Will Zeneca Get An Offer It Can't Refuse?

The drugmaker may need a partner to compete

Zeneca Group PLC has been takeover bait practically since birth. From the day in 1993 when Britain's Imperial Chemical Industries spun it off, rumors have flown that a competitor--perhaps Glaxo Wellcome or DuPont--was about to snap Zeneca up. Chief Executive Sir David Barnes shrugs off the never-ending scuttlebutt. "Our best defense is strong performance," he says.

Indeed, while pharmaceutical and chemical companies around the world have been merging into ever-bigger giants, Zeneca remains on its own--for now. With five consecutive years of growth, prolific product development, and a stock price that has quadrupled since the spin-off, Zeneca is as attractive as ever. Moreover, its market capitalization of $41 billion and its stable of new drugs--for asthma, cancer, and schizophrenia--mean Zeneca can be choosy. Barnes, who retires next May at 63, insists that his priority is continuing organic growth at the company, not doing deals. Still, Zeneca's assets are so juicy that Barnes may yet receive an offer from a behemoth or from a smaller partner that he simply can't refuse.

COVETED. Although Zeneca's businesses include agrochemicals, specialty paints, dyes, and additives, the company's $4.3 billion pharmaceutical division accounts for nearly three-fourths of its total $1.8 billion in operating profits. It is No.1 in the worldwide sale of hospital antiseptics and anesthetics and No.3 in cardiovascular drugs. But what competitors covet most are Zeneca's anticancer drugs. Led by Zoladex, a hormonal drug used for prostate and breast cancer, Zeneca's total such sales topped $1.4 billion in 1997.

With five oncology drugs and 8% of that market, Zeneca is second only to Bristol-Myers Squibb Co., which has a 14% share. "Our ambition is to overtake them within the next 10 years," says Barnes. The goal seems within reach. Zeneca expects to submit Faslodex, a treatment for advanced-stage breast cancer, for approval next year. And Nolvadex, the most widely prescribed hormonal therapy for breast cancer, may be the first on the market as a preventive. Its approval as a prophylactic treatment could mean $230 million more in sales by the end of 1999, Barnes says.

Still, some observers wonder whether Zeneca has the financial clout to compete in the face of industry consolidation. Developments in molecular biology have dramatically increased the number of new diseases for drug companies to explore. But research is ever more costly, so it is becoming harder for companies to break new ground while still creating value for shareholders. In 1997, Zeneca spent $1.1 billion, about 12.6% of sales, for research and development on all its products. But its operating margins of 21% were below those of major competitor Glaxo Wellcome, with 27%.

Mark Becker, a pharmaceutical analyst at J.P. Morgan & Co. in London, thinks that a merger could help Zeneca. Citing new life-science combos such as Novartis, Becker believes that DuPont Co. or Germany's Hoechst would fit well with Zeneca. In addition to cost-cutting benefits, with either partner Zeneca would strengthen its agrochemical business. Meanwhile, DuPont or Hoechst would gain a long-desired entree into pharmaceuticals. Barnes refuses to comment on specific companies, saying only: "We'll remain alert for all high-quality opportunities."

So far this year, Zeneca stock is up 15%, even though the strong pound has taken its toll on earnings. The agrochemical business has also been hurt by Asia's crisis. Salomon Smith Barney predicts the company will see flat earnings for 1998. Zeneca figures that losses due to Asian and British currency fluctuations could hit $180 million this year. Additionally, three of its top products, accounting for 20% of sales, will lose their U.S. patents by 2002.

SAFER. Yet the proportion of Zeneca's sales at risk is smaller than for most of its competitors. Pharmaceuticals chief Tom McKillup, who will succeed Barnes as CEO, predicts that by 2001, nearly 60% of drug sales will come from products still in their growth phase. Zeneca also has a track record of developing new uses of drugs that extend patent life. Zoladex, the cancer drug, was found recently to help improve fertility by stabilizing a woman's hormonal balance.

Another buffer to temporary setbacks is Zeneca's increasing American presence. The company has successfully launched 10 new drugs in the U.S. in the past 2 1/2 years--more than any other drugmaker. Based on the strength of its assets and its promising products, Zeneca may be able to maintain its independence for quite a while longer.