Zeneca and Astra in talks to form pounds 40bn drugs giant

ZENECA, the pharmaceutical giant, last night announced that it was in advanced talks over a pounds 40bn merger with its Swedish rival Astra.

In a terse statement after the market closed, the two groups said that they were in discussions which could lead to "a possible combination of the two companies in a merger of equals' transaction". The announcement confirmed earlier market rumours which had triggered a pounds 1 rise in Zeneca's share price to pounds 25.20.

A deal between Zeneca, the UK's third-largest drug-maker, and Astra, Europe's seventh largest, would create one of the world's top 10 pharmaceutical groups with yearly sales of more than $8.3bn (pounds 5.1bn) and a wide range of drugs.

Sources close to the companies said that the deal was likely to be structured as a no-premium merger because the two groups were of similar size. "No company is buying the other," they said.

Astra, the maker of the anti-ulcer compound Losec, the world's best-selling drug, has a market value of around pounds 18bn, while Zeneca' s capitalisation is around pounds 23bn. The sources said that negotiations were on-going and the merger could be concluded as early as this week.

A Zeneca/Astra combination would have a strong presence in a number of important clinical areas, including cardiovascular diseases, cancer, asthma and pain-control. The enlarged group's two blockbusters would be Astra's Losec and Zeneca's Novaldex, a leading product for breast cancer.

Industry analysts said the two companies' drug portfolios had a good fit and were unlikely to pose an anti-trust issue.

"Both companies were starting to move backwards from a competitive standpoint and needed to do something to address that issue," according to David Molowa, an analyst with Bear Sterns.

Industry insiders said that a merger between Astra and Zeneca would cast a shadow over the future of the UK company's agrichemicals business. Zeneca has recently put up for sale its specialty chemicals operations to concentrate on pharmaceuticals and agrichemicals.

Zeneca and Astra have been under mounting pressure to link up with a rival to compete with industry giants such as Glaxo Wellcome and SmithKline Beecham of the UK, Pfizer and Merck of the US and the recently-formed Hoechst-Rhone Phoulenc Franco-German group.

The Swedish company's need for a merger was compounded by the threat of a sharp fall in earnings from 2001 when the patents for Losec begin expiring. The Astra chief executive Haakan Morgen cleared the decks for a possible merger in June, when it scrapped a joint venture with Merck to sell Losec in the US.

Yesterday's announcement put an end to years of speculation over the future of Zeneca. The British group has long been seen as a prime takeover target despite protestations by Sir David Barnes, the chief executive, that Zeneca had the drugs and the finances to remain independent. It would come as a blow for companies such as Glaxo Wellcome and SmithKline, considered to be two likely suitors, following the collapse of their merger talks.

It is not the first time that Zeneca and Astra have talked about a tie- up. Mr Morgen and Sir David are believed to have held informal talks in March, which were terminated by the UK executive.

Sir David is unlikely to retain an executive position in the combined group as he had already planned to become chairman in May next year. He was to be replaced by Tom McKillop, the head of the company's pharmaceuticals division, who is now the leading candidate to head the merged group.