If Wall Street was looking for a biotech deal that would validate the sector's lofty valuation and provide more fuel for the recent rally, Monday's merger of Idec Pharmaceuticals ( IDPH) and Biogen ( BGEN) probably isn't it.

That's not to say the $6.5 billion merger isn't a good one. It's just that the wedding of Idec and Biogen represents a conservative -- some would say defensive -- strategy that addresses the companies' respective weaknesses more than it plays up any strength.

The Idec-Biogen merger is the second-largest deal in the history of the biotech sector, behind Amgen's ( AMGN) $10 billion acquisition of Immunex in December 2001. But while Amgen saw immediate benefits from its acquisition, it may take longer for the Idec-Biogen combination to prove itself.

In many ways, Idec and Biogen are very much alike. Both are profitable, yet depend largely on single drugs. Biogen markets Avonex, a billion-dollar drug for multiple sclerosis that faces slowing growth due to new and formidable competition in the U.S. market. Idec co-markets with Genentech ( DNA) the cancer drug Rituxan, the most successful biotech-derived cancer drug ever developed, but again, a drug that is maturing.

Likewise, both Idec and Biogen have recently launched new products with lackluster results. Last year, Idec launched Zevalin, a new cancer drug, but so far, sales have been disappointing. Biogen's psoriasis drug Amevive has been slow out of the gate because of insurance-reimbursement issues, and it's also about to run into serious competition from rival drugs.

Lastly, neither company has the most robust drug pipeline in the sector. The brightest prospects are Biogen's experimental drug Antegren, which is currently in multiple Phase III studies as a treatment for Crohn's disease and multiple sclerosis, and Rituxan, which could see expanded use as a possible treatment for rheumatoid arthritis, in addition to cancer.

By joining together, Idec and Biogen create a company with a larger scale, helpful when you need to compete against rivals Amgen and Genentech, both of which have recently undergone growth spurts of their own. Just as importantly, the newly minted Biogen Idec (they need to do something about that name!) will 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.

These are all good reasons for a merger -- maybe not the sexiest reasons, but legitimate nonetheless.

"I look at this merger as very much a Big Pharma-type deal," says one biotech hedge fund manager who generally likes the deal. "Both companies are acknowledging that, for right now, they can't grow organically. So instead, they're going to merge together and grow through cost savings and synergies, and hopefully, in three or four years, they'll grow organically again. That's a very Big Pharma way of doing things."

The problem, of course, is that investors don't necessarily want their nimble, fast-growing biotech companies behaving like lumbering Big Pharma dinosaurs, without a lofty premium attached. That probably explains the initial negative reaction to this merger. By midday, Idec was down $1.80, or 4.6%, to $37.17, while Biogen was down $1.90, or 4.4%, to $41.88 amid general market weakness Monday.

"Given the recent biotech rally, I think investors wanted to see a Pfizer ( PFE) or a Bristol-Myers Squibb ( BMY) swoop in and pay a huge premium for a big biotech firm," says another hedge fund manager. "That type of deal would really get people excited and would go a long way toward validating current biotech valuations. Instead, what we're getting is a deal which is OK, but one that is really coming from weakness."

Under the terms of the deal, Idec is paying only a small premium for Biogen.

On the face of it, Biogen shareholders seem to have more to gain from this merger than their counterparts at Idec. Over the next few years, Biogen was projected to grow earnings more slowly than Idec. Now, however, Biogen gets a piece of Rituxan, which, while maturing, is still a formidable cancer drug. Rituxan's sales growth might also get a second wind if the drug is eventually approved as a treatment for rheumatoid arthritis or as long-term, maintenance therapy for non-Hodgkin's lymphoma. And Biogen is also expecting to release results soon from a Phase III study of Antegren in Crohn's disease. If those results are positive, the company's growth prospects become considerably brighter. This growth, of course, now just benefits the combined companies.

Idec shareholders might be a bit more disappointed if only because they were hoping for a different suitor -- namely Genentech. (After all, who wouldn't want a piece of Genentech's hottest new cancer drug Avastin?) Rumors of a Genentech-Idec hookup have been rampant in recent weeks, but the reality of such a deal always faced serious hurdles. For starters, it's widely believed that Idec management dislikes Genentech and would resist any deal. Second, Genentech's ability to freely pursue a deal like this might be hamstrung by Swiss drug giant Roche, which owns a majority of Genentech stock.

Still, there's an outside chance that Genentech could step up and make a hostile bid for Idec, says another biotech fund manager. He likens the current situation to what happened a few years ago when Pfizer jumped in and bought Warner-Lambert for a significant premium after Warner-Lambert and American Home Products had already announced a merger of equals.

But can Art Levinson, Genentech's mild-mannered CEO, really pull off a Larry Ellison-type move? Most biotech observers I spoke with tend to doubt it. And with Avastin expected to be such a huge hit, Genentech's desire to acquire Idec has likely waned anyway.

So that leaves us with Idec and Biogen, a merger that may end up looking like a lot of marriages: one that requires some hard work before the sparks really fly.


Editor's Note: Interested in learning more about biotech? Attend an interactive chat Wednesday, June 25 with RealMoney columnist Adam Feuerstein to learn the five things you need to know before buying a biotech stock -- and also to ask questions of Adam. Tune in to chat about this hot sector! Click here for more information and to sign up.
Adam Feuerstein writes regularly for RealMoney.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback.

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