2023-05-16 14:16:31 ET
Summary
- Biotech giant Amgen Inc. is facing a lawsuit from the FTC attempting to block its acquisition of Horizon Therapeutics Public Limited Company, a deal worth around $25 billion.
- The FTC's opposition is centered on the potential for Amgen to exploit Horizon's two key drugs, Tepezza and Krystexxa.
- Amgen is expected to mount a robust defense, reflecting its genuine interest in securing the deal, but this will likely take until December 2023.
- A settlement before trial is possible, but may involve a minor concession from Amgen.
- If the deal ultimately breaks, there could be a downside towards $70-$80 per share for Horizon, but if it goes through, there's an expected upside of around 23% from the current price. The uncertainty and volatility surrounding this deal are expected to persist throughout the year.
Amgen Inc. ( AMGN ) is acquiring Horizon Therapeutics Public Limited Company ( HZNP ) at $116.50 per share. Amgen is a huge $100+ billion market cap biotech. Horizon's market cap is no rounding error at ~$25 billion. That means this is a large deal. These types of deals receive the most attention and scrutiny, and today it turns out the FTC will sue to try and stop it from going through.
The deal was originally announced on December 12, 2022, and there were several other bidders interested, including Johnson & Johnson ( JNJ ) and Sanofi ( SNY ). The initial bid came from Sanofi. Horizon shares were down around 15% on the news of the FTC suing.
That's a big move, but if the market was pricing in an 80% chance of the deal-breaking, we would likely be at $80 or below. The current share price leaves a 23.2% upside to the deal ultimately closing. As I wrote in my last article in early March, the company commented it was still confident in the timeline to close in H1 2023.
On CNBC, it was reported that Amgen would mount a very aggressive defense of the deal . That sounds good. However, the acquirer will never give up immediately because the merger contract usually stipulates they must put in a certain amount of effort to get the deal to close. If you roll over, the acquiring company could get sued by the company it is trying to acquire. However, "a very aggressive defense" sounds like Amgen is genuinely interested in tying this up anyway.
The end date is officially June 12, 2023, but this can be extended to September 12 or December 12, 2023. It now seems likely to me the full extension is likely required.
The FTC is focused on drugs Tepezza and Krystexxa (emphasis mine):
The FTC filed a lawsuit in federal court to block the transaction, saying it would enable Amgen to use rebates on its existing blockbuster drugs to pressure insurance companies and pharmacy benefit managers (PBMs) into favoring Horizon's two monopoly products - Tepezza, used to treat thyroid eye disease, and Krystexxa , used to treat chronic refractory gout. Neither of these treatments have any competition in the pharmaceutical marketplace.
"Rampant consolidation in the pharmaceutical industry has given powerful companies a pass to exorbitantly hike prescription drug prices, deny patients access to more affordable generics, and hamstring innovation in life-saving markets," said FTC Bureau of Competition Director Holly Vedova. "Today's action --- the FTC's first challenge to a pharmaceutical merger in recent memory --- sends a clear signal to the market: The FTC won't hesitate to challenge mergers that enable pharmaceutical conglomerates to entrench their monopolies at the expense of consumers and fair competition."
The proposed acquisition is the largest pharmaceutical transaction announced in 2022. Given how central protecting and growing Tepezza and Krystexxa monopoly revenues are to the deal valuation Amgen calculated for Horizon, Amgen has strong incentives post-acquisition to raise Tepezza and Krystexxa rivals' barriers to entry or dissuade them from competing as aggressively if and when they gain FDA approval, the agency argues.
Unfortunately, these drugs are key reasons for the transaction. Here is what it says in the merger agreement on Amgen's reasons for the transaction:
Amgen's growth reflects contributions from therapies with large addressable patient populations (such as cardiovascular disease, osteoporosis, psoriasis, and asthma), as well as therapies that address diseases with lower prevalence (such as ANCA-associated vasculitis, immune thrombocytopenic purpura, and acute lymphoblastic leukemia) that are adjacent to Amgen's core therapeutic areas. TEPEZZA and KRYSTEXXA are a strong fit with the latter category and help to further diversify the Combined Group's revenue outlook.
TEPEZZA has significant growth potential in key ex-U.S. markets such as Europe and Japan, which complements Amgen's international growth strategy.
The transaction did pass muster with German, Austria, and France for its worth. The timeline looks challenging to set up a large trial around a big deal like this. But if the end date isn't respected, issues could start popping up around the financing Amgen has secured. I expect the court will take note of that and work with the parties to set dates that allow the companies to close the deal if they win a court case. That should be very interesting because this looks like another aggressive challenge by regulators (after recently seeing the CMA deliver an uppercut to the Microsoft-Activision deal).
What's novel about these challenges is that these aren't horizontal mergers that have traditionally been challenged. Amgen doesn't have any other significant market share in these therapeutic areas.
First, I must admit I continue underestimating regulators' willingness to go after deals in 2023. The regulatory bodies seem to cooperate more than ever before (within the U.S. as well as outside the U.S.). Sometimes I'm left with the impression regulators care, especially about thwarting the deal at hand to sow fear in the hearts of every board-more than about establishing a clear legal framework for what's possible and what's not. Perhaps this tactic is being employed until clear, and updated legislation can be implemented globally. However, in the meantime, this likely means wide deal spreads and a lot of uncertainty in M&A markets.
The most likely scenario seems like a settlement right before a trial date. The regulator gets to delay the deal, making other acquirers think twice about deals. The company ultimately gets its deal but has to throw the regulator some bone (behavioral remedy or something like that). And the government avoids the risk of a trial decision because it still seems to me that would likely be quite unfavorable for the FTC. If it starts racking up unfavorable rulings, that can unleash the M&A market again because it will increase certainty the deal won't be challenged, or court cases will be won.
If the deal ultimately breaks, there is likely a downside towards $70-$80, That's another 15% to 25% down. The upside from the current price is around 23% as well. I lean towards the deal still has a good chance (above 60%) to get done ultimately. But it will take until the end of the year, and there is constant risk and volatility. In the near term, I expect the deal spread will narrow a little bit from the current level. As the upside gets compressed to 10% or so, I think things would look much less favorable, although it depends on how much time has passed. I've been surprised by this challenge, but I don't love selling this 15% down.
Conclusion
The FTC's lawsuit adds layers of uncertainty to a deal that, despite little practical overlap in therapeutic areas, is being challenged anyway. As the stock has sold off 15%, there is still a lot of potential upside to compensate for the increased uncertainty and volatility. I expect the spread to get compressed somewhat in the coming week as Amgen takes its position. The upside and downside risk appears to be almost in balance, while the likelihood of the deal passing should still exceed 50%.
The key takeaway for Horizon Therapeutics Public Limited Company and Amgen Inc. investors is to brace for ongoing volatility, adjust their expectations in light of regulatory challenges, and to keep a close eye on developments as they unfold. The Amgen-Horizon saga is a potent reminder of the unpredictable nature of M&A activities, and the increasing tendency for regulatory bodies to get their hands dirty. In the short term, this hurts M&A activity, but to compensate for the more risky environment spreads should widen, which will be interesting.
For further details see:
FTC Surprise Challenge Of Amgen's Acquisition Of Horizon Therapeutics