Are you a biotech investor who feels left behind? You're not alone. The broad Nasdaq Composite index has gained 13.7% since mid-May, but the Nasdaq Biotechnology index fell slightly over the same time frame.
The reason that biotech industry stocks have been under pressure lately is fairly straightforward. On May 16, the Federal Trade Commission (FTC) tried to apply some new anti-competition arguments to the question of whether some drugmakers shouldn't be able to buy other drugmakers when it sued to block Amgen's (AMGN 0.22%) planned $27.8 billion acquisition of Horizon Therapeutics (HZNP).
A settlement in sight?
On Aug. 23, the FTC filed a motion to withdraw its administrative challenge to Amgen's proposed acquisition from adjudication. Prompted by the court, the commission's lawyers said they feel it's "appropriate to take steps to allow for discussion with the commission regarding the proper resolution of this matter."
A hearing regarding a related proceeding begins in a few weeks. The recent motion from the FTC puts things on hold for 28 days from Aug. 21, which could give Amgen, Horizon, and the FTC enough time to work out a settlement.
The FTC's latest move doesn't necessarily mean the government will give up any and all attempts to block this deal or others like it. That said, Wall Street analysts who have followed the case closely tend to agree that the FTC's case was on shaky ground at best. With this in mind, the recent suspension is most likely a prelude to a swift settlement that will allow the deal to proceed.
What's the FTC's problem anyway?
It's the FTC's job to prevent unfair business practices that can harm consumers. Traditionally, the commission tries to prevent drugmakers that own competing treatments from merging because that reduces competition. In this case, though, the commission's argument is a lot more complicated.
The FTC isn't worried about Amgen acquiring competing treatments. Instead, it says acquiring Horizon "would allow Amgen to leverage its portfolio of blockbuster drugs to entrench the monopoly positions of Horizon medications used to treat two serious conditions, thyroid eye disease and chronic refractory gout."
In other words, Amgen, a company with 27 approved drugs and roughly $26.6 billion in annual revenue is just too big to buy a smaller company like Horizon, which has $3.6 billion in annual sales. It's a complex argument that only makes sense if you're already familiar with the pharmacy benefits management industry.
In a nutshell, pharmacy benefits managers (PBMs) dictate which drugs consumers can receive from their health plans without incurring additional out-of-pocket costs. When there are multiple treatment options available, placement on a PBM's preferred formulary can be the difference between blockbuster sales and deep disappointment for a newly launched drug.
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To gain preferred positioning on their formularies, drugmakers privately offer PBMs rebates that are often worth more than half a drug's list price. The FTC argues that Amgen has a history of conditioning rebates on its already-popular drugs to gain preferred placements for all of its approved treatments.
Horizon's thyroid eye disease treatment Tepezza carries a list price of $350,000 for a six-month course, and a 12-month supply of its gout treatment, Krystexxa costs around $650,000.
No alternatives to Tepezza or Krystexxa have been approved by the Food and Drug Administration (FDA), but there are some in development. The FTC is trying to stop Amgen from buying Horizon now because it could use its girth to unfairly compete for preferred PBM formulary positioning for the drugs down the road.
What's next?
Patents that allow drugmakers to charge six figures for a treatment are relatively short-lived. For this reason, big companies like Amgen are constantly on the lookout for new acquisition targets.
Since marketing new drugs requires a lot of resources that start-up biotechs generally don't have, selling themselves to larger companies is a common practice. If the FTC continues to make investors wonder whether successful start-ups will be able to attract (and close) lucrative buyout offers, biotech stocks as a whole will suffer.
We don't know yet if the FTC will drop its attempts to block big drugmakers from buying smaller ones simply because they're well established, but the commission appears to be headed in that direction. In addition to Amgen's pending acquisition of Horizon, investors should keep their eyes open for a potential suit regarding Pfizer's proposed acquisition of Seagen for $43 billion.
The FTC requested additional information from both companies in July. The commission still hasn't filed a suit attempting to block that deal. Investors can look at every week that goes by without one as a sign that the FTC will limit acquisition-blocking suits to cases that have more direct potential to stifle competition. This wouldn't necessarily mean biotech stocks will soar, but it would make their path forward a lot smoother.
