Idec and Biogen: a natural union?

Biogen and Idec Pharmaceuticals are set to merge in a stock-for-stock transaction valued at over $6.6 billion following announcements made last week. The deal will create the third largest biotech firm in the world, yet Wall Street has so far appeared unimpressed by the deal. Even individual analysts seem to be disagreeing as to the strategic sense of the partnership.

The new company, which will be called Biogen Idec Inc, will have an R&D budget of approximately $550 million with over 1,000 R&D employees. The union has taken two mid-sized biotechnology companies and created a firm that now only lies behind Amgen and Genentech in the list of the leading biotech firms.

Biogen and Idec see the arrangement as complimenting one another with benefits to be found in both the short and long term. Idec has a strong franchise in cancer and a growing focus on autoimmune diseases, while Biogen is strong in the autoimmune area and is increasingly developing capabilities in cancer.

Equal partners

After Amgen's $10 billion acquisition of Immunex in December 2001, the Idec-Biogen merger is the second-largest deal in the history of the biotech sector. But perhaps unusually this pact is more a merger of two equals as opposed to a takeover. This is despite the disparity in size of the companies; Biogen had revenue of $1.1 billion in 2002, while Idec had 2002 revenue of $404 million.

Idec shareholders will own 50.5% of the new company and Biogen's will own the remaining 49.5%. James C Mullen, Biogen's current chairman and chief executive, will become CEO of the new company, with Idec's current CEO, Dr William H Rastetter, taking the position of executive chairman. Idec has the slight edge so as not to affect the company's relationship with Genentech, which co-markets the cancer drug, Rituxan.

Plans for such an amicable agreement began when Biogen and Idec first started to collaborate in January 2003 on the development of three cancer therapies in Biogen's product pipeline. Having traditionally been focused on neurology and inflammatory diseases, Biogen looked to find a partner more experienced in oncology. It would seem that the companies worked so well together that a merger became the natural progression.

Overcoming weaknesses

The partnership of Biogen and Idec could also help solve the problems faced by the separate units. Both companies rely largely on one or two key products. Biogen in particular has begun to see the danger of relying too much on one product after its market-leading multiple sclerosis drug (MS), Avonex, has been the subject of increasing pressure.

This billion dollar treatment is now facing growing competition and has already lost some of its market share after the launch of Serono's Rebif last year. Within the last fortnight Serono released trial data showing that patients who converted from Avonex to higher dose, higher frequency Rebif, showed a significant reduction in frequency of relapses and MRI lesion activity. Serono is also able to call upon the marketing power of Pfizer who co-promotes the drug in the US.

More opposition looks likely. Last month, Teva Pharmaceutical announced results from a study presented at the European Neurological Society meeting, demonstrating that relapsing-remitting multiple sclerosis patients who failed to respond to treatment with Avonex experienced a significant reduction in relapses after switching to its non-interferon Copaxone.

In Rituxan, Idec has an important cancer drug that achieved sales of $1.1 billion in 2002. The company however, only holds a 35% stake in Rituxan following a development agreement signed with Genentech in 1995. At that time Idec had insufficient power to negotiate a higher share.

By uniting with Biogen, Idec will be able to take a more dominant position in any future drug development agreements. The partnership should be further complimented by the plans to develop Rituxan for diseases such as rheumatoid arthritis. With its experience in autoimmune conditions Biogen should then be a more helpful partner to Idec.

Creating a biotechnology leader

In spite of this, some analysts have suggested that the merger does not make strategic sense, especially for Idec. Although Idec is a smaller company, Biogen has been suffering from a slower rate of growth. Shareholders are yet to approve the deal and Idec representatives may feel less willing to give their consent in the hope that a larger company will come in to hijack the deal. Genentech, in particular, has been suggested as a possible suitor.

But with the boards of Biogen and Idec seemingly so determined, a merger looks likely to go ahead. The two organizations will then be able to do what they could not manage alone, to take on the likes of Genentech and Amgen. Allying with each other also makes them less vulnerable to a large takeover by a pharmaceutical company.

Even more importantly, though, Biogen Idec should be less dependent on any single marketed product, more diversified with expertise in cancer and autoimmune diseases and less susceptible to failures in any individual pipeline project.

"Bringing our companies together accelerates both companies' strategic plans and creates a biotechnology leader with the products, pipeline, infrastructure and financial resources to grow faster and create sustainable shareholder value beyond what either company could achieve separately," explained James C Mullen, chairman and CEO of Biogen.

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