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Wednesday, December 9, 1998 Published at 14:58 GMT

Business: The Company File

Zeneca and Astra merge to form drug giant

The cost of developing new drugs is rising

BBC's Greg Wood: 6,000 job losses will help create £700m of cost savings
Drug companies Zeneca and Astra are planning to merge, forming a new company worth $67bn (£41bn), in one of the largest-ever European mergers.

UK-based Zeneca and Astra from Sweden will form the fourth largest drug company in the world, with $14bn in sales. The new company will be called AstraZeneca.

[ image: Zeneca's chairman Sir David Barnes: UK research centres will stay]
Zeneca's chairman Sir David Barnes: UK research centres will stay
The company said it would cut 6,000 jobs worldwide over the next three years, and that it would achieve cost savings of $1.1bn. Up to 1,000 jobs could go in Britain, according to Zeneca chairman Sir David Barnes, who will be deputy chairman of the new group. But he pledged that the company's main research centres, in Manchester and Loughborough, would stay.

Zeneca chief executive Tom McKillop will become chief executive of the new group, with Percy Barnevik, the chairman of Swedish-Swiss engineering firm ABB, taking the chairman's job. The company will have its headquarters in London, while Research and Development will be based in Sweden.

Shares in Zeneca have risen strongly on the London Stock Exchange. By 1015GMT they were up £1.20 to £26.40, while shares in Astra rose even more - by 22% - in Stockholm. Dealers said there were rumours that another company might still bid for Zeneca, which could lead to a bidding war.

"This is a winning combination. Both are strong in limited areas," commented Sergio Traversa of Mehta Partners, a drug industry investment firm.

'Merger of equals'

[ image: Thousands of jobs will go]
Thousands of jobs will go
In their formal statement, the two companies said they were "engaged in a merger of two equals" - a reference to the fact that both companies had been left behind in the recent mega deals within the industry. Under the terms of the deal, Zeneca shareholders receive 53.5% of the new company and Astra shareholders will get 46.5%.

Although Zeneca makes the leading hypertension drug Zestril and Astra the ulcer drug Prilosec, the world's best selling prescription drug, it was widely assumed in financial circles that both would have to find partners to compete with giants like Glaxo Wellcome and Merck. The patents on their main drugs expire soon, and they need to combine their research and development on new products. The two companies are market leaders in anti-cancer drugs and anesthetics, with Astra's Xylocaine.

The final impetus for the talks was probably the merging of the pharmaceutical divisions of Hoescht of Germany and France's Rhone-Poulenc, announced last week.

The deal makes AstraZeneca second in Europe, ahead of the two biggest UK pharmaceutical companies, Glaxo and SmithKline Beecham.

Tom McKillop, the new chief executive, said:
"Astra and Zeneca are a perfect fit in terms of highly complementary product portfolios as well as sales and marketing organisations. A similar management philosophy together with a strong science-based culture makes the companies natural partners."

Earlier preparations

[ image: The companies hope the deal will improve research and development]
The companies hope the deal will improve research and development
Both companies have been preparing for a merger for a long time.

Earlier in the year Astra bought its way out of a US marketing deal with rival Merck to pave the way for a merger.

The new company will now have to pay Merck $740m as part of that settlement.

Zeneca, which was demerged from ICI in 1993, has been the subject of bid speculation for some time.

Astra had to overcome resistance from its biggest shareholder, the Wallenberg family who own 12% of the company. The appointment of Mr Barnevik, who heads Mr Wallenberg's investment company, has eased those concerns.

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