FTC v. Amgen / Horizon Therapeutics

The Biden administration is seeking to overhaul US antitrust doctrine. Several bills have been proposed, and key appointments to merger regulators have been made, seeking to reign in the perceived market power of ‘Big Tech’ behemoths like Google or Amazon.

One such appointee is Federal Trade Commission (FTC) Chairperson Lina Khan, in office since 2021. Chair Khan has vigorously pursued novel theories of what constitutes anti-competitive behavior, in a controversial departure from regulatory precedent.

U.S. antitrust guidelines prior to Chair Khan largely followed the doctrine first articulated by Justice Robert Bork in the 1970s. Justice Bork argued that most mergers largely left consumers better off; the most significant exception were mergers between direct competitors – so-called ‘horizontal mergers’ that created excessive market concentration. The resulting monopolies (or oligopolies), if allowed to exist, would be able to dictate prices and reduce consumer welfare.

Under this doctrine, suppliers and their customers were largely allowed to merge with few constraints. These so-called ‘vertical mergers’ were thought to result in no appreciable reduction in consumer welfare.

Yet, in December of 2022 the FTC sued to block Microsoft’s (MSFT) acquisition of Activision Blizzard (ATVI). The FTC argued that MSFT would use ATVI’s Call of Duty gaming franchise to illegally boost its Xbox gaming console against competitors. In effect, the FTC sought to challenge a vertical merger between a supplier (of video games) and its customer (the console maker).

The courts disagreed. In July, a California judge sided with MSFT, allowing its acquisition of ATVI to proceed despite the FTC’s objections[1].

The FTC’s philosophical opposition to certain vertical mergers is not limited to the technology industry, however. In healthcare land, the FTC sued in May to block Amgen’s (AMGN) acquisition of Horizon Therapeutics (HZNP) using a similar doctrine.

AMGN and HZNP are not direct competitors. The FTC’s argued that AMGN would be able to pressure its customers to favor HZNP’s key products, two drugs called Tepezza and Krystexxa, over potential future competitors that do not yet exist[2].

As one manager we admire put it: ‘In the FTC’s complaint, the commissioners undertake acrobatics to speculate how AMGN will leverage their existing business by bundling their product with the newly acquired therapies to maintain a monopoly that unfairly precludes future market entrants from competing.’ Remarkable stuff.

As of mid-August, HZNP was trading at a ~12% discount to the proposed deal price of $116.5/share. At that price, the market was implying a ~75% probability that the FTC would lose in court[3].

On August 26, the FTC announced that it was suspending its challenge to the AMGN/HZNP merger for settlement talks. On September 1, the FTC and AMGN announced they had reached a settlement and that the AMGN/HZNP merger could now proceed as planned.

Even with the FTC now having settled (or had the FTC lost in court), market participants remain concerned about the risk of government intervention. Litigation outcomes are inherently hard to predict.

Heightened regulatory scrutiny of healthcare M&A increases the probability of antitrust litigation, no matter the merits, which in turn increases the risk that a given deal will fail to close. This increased litigation risk will dampen the perceived upside from M&A – and therefore the current valuation – of several small and mid-sized life sciences innovation companies for the foreseeable future.

[1] Source: https://www.reuters.com/markets/deals/us-ftc-withdraws-case-against-microsoft-activision-deal-before-internal-agency-2023-07-20/. [2] There are currently no FDA-approved competitors to Tepezza (for thyroid eye disease) and Krystexxa (for chronic refractory gout). [3] Merger arbitrageurs estimate market-implied probabilities of completion by looking at (a) the observable spread to the deal price, (b) the estimated price at which the acquisition target would trade in the event of a blocked transaction, and (c) the estimated time until the merger closes or breaks.