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Idec Pharmaceuticals Agrees to Purchase Biogen for $6.4 Billion

The shares of both biotech companies fall 5% as doubts arise about price and compatibility.

June 24, 2003|James F. Peltz | Times Staff Writer

The consolidation of the biotechnology industry accelerated Monday when Idec Pharmaceuticals Corp. of San Diego agreed to buy Biogen Inc. for $6.4 billion in stock.

Wall Street gave the proposed deal a chilly reception, with both companies' shares tumbling 5%. Some analysts wondered whether Idec, known for cancer drugs, and Biogen, with a popular multiple sclerosis drug, would make a good match. Analysts also questioned the price: Idec offered only a 2% premium above Biogen's closing stock price Friday.

Although Idec would be buying much-larger Biogen, the companies referred to the deal as a "merger of equals." Both are profitable, and each is largely dependent on a single popular drug.

The firms announced their deal one year after industry leader Amgen Inc. of Thousand Oaks acquired Immunex Corp. for nearly $10 billion in the largest biotechnology combination to date.

Analysts predicted more mergers would be coming as industry players grapple with faltering sales growth for existing drugs while having to spend heavily to develop new treatments. The pressure is especially acute for companies that hope to compete against the two biggest biotech companies, Amgen and Genentech Inc., analysts said.

Although successful biotech drugs carry double-digit profit margins, developing medicines is extremely costly, and the failure rate of experimental drugs is high. As a result, after Amgen, with a total stock market value of $82.7 billion, and Genentech, whose market value is $36.3 billion, most biotech firms have only a fraction of the big companies' funds to spend on research and development.

Idec and Biogen said the merger idea grew out of their agreement, announced in January, to co-develop three cancer-related treatments from Biogen's pipeline of early-stage drugs.

The companies said they would use their marriage to broaden their sources of revenue, expand development of new drugs and eliminate overlapping costs. That probably would mean some staff cuts, said Biogen spokesman Tim Hunt, who didn't provide any numbers.

The combined company -- to be called Biogen Idec Inc. -- would be the third-largest biotechnology concern, behind Amgen and Genentech, with annual sales exceeding $1.5 billion and a research and development budget topping $550 million. Together, the two would be able to compete "better, faster and with less risk than we would have as separate companies," said William Rastetter, Idec's chairman and chief executive.

The new company would be based in Cambridge, Mass., where Biogen is headquartered, and would keep a major facility at Idec's San Diego home. Idec also is building a manufacturing plant in nearby Oceanside.

Idec's Rastetter would become executive chairman , and Biogen Chairman and Chief Executive James Mullen would be CEO.

Idec, with revenue last year of $404 million and 1,000 employees, is best known for Rituxan, which treats non-Hodgkin's lymphoma. Idec co-markets the drug with Genentech. Idec also is working to use Rituxan for other ailments such as rheumatoid arthritis. Idec's second drug is Zevalin, which also treats non-Hodgkin's lymphoma. It has been on the market for a year, but recent sales have been substantially below Wall Street's expectations.

Biogen is about three times larger than Idec, with 2002 revenue of $1.15 billion and about 2,700 employees. Biogen's primary drug is Avonex, used to treat patients with relapsing forms of multiple sclerosis. This year, Biogen also introduced Amevive for the skin disease psoriasis.

Rituxan and Avonex each generate more than $1 billion in annual sales. But their sales growth is slowing. Biogen said sales of Avonex were up only 3% in this year's first quarter, compared with 21% growth in the year-earlier quarter.

That trend fueled the merger deal, as did the need for additional capital to develop drugs that treat not only a disease's symptoms but also its causes, said Viren Mehta, a principal of Mehta Partners, a biotechnology investment firm.

"The companies are merging out of necessity because sales of their top-selling medicines are stagnating and they have a shortage of early-stage experimental medicines in their pipelines," he said.

Other biotechnology firms will find themselves in the same position, and "we will be seeing more of these" mergers, said Ajit Baid, an analyst with consulting firm Frost & Sullivan. Amid climbing costs for research and development, "the stakes have been rising over the past few years," he said.

Under the proposed deal, Idec would exchange 1.15 shares of its stock for each Biogen share. With Idec's stock closing Monday at $36.96 a share, down $2.01, that values the offer at $42.50 per Biogen share. Biogen closed at $41.55 a share, down $2.25, on Nasdaq, where Idec also trades.

Another reason the merger didn't excite investors is that Idec's stock "already was trading at a pretty significant premium" to the company's expected sales and earnings, said Thomas Dietz, research head at Pacific Growth Equities Inc.

Other analysts suggested investors were disappointed that Genentech didn't make a bid for Idec, as had often been rumored.

The merger must be approved by both companies' shareholders and by regulators. Idec and Biogen said they expected to close the deal by the end of this year.

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