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Drug Makers Zeneca, Astra To Merge

December 10, 1998 GMT

LONDON (AP) _ Astra and Zeneca, two mid-sized European drug makers, are merging in a $37 billion deal aimed at raising their profile in the increasingly competitive global pharmaceutical industry.

The merger between the Swedish and British firms will form one of the leading drug companies in the world, with annual drug sales of about $11.5 billion. Executives announced the merger Wednesday, a day after revealing they were in talks.

Sir David Barnes, deputy chairman of the new company, which will be called AstraZeneca, called the combination a good fit because of complementary product mixes, similar corporate cultures, and research and development focuses.

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About 6,000 people are expected to lose their jobs because of the merger. The cuts, amounting to 11 percent of the combined work force of 54,000, will be spread throughout the world over the next three years, said Jon Symonds, finance director of the new company.

Pharmaceutical mergers are becoming commonplace as companies need to increase research spending and marketing efforts to compete with giants such as Glaxo Wellcome of Great Britain and Pfizer and Merck & Co. of the United States.

Last week, Germany’s Hoechst and France’s Rhone-Poulenc agreed to merge their drug and agrichemical businesses as the first step toward a total merger. In France, Sanofi and Synthelabo recently announced a $10 billion merger.

Astra’s ulcer and heartburn drug Prilosec is the world’s best-selling prescription medicine, comprising about half the company’s sales. But Prilosec’s patent protection runs out in 2001, opening the door for generic firms to make less expensive versions.

Analysts speculated that worries about revenue losses because of the patent expiration were a leading factor influencing the merger. Astra also makes lidocaine, a popular local anesthesia.

Zeneca is the second-leading maker of cancer drugs behind Bristol-Myers Squibb of the United States. It also has a large agrichemical business and owns Salick Health Care, a U.S. operator of cancer treatment and dialysis centers.

Last year, Zeneca introduced its migraine drug Zomig, and earlier this year received clearance for a breast cancer drug. But like Astra, Zeneca also has several cancer drugs expected to lose their patent protection soon.

Tom McKillop, Zeneca’s chief executive officer and the proposed chief executive of the new company, said final merger documents are expected by the end of the year and that he hoped for shareholder and regulatory approval soon afterward.

Astra and Zeneca, including non-pharmaceutical divisions, had total 1997 sales of $15.9 billion, with pre-tax profit of $3.5 billion.

AstraZeneca’s corporate headquarters will be in London, with its research and development headquarters in Sweden. The company will be listed on the London, New York and Stockholm stock exchanges.

Restructuring was projected to require three years’ time and cost about $1.2 billion, after which annual operating costs would be lowered by about $1.1 billion.

The Zeneca-Astra merger, if completed, will yield a huge bonanza for Merck.

Last spring, Astra restructured Astra-Merck, its drug producing and marketing venture with Merck, a move that Astra a more tempting merger target.

As part of the restructuring, Astra will have to pay Merck between $675 million and $1 billion when the Zeneca merger is completed. In addition, if that merger is completed, Astra next year will have to pay Merck $950 million as an advanced payment that will let Astra out of its arrangement with Merck.

Further, Merck still will get paid royalties on Astra’s products sold in the United States through at least 2008. Astra will have to pay Merck at least $5.6 billion after 2008 to purchase its interest in the 50-50 partnership from Merck, Merck officials said.