Questions Surround a Biogen Deal

The big biotech news over the past several days has been Carl Icahn's $23 billion bid for Biogen IDEC (Nasdaq: BIIB), as The Wall Street Journal and other news agencies reported.

Biogen issued a statement on Friday confirming that it had received "expressions of interest" from Icahn and that its board of directors had given the go-ahead to management to shop the drugmaker around.

Shares of Biogen have been up more than 85% from its 52-week low because of the buyout speculation and sales growth of multiple sclerosis drugs AVONEX and TYSABRI. Any drugmaker acquiring Biogen would get access to possibly the top multiple sclerosis drug pipelines in pharma land. For example, just last week Biogen and partner PDL BioPharma (Nasdaq: PDLI) announced positive results for phase 2 multiple sclerosis drug candidate Daclizumab.

What an acquirer might not get is one of Biogen's top drugs, lymphoma and rheumatoid arthritis treatment RITUXAN. Genentech (NYSE: DNA) co-promotes RITUXAN with Biogen in the U.S. and in the event of a change of control at Biogen (like a buyout of the company), Genentech will have 90 days to make an offer to buy Biogen's rights to the drug. If Biogen doesn't accept the offer (presumably because it thought the deal was too low), then it has to buy back the rights from Genentech at that offer price.

Everything would be all fine and dandy if that were the case, but the fate of RITUXAN in any acquisition of Biogen is not so clear. Genentech and Biogen are already in binding arbitration over the drug, as Genentech claims that the acquisition of Biogen by Idec in 2003 was a change in control giving it the right to buy back RITUXAN and develop follow-on and possibly improved versions of the drug (which it is doing).

Biogen says Genentech didn't assert its buyback rights in the 90-day time frame it was allowed, but this arbitration ruling will be a cloud hanging over any buyout deals (and possibly included as a material adverse event clause allowing the buyer to skip out of the deal if the ruling doesn't go Biogen's way).

The other question mark in any possible Biogen deal is what will happen with its biggest growth story, TYSABRI. Biogen's partner Elan (NYSE: ELN) has hired Lehman Brothers to advise it on its options in the case of a Biogen buyout, which include allowing Elan to reacquire 100% rights to TYSABRI.

Whenever a large drugmaker publicly goes on the block, every large-cap pharma with cash to spare gets mentioned as a potential buyout candidate. Many have speculated that Pfizer (NYSE: PFE) might make a bid for Biogen with its almost $28 billion in cash investments sitting on the balance sheet.

Biogen is hardly a good match for Pfizer, though. Its smaller size does give it a little more cushion for Pfizer to afford it, as opposed to other Pfizer rumored deals, like a potential stake in Sanofi-Aventis (NYSE: SNY), but Pfizer co-promotes competing multiple sclerosis treatment Rebif in the U.S.

Rebif uses the same active ingredient as AVONEX, so the benefit from acquiring Biogen's top drug, AVONEX, which had $1.7 billion in sales last year, would be significantly less meaningful to Pfizer than to other drugmakers.

No matter what happens, any potential Biogen deal will likely have large ramifications for a large chunk of the biotech sector. Stay tuned for more.