By Randall Osborne

In a move that the two pharmaceutical giants describe as the first phase of a two-step plan that will merge them as "equals," Hoechst AG and Rhone-Poulenc SA said they will combine their life-sciences work into a new company, called Aventis, to be headquartered in Strasbourg, France.

Christine McCracken, an analyst with Vector Securities Inc., of Deerfield, Ill., said the deal "leverages their research and development efforts, definitely." Paris-based Rhone-Poulenc and Hoechst, of Frankfurt, Germany said the combined research and development budget for Aventis will reach almost $3 billion, and the new company boasts pro forma sales in 1997 of $20 billion.

"It sounds like a very strong marriage," McCracken said. By joining, the companies intend to save 60 percent in pharmaceutical costs and 40 percent in agricultural and other areas, with "synergies" of more than $1.2 billion over the next three years, as the full merger gets under way. Non-life-sciences assets will be divested by the two companies.

"They both needed more firepower, and this gives it to them," McCracken told BioWorld Today.

"There's a lot of strong pharmaceutical aspects of [the deal]," she added, and the companies said the U.S. market is a high priority. Of the pro forma sales, pharmaceuticals accounted for 72 percent and agriculture for 28 percent, with one-fourth of the total in the U.S. But one of the early actions resulting from the merger may take place in the agricultural realm. McCracken said Aventis is likely to make a play for about $250 million of St. Louis-based Monsanto Corp.'s cotton assets.

"Everybody knows [Monsanto] is going to have to sell some cotton assets, but I don't think they know it's going to be Aventis that goes after them," she said. "Novartis [AG, of Basel, Switzerland] could bid, and Dow [Chemical, of Midland, Mich.] could bid, but Aventis is the most likely bidder."

Under the terms of the merger agreement, due to complete in mid-1999, Hoechst and Rhone-Poulenc will contribute all assets of their respective agricultural enterprises — namely AgrEvo (formed as a joint venture between Hoechst and Schering AG, of Berlin) and Rhone Poulenc-Agro — to a new entity known as Aventis CropScience. Schering shareholders will retain a holding in the new company.

"The real question this begs is, 'What happens to the Dow/Rhone-Poulenc agreement?'" McCracken said. Dow's wholly owned subsidiary, Dow AgroSciences LLC, of Indianapolis, entered a research agreement with Rhone-Poulenc Agro last month. Aventis could be particularly well-placed to buy Monsanto's cotton assets, "with Dow and Rhone-Poulenc working on it together," she said.

However strong it may be in pharmaceutical competition, the Aventis merger "doesn't solve the problems" of either Rhone-Poulenc or Hoechst in the agricultural biotechnology, beyond maybe providing a better shot at Monsanto's cotton, McCracken said.

"They still need access to a pool of germ plasms, which is seeds," she said. "And you're joining the French and German people. How well is that going to work, realistically?"

David Stone, managing director at S.G. Cowen Securities Corp. in Boston, said the "changing competitive position in the drug industry" calls for increased economies of scale and higher research productivity, and the merger provides both.

"The economy-of-scale part is obvious: a bigger sales force, more manufacturing efficiency," Stone said. Even so, the research productivity of pharmaceutical companies "is generally acknowledged as not being high enough to support growth rates required to meet financial targets," he said — particularly at companies like Hoechst and Rhone-Poulenc, where the pipeline depends to some degree on patent expirations.

Increased size helps again in this regard, Stone said, allowing Aventis to offer "more deals and more lucrative deals for biotech companies that can offer up drug candidates with large enough market potential to be of interest." *