In the second-largest merger of biotech drug makers ever after the 2001 combination of Amgen (NASDAQ:AMGN) and Immunex, Idec Pharmaceuticals (NASDAQ:IDPH) and Biogen (NASDAQ:BGEN) will combine in a $6.4 billion stock deal expected to close in Q3 or Q4. The new company, to be named Biogen Idec Inc., will integrate Biogen's primary focus on autoimmune diseases with Idec's concentration on cancer, as well as some existing research crossover.

Each Biogen shareholder will snag 1.15 shares of Idec per Biogen share, giving Idec shareholders 50.5% of the new company and Biogen owners 49.5%. They will own an entity with $1.6 billion in trailing-12-month revenues, $1.5 billion in cash, and shy of $1 billion in mostly Idec debt -- the latter conveniently omitted from the press release.

Founded in 1978, Biogen went public in 1983, and its biggest success to date has been the blockbuster multiple sclerosis treatment Avonex, now nearing the end of patent protection and subject to increasing competition. It pins future hopes on new psoriasis drug Amevive and drug candidate Antegren for multiple sclerosis and Crohn's disease.

Idec formed in 1986 and sallied forth with an IPO in 1991 with a cancer focus. Idec shares the revenues -- $1 billion in 2002 -- from hit non-Hodgkins lymphoma monoclonal antibody treatment Rituxan with Genentech (NYSE:DNA), as well as the so-far insignificant revenues from the first marketed radioisotope-delivered monoclonal antibody, Zevalin.

Opportunity for investors?
For a quick take, let's look at Idec and Biogen's returns on invested capital (ROIC). Though still high, they have been declining for the last four years:

    Return on Invested Capital:

Year Biogen Idec Amgen Pfizer
TTM 27% 35% -5% 45% Y1 30% 34% -7% 51%Y2 47% 51% 37% 48%Y3 56% 71% 47% 22%Y4 70% 91% 62% 37%

Declining ROIC usually brings lower valuation multiples, yet both are valued quite highly for growth:

      Valuation Measure  Biogen  Idec
    FCF change Y1-Y2    -62%    -85%           Y2-Y3    -27%    184%           Y3-Y4    -40%    -37%           Y4-Y5     80%  1,318% EV/FCF              360     130EV/EBITDA            19      26EV/NOPAT             27      41 P/E                  35      42KEY: Y1-Y2 = Most recent year vs. prior year
EV = enterprise value
FCF = free cash flow
EBITDA = earnings before interest, taxes,
depreciation, and amortization
NOPAT = net operating profit after taxes
P/E = price-to-earnings ratio

Compare these numbers with management's glowing predictions for the new company of 15% compound annual revenue growth and 20% compound annual EPS growth, and the companies are currently priced too richly for my blood. That could change if the merger shows signs of management's promised savings -- $300 million through 2007 -- and research synergies that augur more possible reward than what's available at current valuations.

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Writer and Senior Analyst Tom Jacobs regularly covers biotechnology and drugs for and writes the monthly investing column for the journal Nature Biotechnology. He owns no stocks mentioned in this Take.