National Editor

In a planned stock-swap "merger of equals," Biogen Inc. and IDEC Pharmaceuticals Inc. said they have entered an agreement that would create a combined entity with a market cap of $13.7 billion, the third-largest biotechnology firm based on revenue, profits and research and development spending.

William Rastetter, chairman and CEO of San Diego-based IDEC, who will become executive chairman of the new company, called the fit between IDEC and Biogen "uncanny."

Paul Abel, portfolio manager for Kinetics Medical Fund in New York, noted the merger came as a surprise to the market, and to him.

"It's relatively lackluster - a linear combination of the two companies - but a very solid business deal," Abel told BioWorld Today.

The two firms signed a cancer collaboration earlier this year, and "the team has already gelled around a broader opportunity," Rastetter told investors during a conference call, noting that talks between the pair led to a "fusion of strengths" so that "critical mass that can be created immediately."

Biogen IDEC Inc., as the combined company will be called, with $1.55 billion in pro forma revenue for 2002, would lag in size behind only Amgen Inc., of Thousand Oaks, Calif., with $6 billion in revenue, and South San Francisco-based Genentech Inc. with $2.6 billion.

The new company's pro forma 2002 R&D spending is $462 million, compared to Amgen's $1.1 billion and Genentech's $623 million. Biogen IDEC's pro forma 2002 net profit is $390 million, compared to Amgen's $1.5 billion and Genentech's $449 million.

Under terms of the merger, each share of Cambridge, Mass.-based Biogen common stock will be exchanged for 1.15 shares of IDEC common stock. On a pro forma, fully diluted basis, IDEC shareholders will end up with 50.5 percent of the stock of the combined company and Biogen shareholders will have 49.5 percent.

Both boards have approved the deal but shareholders must still vote on the merger, which is subject to the usual regulatory scrutiny and is expected to close at the end of this year's third quarter or early in the fourth. The new company will have more than $1.5 billion in net cash.

Excluding merger-related expenses, such as in-process R&D write-off and amortization of identifiable intangible assets, the transaction is expected to be accretive by 15-plus percent to IDEC's cash earnings per share, immediately following closing of the transaction. On a GAAP EPS basis, the transaction is expected to be accretive within two to three years, the companies said.

Headquartered in Cambridge, Biogen IDEC brings together IDEC's cancer franchise and Biogen's focus on autoimmune diseases. Each firm recently has been exploring the other's area of expertise "but in a very cursory manner until now," Abel said.

Another site will be in San Diego, with that facility focused on oncology and the Cambridge location focused on immunology. Biogen IDEC also will have international operations in Europe, Canada, Australia and Japan.

The new firm will have two blockbuster drugs: Biogen's multiple sclerosis drug Avonex (interferon beta-1a) and IDEC's Rituxan (rituximab), for non-Hodgkin's lymphoma, which is partnered with Genentech.

"This nonsynergistic product portfolio may at first glance not appear so interesting," Abel said, but the merger "diversifies the risks of bringing another drug to market." Kinetics has money in both firms, holding 29,000 shares of IDEC and 15,000 shares of Biogen.

The merged firm's R&D budget will total more than $550 million yearly, with about 1,000 dedicated R&D employees. That's a key element at a time when other companies are cutting back on early stage work as investors clamor for near-to-market drugs - a move with which Abel disagrees.

"Investors raise and lower their threshold of impatience almost hourly," he said. "R&D is tomorrow, and if you start paring back your R&D expenditure, you might as well close up shop."

Big Advantages With No Economic Leakage'

The combined company will have 10 products in clinical development.

James Mullen, chairman and CEO of Biogen, who will become CEO of the new company, said during the conference call that Biogen IDEC expects "to double our pipeline through partnerships by 2010. The object is to take advantage of opportunities after some of the risk is gone."

Rituxan, expected to sell about $1.4 billion this year, may be partially replaced, in time, by a next-generation version. Last week, Genentech and IDEC disclosed they had entered an agreement to develop new humanized anti-CD20 antibodies to target blood cancers as well as autoimmune diseases such as rheumatoid arthritis, idiopathic thrombocytopenia purpura and lupus.

Financial terms of the new Genentech/IDEC deal were not disclosed. IDEC did say during the conference call, however, that the company is reimbursing Genentech for earlier R&D costs as part of the widened deal, paying $20 million up front, and the charge will be incurred during the second quarter.

UBS Warburg analyst Meirav Chovav said in a research note that investor worries are unfounded over IDEC's Rituxan becoming cannibalized by its own radioimmunotherapy Zevalin (ibritumomab tiuxetan) for NHL.

Until postmarketing data become available, she said, most doctors probably will prescribe Zevalin for patients who are refractory to Rituxan. Zevalin has yielded better efficacy data than Rituxan, she pointed out, but worse safety data, so it most likely would not be used in re-treating patients. What's more, each Zevalin regimen includes two low doses of Rituxan.

Like IDEC, Biogen had recent news involving Genentech, informing the market last week the two are collaborating to develop a BR3 protein therapeutic for RA and lupus. The BAFF-R protein that is the focus of the deal is a B-cell-activating factor receptor. Terms were not disclosed.

As of Monday, though, many eyes were on Biogen IDEC. Peter Kellogg, chief financial officer of Biogen, who will serve as CFO of the merged firm, said there will be dramatic synergies in the deal, with Biogen bringing its global infrastructure to the table and IDEC bringing a large-scale manufacturing facility, now under construction.

