Merging is the easy part

With a thin pipeline and maturing growth for its blockbuster product, it was clear that Idec Pharmaceuticals Corp. needed to do something on the in-licensing front to maintain its growth. What was not obvious, however, was that IDPH would combine stables with Biogen Inc., a company that has been facing the same structural hurdles.

Thus, the challenges of the merged company are quite similar to the ones each faced independently: increasing scientific productivity, putting another big product on the map, and providing EPS growth that separates them from their peers. As the scientific productivity will play out over several years, investors will focus on near-term EPS growth as a measure of the merger's success.

Biogen Idec Inc. will be aiming to provide 20% EPS growth through 2007. The 20% estimate hinges on continued growth in sales of the combined company's four drugs and also assumes approval of BGEN's Antegren natalizumab to treat relapsing-remitting multiple sclerosis (RRMS). But blockbusters Rituxan rituximab, IDPH's non-Hodgkin's lymphoma drug, and BGEN's Avonex interferon beta-1a for multiple sclerosis, are maturing. So new products, primarily from outside sources, will need to make up lost growth before earnings can accelerate.

The newco contends that it will have the critical mass in key areas to make it a partner of choice in the biologics space. The company also contends the merger puts it into the valuation sweet spot necessary to chase the tail of the biggest biotech company, Amgen Inc. (AMGN), which has - at least over the short-term - succeeded in putting itself on another valuation growth curve through biotech-to-biotech M&A.

Meanwhile, the merged company expects that rationalizing its R&D infrastructure will allow more money to go toward bench science and clinical development.

Skeptics already have cast their vote, as several Wall Street analysts reduced their ratings for IDPH and BGEN last week (see Analyst Picks & Changes, B17).

The nut

In order for the deal to make sense for IDPH shareholders, Biogen Idec needs to generate more than 16% annualized EPS growth. Anything lower would generate a smaller earnings stream than shareholders would have anticipated had IDPH remained alone, giving them a smaller stake in a less profitable company.

BGEN shareholders won't

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