hoechst of Germany and France's Rhône-Poulenc have confirmed they are creating the world's largest pharmaceuticals and agrochemicals group.

The companies are forming a 50-50 joint venture combining their life sciences businesses under the name Aventis, as a precursor to a full merger of the two group's within three years.

The full merger will draw in the huge chemicals assets of both companies to create a drug and chemical giant on the world stage.

[ image: Is the chemistry right?]
Is the chemistry right?
Aventis will be based near the Franco-German border in Strasbourg and will enjoy annual sales of around $20bn.

The two companies gave no indication of how many jobs would be lost as a result of the deal.

"We want to form a new company with common European roots and a worldwide presence in order to take part in the significant growth opportunities in the life sciences," Hoechst chief executive Juergen Dormann and Rhone chairman Jean-Rene Fourtou said in a joint statement.

"Going it alone would put us at risk of losing momentum and falling behind in rapidly changing and consolidating industry," Mr Dormann added at a news conference.

"We see this merger as a window of opportunity that we want to take advantage of," he said.

[ image: Juergen Dormann, chief executive of Hoechst]
Juergen Dormann, chief executive of Hoechst
Mr Dormann will head the new group as chairman while Mr Fourtou will be vice chairman.

The companies expect to make savings of $1.2bn a year when the tie-up is complete.

A significant proportion of those savings will come from the lower taxes the combined group will have to pay by having its head offices in France.

Aventis' choice of location is bound to cause further controversy amid growing calls for harmonisation of tax regimes across Europe.

The merger has partly been driven by the need for economies of scale in the development of new drugs, and the push by European health services to keep down the price of drugs.

Analysts also point out that the two groups have lagged behind their US rivals and question marks have been raised over their drug pipelines.

Big mistake?

European stock markets reacted warily to the deal, with shares in both companies falling sharply on Tuesday.

Most analysts are sceptical about the joint venture and suggest that Hoechst may have found the wrong partner.

[ image: Rhône-Poulenc's Paris headquarters]
Rhône-Poulenc's Paris headquarters
They say the deal will will do little to allow the two to lift market share in the large and lucrative US market where there combined penetration will be about 3%.

Christian Faitz, analyst at Banque Nationale de Paris in Frankfurt: "We don't think much of the merger, nothing great is going to come from putting two sick companies together."

Christa Baehr of BHF-Bank said a merger with Rhône-Poulenc was "not the ideal solution". Neither company had a good "product pipeline" of promising new drugs and both were heavily in debt.

Culture clash

Cultural differences are also seen as an obstacle, both on national and corporate management levels.

Two other mega-mergers in the pharmaceutical industry collapsed this year over the question of leadership - Glaxo's proposed merger with rival SmithKline Beecham, and American Home Products' tie-up with life sciences company Monsanto.

Industrial giants

The German firm has had a difficult time lately, with a massive drive to modernise and streamline the company failing to produce any result.

Ten years ago, Hoechst was one of the leading drug makers of the world, but experts agree that it has recently lost its way.

Rhône-Poulenc employs 68,000 people in 160 countries world wide and in 1997 had sales of $15bn.

Hoechst is even bigger, with 120,000 employees and worldwide sales of $30.5bn.

Both companies have been trying to move away from reliance on heavy chemicals, a high-volume, low profit business.

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