In an exclusive quickfire analysis, Morning Flash analyst Kevin McCaffrey explores the implications of a possible challenge to Amgen’s USD 28bn takeover of Horizon Therapeutics. The opinions expressed here are those of the analyst only.
This morning marks a red-letter day for the pharmaceutical industry, following a report that the Federal Trade Commission (FTC) will challenge Amgen’s [NASDAQ:AMGN] takeover of Horizon Therapeutics [NASDAQ:HZNP].
It’s natural to look back after an unprecedented event to try and see if there was a clear breadcrumb leading up to it that went unnoticed, whether it be Elizabeth Warren's letter to Lina Khan calling for careful scrutiny of the deal, or the FTC's working group from back in 2021 formed to more broadly scrutinize these transactions.
Either way, we find ourselves looking at a potential legal challenge from the FTC for a pharma deal with no obvious overlaps, and one that threatens to end the sector's recent M&A momentum just as it was getting going. There are a lot of questions stemming from this report, so let's tackle them one at a time.
What just happened?
The FTC sued to prevent the AMGN/HZNP deal Tuesday, saying it would hurt innovation. Amgen vowed to move forward with the deal, despite the challenge. The merger got a second request in January and the 30-day clock following substantial compliance was expected to end sometime this month. As of this morning, we do not have official confirmation from the FTC or the companies that they expect a lawsuit. HZNP shares are down over 17% in the pre-market, trading around USD 93 per share.
OK – but why?
The new antitrust regime under Biden has been signalling for some time now that it wants to test nascent – or hipster – antitrust theories as a way to stem the tide of consolidation, and with a particular eye towards pharmaceutical transactions.
The FTC formed a working group back in 2021 with the expressed purpose of exploring, among other things, whether price-setting practices should be included in a pharmaceutical merger's review, and which Senator Warren specifically criticized the companies for in her January letter. Khan said at a workshop last June that the list prices for drugs have soared from 2008 to 2021, to the tune of a 20% increase per year. She also mentioned relatively few leading drugs have been developed within large pharmaceutical companies, despite them enjoying the vast majority of the profits.
It's hard to discount Warren's effect here, too. She wrote in a letter to Khan that both AMGN and HZNP have engaged in "brazen" price increases on drugs with very little competition, such as AMGN's Enbrel and HZNP's Vimovo. Warren noted that the deal was "particularly alarming" given HZNP's ownership of a number of orphan, or rare-disease drugs.
Taken together, it appears that Khan et al. are ready to try their hand on blocking a deal not over whether companies hold singular market power over a particular sphere of drug treatment, but because of fears around unbridled price increases.
There is one potential overlap to flag, though. AMGN’s newly launched drug, Tezspire, is a thymic stromal lymphopoietin (TSLP) blocker for patients with severe asthma, and which was jointly developed with AstraZeneca [LON:AZN]. HZNP is currently working to develop a drug known as ADX-914, which also works by blocking TSLP, but is being tested in atopic dermatitis. Evercore ISI’s Umer Raffat flagged the potential overlap in a webinar this morning.
Where do they go from here? Could Amgen walk?
Under the merger agreement, AMGN is required to use its "reasonable best efforts" to try and see the deal through. So, for now, yes, but the companies didn't give themselves a ton of time. The current end date is set for next month 12 June, but which can be extended if they are still working on securing antitrust approval until 12 September, and then again until 12 December. So the companies have about six months to work through a trial wherein the FTC may be putting forth a novel theory of harm. It’s worth mentioning that AMGN recently sold a USD 24bn investment-grade bond earlier this year to help finance the deal.
There is also the question of HZNP’s recent sales. One of HZNP's lead assets, Tepezza, reported sales of just USD 405.3m for 1Q23, down significantly from 4Q23's USD 493.5m and 3Q23's USD 490.9m. That kind of sales trajectory may not sit well with AMGN. For Tepezza, the data around chronic thyroid eye disease (TED) was a key win for the drug, though, as that is expected to expand its target market going forward.
What does this mean for other major outstanding deals, like PFE/SGEN?
If pharmaceutical transactions are getting strung out in court over price-gouging concerns, deals with more traditional antitrust concerns (i.e. that have obvious overlaps) should receive the same or more scrutiny. You see that in how SGEN stock has reacted this morning with shares down nearly 5% in the pre-market. PFE has attempted to get ahead of some of those concerns with the recent termination of its partnership for Bavencio, but there is still an overlap with the companies' BCMA programs that we've flagged. It's also specifically spelled out in the SGEN merger agreement that PFE would “contest, defend and appeal any legal proceedings,” challenging the deal.
Could this chill M&A in the sector?
The most likely result here may be a shift away from acquirers' recent predilection toward revenue-generating products and back to pipeline assets. If the FTC challenges this deal, it would signal more broadly that the agency plans to try and stop major pharma M&A writ large involving two merging companies with pricing power.
