Unusually, the FTC’s complaint does not relate to specific overlapping commercial or pipeline products, but cites the more general concern that increased scale allows pharma companies to more aggressively defend their market share using targeted discounts and rebates. This approach introduces a new risk for biotech investors to consider, and may weigh on the performance of stocks in the sector in the coming months.
While this particular deal was first announced in December 2022, several other deals have recently been announced in the biopharma space, including Pfizer’s proposed USD 43bn acquisition of Seagen and Merck’s proposed USD 11bn purchase of Prometheus Biosciences. Acquisitions like these are a normal part of the biopharma industry as companies buy in promising new products to replace those lost to generic and biosimilar competition. Many successful biotech companies end up being bought by large-cap pharma and a healthy M&A environment is therefore supportive of the performance of smaller biotech companies.
The rebating argument is complex and relates to so-called formulary positions negotiated between pharma companies and insurers. Under such agreements, which are an accepted part of the US drug market, manufacturers grant discounts or rebates to insurers in return for preferential status on lists of covered drugs. By integrating Horizon’s drugs into Amgen’s larger portfolio, the FTC believes Amgen could effectively cross-subsidize deeper rebates for them, stifling competition. To our knowledge, no prior transactions have been blocked based on such an argument.
Investors’ concern is that this case could effectively create a new legal precedent, and in so doing substantially reduce future biopharma M&A. Amgen has confirmed that it intends to proceed with the deal. But given the novelty of the FTC’s argument, it is difficult at this stage to judge the odds of success, which will depend on the judge’s assessment of the merits. We expect that a decision may come in around six months.
In the meantime, it is likely that M&A within biotech will slow down, as company boards take a more cautious view until this case is decided. Smaller deals may be less impacted, in our view. With fewer transactions taking place, positive clinical data and regulatory decisions become more important to support the performance of biotech stocks. On this front, we note that last week an FDA advisory panel voted 8–6 in favor of approving Sarepta Therapeutic’s gene therapy for duchesne muscular dystrophy, an inherited degenerative muscle condition.
Longer term, the incentive for large-cap pharma and biotech companies to acquire their smaller peers remains in place. The industry faces substantial patent cliffs in the 2025–30 period, and must replace sales of drugs facing generic or biosimilar competition with new products. Much of the most exciting innovation takes place at smaller companies that lack the commercial resources to launch drugs themselves. Large-cap companies generally have sound balance sheets, strong cash flow, and good credit ratings.
Main contributors - Lachlan Towart, Eric Potoker
Content is a product of the Chief Investment Office (CIO).
Original report - FTC risk may weigh on biotech in the near term, 15 May 2023.