Biotech Companies Agree to Merge in $6.79 Billion Deal
By ANDREW POLLACK
The pharmaceutical company merger spree has produced corporate names like GlaxoSmithKline and AstraZeneca. Now the biotechnology industry is getting its own combination nameplate —Biogen Idec.
Biogen and Idec Pharmaceuticals announced a merger yesterday that seemed to be taken from the Big Pharma playbook — an effort to cut costs and broaden product pipelines, in part because each company could not develop products fast enough on its own to sustain rapid growth.
"It is sort of the first deal we've seen that has more of a pharmaceutical bent," said Eric Schmidt, a biotechnology analyst at SG Cowen.
The deal is also one of the few prominent ones amid a deep slump in the market for mergers and acquisitions. Technically, Idec will acquire Biogen in a stock swap valued at $6.8 billion before the deal was announced. That would make it the second-largest acquisition involving two biotechnology companies, after Amgen's acquisition of Immunex, which was worth $16 billion when announced late in 2001.
Executives said that Biogen Idec would be the third-largest biotechnology company, after Amgen and Genentech, with annual revenue of $1.55 billion based on 2002 results and a research budget of $550 million. They said earnings would grow 20 percent a year, helped by cost savings of $300 million over four years.
"Biogen Idec really becomes an incredible powerhouse," William H. Rastetter, the chairman and chief executive of Idec, said in a conference call with analysts.
Analysts and investors said that the merger of biotechnology companies made some sense because the industry has too many small companies. Biogen, based in Cambridge, Mass., and Idec, based in San Diego, are two of a relative handful of biotechnology companies that are consistently profitable.
Still, many analysts and fund managers questioned the rationale of this merger, finding it disappointing that the biotechnology companies would so quickly be imitating the strategies of the slower-growing pharmaceutical companies.
"Investors want to see great products coming out of this industry, not synergies and cost-cutting," said Linda I. Miller, manager of the John Hancock Health Sciences Fund. The deal, she said, seemed to be "in lieu of" such products.
Shares of both companies fell about 5 percent on a day when the market was down over all. Shares of Biogen fell $2.25, to $41.55, while Idec dropped $2.01, to $36.96.
Each company has a billion-dollar drug — Idec's Rituxan for non-Hodgkin's lymphoma and Biogen's Avonex for multiple sclerosis. Each also has a second drug on the market. But those products — Idec's Zevalin, also for lymphoma, and Biogen's Amevive, for psoriasis — are off to somewhat slow starts and some analysts doubt they will become big sellers.
Another similarity to big pharmaceutical companies is that the big biotechnology companies themselves are looking to license products from smaller biotechnology companies to spur their growth. Biogen and Idec executives said they expected half the products in Biogen Idec's pipeline in 2010 would be licensed from others, and a reason for the merger was to be able to better compete for such deals.
Under the terms of the deal, each Biogen share will be exchanged for 1.15 shares of Idec. Based on Friday's closing prices, there was no premium being paid to Biogen shareholders.
Idec shareholders will own 50.5 percent of the combined company, which will be based in Biogen's hometown, Cambridge. James C. Mullen, chairman and chief executive of Biogen, will be chief executive of Biogen Idec, while Dr. Rastetter of Idec will be executive chairman. The board will be split evenly between the two companies.
The companies said the savings would come not from layoffs but by avoiding duplication and new hiring in the future for activities like manufacturing.
Biogen, founded in 1978, is one of the oldest biotechnology companies. It was founded by, among others, Walter Gilbert of Harvard and Phillip Sharp of the Massachusetts Institute of Technology, both Nobel Prize winners. But it has not been valued by investors as highly as some other big biotechnology companies because Avonex, a form of beta interferon, is facing new competition from Rebif, a beta interferon sold by Serono and Pfizer.
Idec, founded in 1985, is still experiencing rapid growth of Rituxan, a drug it shares with Genentech. Rituxan is now in advanced testing to determine whether it works as a treatment for rheumatoid arthritis, which could open a new market for it.
Still, Dr. Rastetter said combining product portfolios with Biogen would allow Idec to "avoid the growing pains and fits and starts of organic growth, which is an arduous process."
The companies do have somewhat complementary products. Idec has specialized in cancer and was moving into autoimmune diseases. Biogen started with drugs for autoimmune diseases and was moving into cancer. Indeed, merger talks began earlier this year after Biogen licensed some of its cancer drug candidates to Idec.
"Where we were going with Biogen was to build things that Idec already had and where Idec was going was to build things that Biogen already had," Mr. Mullen said in an interview.
Still, some analysts questioned the savings that would be achieved, saying that unlike big pharmaceutical companies, Biogen and Idec do not have overlapping sales forces. Moreover, some said, mergers of equals can be difficult to manage, especially when the companies are on opposite coasts.
"I don't get it," said Michael G. King Jr., an analyst with Banc of America Securities. "The sector needs to consolidate, but this is not what I had in mind."
The companies said they expected the deal, which has been approved by both boards, to close late in the third quarter or early in the fourth.
Some analysts and investors say it is not out of the question that the deal could fall apart like a similar unpopular merger announced earlier this year by NPS Pharmaceuticals and Enzon Pharmaceuticals.
One factor that could change Biogen's valuation are the results, expected this summer, of a late-stage clinical trial for its experimental drug Antegren, for Crohn's disease, a bowel inflammation. Antegren could be Biogen's next product.
There is also a possibility that another company might now make a bid for one of the companies and perhaps offer a premium to shareholders. "Are these companies in play? Yes they are," said Ms. Miller of John Hancock.
Indeed, one reason the stocks dropped yesterday, analysts said, was that some investors had been hoping Biogen would be acquired for a premium by a big pharmaceutical company and that Genentech would acquire Idec to gain full control of Rituxan.
Eyes will now be on Genentech. But Genentech executives in the past have expressed skepticism about mergers, and analysts said it would be unlikely for Genentech to make a hostile bid. Moreover, Genentech has its hands full with product introductions. Xolair, its asthma drug, was approved Friday, and two more drugs might be approved by the end of the year.
Dr. Rastetter of Idec discounted any speculation, saying "neither company is for sale."
Eric Roberts, former co-head of health care banking at Lehman Brothers, said he expected more mergers as more companies in biotechnology become profitable. Buying unprofitable companies can dilute the value of shares in the acquiring company, he said.
Still, analysts said there were not that many big biotechnology companies that might seek to join forces with each other like Biogen and Idec are. As with Genentech, Amgen, MedImmune and Gilead seem to have high growth prospects based on their own products. Chiron recently announced it would buy the British vaccine maker PowderJect Pharmaceuticals.
Copyright 2003 The New York Times Company http://www.nytimes.com