Biogen and IDEC Pharmaceuticals, two rivals racing to develop drugs or cancer and other diseases, announced plans to merge and create the No. 3 biotechnology company, the latest of a string of consolidations in the industry.

The $6.4 billion all-stock deal is designed to create a powerhouse benefiting from the combination of short-term growth prospects of smaller, San Diego-based IDEC, whose main product is the cancer drug Rituxan, and Cambridge-based Biogen's research and development expertise and global reach.

"These two players as stand-alones can be major mid-cap contenders, but in order to penetrate the upper stratosphere where Amgen and Genentech currently breathe, both of these companies needed more critical mass, they needed more R&D horsepower," said Jennifer Chao, a biotechnology analyst at RBC Capital Markets.

Wall Street, however, viewed the announcement as an admission of weakness by two companies whose main drugs face slowing sales.

Analysts said some investors were also disappointed that faster-growing Genentech wouldn't be acquiring IDEC, while others worried that Biogen undervalued itself ahead of trial results expected this summer for a potentially lucrative drug to treat Crohn's disease. The deal represents just a 2 percent premium over Biogen's share price.

"I think in the end when investors come to realize the benefits of the transaction, I think they will appreciate this is a very good move financially and strategically for both companies," Deutsche Bank Securities analyst Dennis Harp said.

Executives repeatedly called the deal a "merger of equals." The new company, to be called Biogen IDEC Inc., will be headquartered in Cambridge and Biogen CEO James Mullen will carry the same title at the new company. IDEC chairman and chief executive William H. Rastetter will become executive chairman, while both companies will contribute equally to the board.

The deal, expected to close later this year, is the largest this year in an industry which has seen widespread consolidation of smaller companies hoping to find ways to fund expensive drug research.

"There has to be some consolidation in the industry at some point," Harp said. "It's uneconomic to have 350 public firms in the sector."

Both companies specialize in drugs to treat cancers and autoimmune disorders. Biogen's $1.15 billion in sales last year were nearly triple IDEC's $404 million, but sales growth of Biogen's flagship multiple sclerosis drug Avonex has been hampered by a rival drug, Rebif, introduced last year by Serono SA.

IDEC, meanwhile, is highly dependent on Rituxan sales and could use some insurance in case another drug, Zevalin, flops.

It could also benefit from Biogen's manufacturing capacity. Rituxan is manufactured by Genentech, though the two companies expanded their agreement on Friday.

"If anything this merger of equals will make us a bigger and stronger and better partner for Genentech," Rastetter said.

Biogen has nearly 3,000 employees and IDEC about 1,000. The combined company would expect $1.9 billion in pro forma revenues this year and says it hopes to have five approved drugs by 2005 and more than 10 others in clinical trials. It would also carry $1.5 billion in cash.

"That's a lot of money to go shopping with," said Paul Abel, portfolio manager of the Kinetics Medical Fund.

The merger is expected to result in nearly $500 million in operational and capital cost savings through 2007. The company said it would add 15 percent to cash earnings per share.

We will prove that one plus one is more than two and it won't take years to get the financial benefits to appear," said Biogen chief financial officer Peter Kellogg.

Mullen declined to say how many job losses the merger might cause but said there are "some obvious areas where this is direct overlap," notably in clinical manufacturing. He said the new company would move out of some leased buildings in California but would use the new IDEC corporate campus under construction in San Diego as a West Coast research facility. Two new manufacturing facilities in Oceanside, 30 miles north of San Diego, will also be used.