Has Zeneca chosen wisely?

FOR ASTRA and Zeneca, yesterday was the start of the rest of their lives. After a frantic day of analysts' meetings and press briefings, the Swedish and UK pharmaceutical groups began the long, hard slog to get their pounds 48bn merger approved by the competition authorities in Europe and the US.

If everything goes to plan, the combined group will make its debut on the London, New York and the Stockholm stock exchanges next year, as the world's third-largest drug-maker. In the meantime, the two companies will start to integrate the two businesses while keeping an eye out for any hostile bid which might spoil the party - Roche, the Swiss group, is the hot favourite.

But as the lights go down on the glitzy presentations, and the soundbites about a "perfect fit" between the companies fade away, key questions remain. Is this a good deal for Zeneca? Has the UK group, which professed the merits of independence for so long, found the right partner to get ahead in the cut-throat pharmaceutical market?

The answer lies in Astra and its controversial chief executive, Hakan Mogren. Despite its high profile in Sweden, Astra is little known outside pharmaceutical circles in the UK. Founded in 1913 by a group of scientists, the company's development has mirrored the expansion of Swedish capitalism.

From near bankruptcy at the end of the World War I, Astra, backed by the Wallenbergs, Sweden's most powerful corporate dynasty, has grown steadily to become the maker of the world's best-selling drug and one of the country's corporate powerhouses. Its shares now account for around 15 per cent of the Stockholm stock exchange's market capitalisation and its sales make up some 20 per cent of the country's current account balance.

But although the numbers speak of steady, solid growth, a closer look at Astra's recent past points to a more chequered history, marred by a number of setbacks. From a pharmaceutical standpoint, Astra has always been plagued by the label of "one-drug wonder". Its first blockbuster came in 1948 in the form of Xylocaine, a local anaesthetic. The drugs' burgeoning sales triggered the first giant leap in Astra's growth as the company branched out in the rest of Europe, Australia and Latin America.

The Xylocaine experience was repeated on a bigger scale almost 30 years later in 1988, when the company launched Losec, its anti-ulcer drug. The medicine, widely considered to be the best treatment for gastric acid, had a tremendous success, becoming the world's best selling prescription drug within six years, with yearly sales of over pounds 1.6bn.

But Losec's triumph was to prove Astra's biggest headache. The company was unable to discover "medium-sales" drugs which could support and balance out Losec's dominance. As a result, it found itself hostage to the success of its anti-ulcer drug, which now accounts for almost half of its annual turnover of SKr44.9bn (pounds 3.4bn) ( see table). With Losec starting to lose patent protection in 2001, Astra was increasingly seen by analysts as a lame duck in desperate need of a partner.

"Their drug pipeline is weak. There is a handful of products in there but nothing will ever come near Losec. Astra's prospects before the merger looked very very poor," one industry expert said.

Astra's other weak point, according to industry insiders, is in drug development. The company has suffered a series of setbacks in bringing its products to the market in the recent past. The biggest scare of all came in the early 1980s, when Astra was forced to halt pre-clinical studies of its blockbuster-to-be Losec because of fears that it might cause cancer. In the event, the company proved that tumours in some of the rats in the trials were not caused by Losec, but the whole episode caused a long delay in the development of the drug.

More recently, Astra has had to wait longer than expected for the US approval of its asthma drug Pulmicourt, because, as one insider put it "it had not anticipated the American authorities' questions".

Outside the pharmaceutical world, Astra has been linked to a sexual harassment scandal in the US, which saw the departure of one of its top executives, although the company has always rebutted all the allegations.

Throughout this mixed history, the company's fate has been inextricably linked to the Wallenbergs, whose empire spans most of Sweden's blue-chips, including ABB, Saab, Electrolux and Ericsson. Investor, the Wallenbergs' investment vehicle, is Astra's largest shareholder - a position which it will retain in AstraZeneca. The merger will do little to dilute the Wallenbergs' grip on the company, with Percy Barnevik, the respected head of Investor set to become chairman of the new group.

But it is Hakan Mogren, the executive deputy chairman of AstraZeneca, who is the key link between the family and Astra. Dr Mogren, a former top manager at Maribou, Scandinavia's leading chocolate maker, has been at Astra's helm for almost 10 years and was one of the architects of the Zeneca deal.

Despite being widely credited as the man who turned Losec into a best- seller, Dr Mogren has few friends among the analysts and press, who accuse of him of being aloof and uncommunicative, and bemoan what they see as his lavish lifestyle. Few industry insiders forgive Dr Mogren, a biochemist by training, for his food industry background, which they regard as inadequate preparation to run a drug company.

A recent survey of Swedish analysts found that 88 per cent believed that Astra's share price would rise if Dr Mogren left. His supporters counter that the opera-loving chief executive with a passion for food and wine is simply too colourful for the stuffy Swedish corporate world. They claim that London, AstraZeneca's new base, will be a perfect stage for his flamboyant talents and believe that the UK financial community will see a mellower Dr Mogren.

However, some observers contrast Dr Mogren's abrasive character with the gentlemanly and suave manners of Sir David Barnes, the Zeneca chief executive who will be the merged company's co-deputy chairman, and wonder whether their relationship will survive the harsh test of a merger.

A chequered past

1913 - Astra founded

1928 - Posts a loss for the last time this century

1943 - Opens its central laboratory in Sodertalge, near Stockholm. To this day the town remains Astra's main research and development hub

1948 - Launches the anaesthetic Xylocaine, its first star product

1955 - Lists on the Stockholm Stock Exchange

1969 - Reaches out-of-court settlement in a high-profile case over thalidomide.

1970s - Sells its non-pharmaceutical operations to concentrate on drugs

1982 - Strikes deal with the American giant Merck to co-operate in the US

1985 - Lists on the London Stock Exchange

1988 - Launches Losec, an anti-ulcer treatment which is to become the world's biggest-selling prescription drug

1996 - Lists on the New York Stock Exchange

1996 - Sexual harassment scandal involving its US subsidiary

June 1998 - End of Merck agreement

December 1998 - Agrees pounds 48bn merger with Zeneca of the UK