Astra Investors Breathe A Sigh Of Relief

The merger with Britain's Zeneca means new management

Investors applauded when, on Dec. 9, Sweden's Astra and Britain's Zeneca Group PLC agreed to join forces to become the world's No. 3 drugmaker. Astra's shares surged nearly 13%, while Zeneca's jumped close to 8%. But the big boost in Astra's stock can also be attributed to a little-mentioned side benefit of the deal: It sweeps out the Astra management team that was to blame for one of the worst corporate scandals to ever shake Sweden.

Indeed, behind the $34.6 billion merger seems to be none other than Europe's preeminent corporate strategist, Percy Barnevik. As chairman of Investor, the investment vehicle for Sweden's Wallenberg family, he acknowledges that he "has not been so happy" with the performance of Astra--Investor's single largest holding, accounting for 25% of its assets. Astra's stock has traded at a discount to other drugmakers and is down around 3% in real terms from a year ago. Astra also faces the looming patent expiration next year of its top-selling drug, the anti-ulcer medication Losec.

On top of that, Astra Chief Executive Hakan Mogren has come under fire in Sweden for failing to develop new drugs and for losing control of top lieutenants. Some of them have been accused of sexual improprieties and misuse of corporate funds. It was under Mogren's watch that Astra USA Inc. became mired in allegations of sexual harassment and is still facing related lawsuits.

In the new merged company, to be called AstraZeneca, Mogren will be bounced upstairs, away from daily responsibility for operations, as nonexecutive deputy chairman. Zeneca's drug-unit chief, Tom McKillop, is set to become AstraZeneca's new chief executive, while Barnevik will head the company as nonexecutive chairman. The merger, says a well-placed Stockholm executive, "was an elegant solution" to Investor's goal of reducing Mogren's role. Mogren says the merger is "his baby" and denies that he is being sidelined.

The new AstraZeneca also helps solve a strategic problem facing both of the companies. As the industry consolidates, the companies' research budgets have been shrinking relative to their bigger rivals', making it harder to compete against powerhouses such as Merck & Co. Astra and Zeneca have strong positions in treatments for respiratory and cardiovascular diseases. Yet just as Astra's Losec begins losing patent protection in 1999, the patent for Zeneca's top heart drug, Zestril, is also expiring soon.

To save money to channel into research, AstraZeneca aims to cut costs by $1.1 billion over the next three years, while slashing around 6,000 jobs. Its research budget will be $1.95 billion, No. 3 in the world. "We'll have the financial muscle" to ensure a strong flow of new drugs, McKillop says, adding that Astra and Zeneca together have 26 potential new drugs in later stages of development. The most promising is Faslodex, a treatment for advanced breast cancer.

GLOBAL PLAYER. Barnevik is bullish on the new company's prospects. In fact, he vows to boost Investor's stake to well above the 4% it will hold if the deal is concluded. "It is our long-term ambition to become the lead shareholder in the merged company," he told BUSINESS WEEK. The AstraZeneca deal gives the Wallenbergs a stake in a more powerful global company rather than a smaller Swedish player. Investor's strategy, Barnveik adds, is to focus on fast-growing industries such as pharmaceuticals and information technology.

Barnevik denies that he was the prime instigator of the AstraZeneca deal or that he wanted to sideline Mogren. "It was not that Investor pushed or forced Astra to move," he says, adding that the idea came from the CEOs of the two companies. But analysts see it differently. This deal "is driven by Percy Barnevik," says Lehman Brothers' top drug analyst, Stewart Adkins. In November, while he was lunching with Barnevik, Adkins says, the Swedish executive quizzed him on Zeneca. Now, it will be up to the new chief executive, McKillop, to keep Barnevik--and other AstraZeneca shareholders--happy.

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