"We will prove that one plus one is more than two, and it won't take years to get the financial benefits to appear," Kellogg said during the conference call.

"We expect to achieve in the next four years over $300 million in operating expense savings, over $175 million in capital expenditure savings, and over $50 million in treasury tax benefits."

Fifteen percent compound annual revenue growth, and about 20 percent compound annual cash earnings per share growth are expected for the merged firm between 2003 and 2007.

The merger is tax free, "without the challenge of overcoming any economic leakage," Kellogg said. "There is no acquisition premium."

Aiming To Create Powerhouse' During Next Decade

In a separate disclosure Monday, Biogen reconfirmed its operating earnings per share for 2003 of $1.72 to $1.85, noting that it expects quarterly earnings to be "uneven" during the year, mainly because of lower royalties from Madison, N.J.-based Schering-Plough Corp.'s sales of Intron A (interferon alpha-2b), which have been affected by reductions in trade inventory levels. Second-quarter earnings, for example, will be in the range of 32 cents per share to 38 cents per share, Biogen said.

The company settled a royalties dispute with licensee Schering-Plough last fall, gaining a payment of $45 million to $50 million that was due by the end of 2002 and a pledge by Schering-Plough to start paying royalties this month on sales of its Intron and PEG-Intron, a modified form of Intron A. (See BioWorld Today, Oct. 21, 2002.)

"Biogen's revenue-growth prospects are not that great in the short term," Abel said. Chovav found the same, predicting "flattish" progress and noting "hurdles in broad market acceptance" for Amevive (alefacept), the company's treatment for moderate to severe chronic plaque psoriasis, approved in January.

Long-term safety data are not yet available on Amevive, which recently lost a bid for approval in Europe when an advisory board asked for more information, delaying the marketing of the drug there by a period of years. (See BioWorld Today, Feb. 21, 2003.)

Mullen, responding to an analyst's question during the conference call, said he is "still excited and enthused" about Amevive.

"I don't think this [deal] says anything" about its development, he said, adding that "I don't recall ever saying I needed to see anything from Amevive [in terms of more data] before I decide whether to sell it to big pharma."

Mullen acknowledged there had been "discussions about what this transaction really means" for pipeline drugs such as Amevive and Antegren (natalizumab), Biogen's late-stage drug for multiple sclerosis and Crohn's disease. "Everybody knows we've been talking about having Phase III data [from the] Crohn's induction trial over the summertime," he said. "That still remains the plan, and I do not have the results of the trial at this point."

He chose to focus on a wider perspective.

"Our view is that, as we look back over the last six to nine months, these two stocks have traded pretty equivalently in the market," and the deal makes for a perfect fit with long-range potential, he said.

Biogen's stock (NASDAQ:BGEN) closed Monday at $41.55, down $2.25. IDEC's shares (NASDAQ:IDPH) ended the day at $36.96, down $2.01.

Rastetter echoed Mullen.

The merger "isn't about any given product or pair of products," he said. "It's really about the powerhouse we can create over the next five to 10 years," not to mention the "tremendous strategic advantage overnight."

Big Plus For Biogen: IDEC's Manufacturing Clout

Still, analysts were busy examining the pipeline. Not only is IDEC's Zevalin unlikely to cannibalize Rituxan, Chovav wrote, but also it's having trouble getting its own market up to speed.

Ramp-up of sales has slowed. Many of the first candidates for treatment have been found ineligible according to the label because they've deteriorated with advanced disease. Chovav believes that, as more physicians hear about Zevalin, they will use it earlier in refractory NHL cases, with more patients thus eligible for the drug.

On Biogen's side, observers also have noted the weak Amevive launch and slowing revenues from Avonex. Abel said the combination of IDEC and Biogen helps offset such difficulties faced by each company alone - "they mitigate each others' weaknesses" - and the hefty Biogen IDEC cash position will let the new company "go shopping for small biotech companies that are poorly capitalized."

These are many, he pointed out.

"If you look through the vast majority of the to-be-profitable biotechs, tens of them have cash positions below $10 million," Abel said. "What kind of R&D is being done with $3 million in cash on your balance sheet?"

Officials said Biogen IDEC would be looking closely at in-licensing more products.

A 10-person integration planning committee will oversee the process during the next six to nine months. Biogen IDEC, with a combined strength of about 4,000 employees, may undergo reductions, Mullen said, adding that certain areas of overlap are obvious.

"I think the biggest area where we see opportunity, which will start to show up in [2004] is in the clinical manufacturing front," he said, since IDEC's facility under way in California will allow Biogen to defer much of its large-scale manufacturing.

William Rohn, president and chief operating officer of IDEC, will become the new company's COO. IDEC's chief scientific officer, Nabil Hanna, will become head of research, and Burt Adelman, Biogen's vice president of R&D, will become the head of development.

Biogen's cancer deal with IDEC, entered in February, was for the co-development of three oncology products. Few terms were disclosed, but IDEC was to fund development for four years. (See BioWorld Today, Feb. 3, 2003.)

In the merger, Goldman, Sachs & Co. acted as financial adviser and Skadden, Arps, Slate, Meagher & Flom LLP served as legal counsel to Biogen. Financial adviser to IDEC was Merrill Lynch & Co., and legal counsel was Pillsbury Winthrop LLP.