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Wednesday, Dec. 2, 1998

Hoechst, Rhone-Poulenc plan merger

New company to focus on pharmaceuticals, agrichemicals and animal health

By SUSANNAH PATTON
Associated Press

   PARIS - Hoechst of Germany and France's Rhone-Poulenc are merging their pharmaceutical operations in a deal that will create an international drug giant rivaling world leaders Merck and Glaxo Wellcome.
   But analysts warn that, in this case, bigger may not necessarily be better.
   Hoechst and Rhone-Poulenc's combined life sciences company, to be called Aventis, will have about $20 billion in annual sales, spanning pharmaceuticals, agricultural chemicals and animal health products, the companies said Tuesday, outlining their long-rumored merger plans.
   Company executives were upbeat, saying annual cost savings of $1.2 billion over three years will boost profits until new products begin hitting the market. But the new company may have trouble producing enough new lucrative drugs to match competitors' profitability.
   (Hoechst AG last month approved spinning off its bulk chemicals units to focus on drugs and agrochemicals. Hoechst Group, a subsidiary of Hoechst AG, manufactures commodity chemicals and Ticona engineered plastics at its Bishop plant. The plant also manufactures acetaminophen and ibuprofen for BASF.
   (After the spinoff, the chemicals and plastic products groups would fall under the umbrella of a newly created Celanese AG. That means the 1,000 employees at the Bishop plant and 200 employees at Hoechst's Corpus Christi technical center will officially work for Celanese AG.)
   Investors expressed their dissatisfaction with the news of the merger by pushing down the shares of both companies. Rhone-Poulenc stock fell 7 percent in Paris trading, and Hoechst stock fell 6 percent in Frankfurt.
   In a news conference held in Strasbourg, France, where the new company will be based, the two companies said creation of the 50-50 joint venture is a first step toward fully merging the companies within three years.
   "Unlike what has happened to other companies in our industry, the creation of Aventis - provided we obtain all the necessary authorizations - will be translated into reality," Rhone-Poulenc chairman Jean-Rene Fourtou said.
   

A close match

   Despite concerns over profitability and research capabilities, the combination will allow the companies to improve their marketing muscle in the United States, allowing them to negotiate better deals with U.S. managed care providers.
   "Each company could not have found a better partner in terms of size, culture and compatibility," said Ian Broadhurst, a pharmaceutical analyst at Enskilda Securities in London.
   Seeking to calm investors' worries over the company's merger plans, Rhone-Poulenc executives said they would trim the new company's debt over the next four years, while expanding in the United States.
   

Some skepticism

   Still, while Aventis will be able to compete with the top drug companies in terms of revenue, industry leaders such as Merck & Co. of the United States, Britain's Glaxo Wellcome PLC and Switzerland's Novartis AG are still far ahead when it comes to profitability and research productivity.
   "Hoechst and Rhone-Poulenc share the same problems - low profitability and underpowered research and development portfolios," said Paul Diggle, a drug analyst with Societe Generale in London.
   Also, analysts said cost-cutting projections are below average for mergers in the industry, shedding further doubt on the companies' ability to quickly boost profit.
   

A merging market

   The merger announcement comes on the heels of a flurry of major cross-border transactions, including Daimler-Benz AG's acquisition of Chrysler Corp., Deutsche Bank AG's purchase of Bankers Trust Corp. and French oil company Total SA's agreement Tuesday to take over the Belgian refiner Petrofina SA.
   Within the pharmaceutical sector, the Hoechst-Rhone-Poulenc link-up is likely to encourage more matchmaking. While a series of drug companies have recently decided against mergers, the Franco-German combination could renew the trend. Most imminently, France's Sanofi SA and Synthelabo SA are said to be in advanced talks about their own corporate blend.
   "This deal starts to change the scene," Diggle said. "Drug companies in the U.S. and elsewhere will be gently moving in the direction of more consolidation."
   

Hurdles to overcome

   But some warned that strong labor unions in Germany and France could hamper merger plans for Hoechst and Rhone-Poulenc.
   "France and Germany are particularly difficult places to cut costs," said Broadhurst.
   Unions in France and Germany have been critical of the merger so far, fearing that cost cutting will lead to layoffs. Hoechst employs 118,000 workers and Rhone-Poulenc employs 68,000.
   Merck remains the world leader in the drug business, with $11.3 billion in global pharmaceutical sales in 1997, according to U.S. research firm IMS Health. Hoechst and Rhone-Poulenc together had $11.25 billion, and Glaxo $10.87 billion.
   Caller-Times staff contributed to this report.
   

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