Description

This write up is actually on the Horizon Therapeutics merger arbitrage but because mojoris wrote a survey write up about elevated merger arb spreads on January 30, 2023 and used the HZNP ticker to tag that write up I can’t post a more thorough write up of the HZNP merger arb situation in the VIC system because it is less than 6 months since the last time an idea was posted with the HZNP ticker. Given the recent FTC decision to file for a preliminary injunction to block the AMGN-HZNP deal, I think it is worthwhile to have a more thorough write up on the HZNP situation. Here is a very quick summary of the very low risk Prometheus merger spread and then the real write up on HZNP follows. 

On April 17th, Merck announced plans to acquire Prometheus Biosciences for $200/share in cash in a $10.8 billion deal. There is no financing contingency with Merck planning to finance the transaction through cash, commercial paper or new debt issuance. Prometheus is a clinical stage immunology company. 

On May 23rd the HSR waiting period expired without the FTC taking action. The only remaining hurdle to closing the deal is the Prometheus shareholder vote which is scheduled for June 15th. This vote should be perfunctory as Merck was by far the highest bidder in the Prometheus auction and is paying a 75% premium. The companies have said the deal is expected to close in Q2 or early Q3. 

RXDX currently trades with a 0.7% gross spread or an 8.3% IRR to a June 30th close. 

Horizon Therapeutics

Thesis

The HZNP merger arb spread currently sits at 17% gross (33.5% IRR to a mid December close) as the FTC has filed for a preliminary injuction to block the deal. The FTC’s case relies upon a novel interpretation of antitrust law which has no precedent; even the FTC admits the companies don’t compete against each other and have no pipeline product overlap – the historical standard by which pharmaceutical mergers have been evaluated. The merger spread implies a probability of the deal being completed of around 50%. I believe the probability that the merger is ultimately approved is over 70% (and likely over 90%) as the FTC has an extremely weak case as the two companies have no product overlap, Amgen has committed to not bundle Horizon’s products, there is no precedent to block a pharmaceutical deal due hypothetical future bundling, the broad negative precedent blocking this deal would set for the rest of the industry, and the US courts’ unwillingness in the past year to support the FTC’s more activist approach in a variety of other cases across different industries. If you assume HZNP would fall to around $85/share if the FTC prevails in court (roughly equivalent to the unaffected share price plus FCF plus the merger termination fee), HZNP should be trading closer to $107/share today vs. its current share price of $99.61. Finally, Sanofi was desperate to buy HZNP before being outbid by Amgen. If the FTC is successful in blocking this deal (most likely because the courts rule that Amgen is a bad actor), there is a decent probability that Sanofi will once again try to acquire HZNP. Sanofi’s final bid was $110/share and HZNP will have almost $2 billion more in cash post a deal break than when Sanofi was bidding implying a potential acquisition price not materially different than the $116.50/share offered by Amgen. To hedge the trade, I would recommend buying a December $100-$80 put spread to hedge the merger spread which can be purchased for ~$5. 

Company Overview

Horizon Therapeutics is a specialty pharmaceutical company that focuses on orphan diseases. HZNP’s 3 major products are Tepezza a treatment for Thyroid Eye Disease (TED), Krystexxa a treatment for Gout, and Uplinza a treatment for Neuromyelitis Optica Spectrum Disorder (NMOSD.)

Horizon also has a pipeline of drugs under various stages of development.

Deal Terms

On December 12th, 2022 Amgen announced that it had entered into an agreement to acquire Horizon Therapeutics in an all Cash deal at $116.50/share. 

AMGN has agreed to pay HZNP a termination fee of $974,415,054 in cash in the event the transaction agreement is terminated following the end date as a result of being unable to obtain regulatory approval. 

Amgen has already raised the financing for the transaction. 

On May 16th, the FTC filed a lawsuit seeking a preliminary injunction to block the deal.

The deal was originally anticipated to close in Q2 2023 but after the FTC moved to block the merger, the timeline has been extended to Q4 2023. The merger has a termination date of December 12, 2023.

After the FTC decision to seek a preliminary injunction to block the merger, the deal spread blew out. 

Background on the merger/Sanofi Interest

Horizon was put in play by an unsolicited acquisition proposal by Sanofi. Sanofi repeatedly upped its bid and seemed pretty desperate in its attempt to acquire HZNP. If the AMGN-HZNP deal breaks it seems likely that Sanofi will make an other attempt at acquiring HZNP. 

Here is the merger background from the merger proxy with the timeline of the various bids by Sanofi bolded. 

On October 15, 2022, Horizon received an unsolicited non-binding proposal from Sanofi to acquire the entire issued and to be issued ordinary share capital of Horizon for $90 per Horizon Share in cash (the “October 15 Proposal”). The closing price of a Horizon Share was $62.51 on the Nasdaq Global Select Market on October 14, 2022.

On October 16, 2022, the Horizon Board, together with Horizon’s senior management, and with the assistance of its outside financial and legal advisors, Morgan Stanley, J.P. Morgan, Cooley LLP and Matheson LLP, met to discuss the October 15 Proposal. During the meeting, Matheson reviewed the Horizon Board’s fiduciary duties under Irish law in the context of the proposed transaction. Representatives of Morgan Stanley and J.P Morgan reviewed recent market data and performance metrics regarding Horizon and provided an overview of Sanofi and other large multinational pharmaceutical companies. Representatives of Morgan Stanley reviewed a preliminary financial analysis for Horizon based on Horizon’s risk-adjusted long range plan, which had been reviewed by the Horizon Board at its regular board meeting in July 2022. Horizon had previously retained Morgan Stanley and J.P. Morgan for advice on takeover defense and activism. The Horizon Board also discussed Horizon’s strategic alternatives, including continuing to execute on its long-term strategy. Following discussion, the Horizon Board determined that the October 15 Proposal substantially undervalued Horizon and rejected the proposal. Following the meeting, the rejection was conveyed to Sanofi.

On October 19, 2022, Sanofi submitted a revised unsolicited non-binding proposal to acquire the entire issued and to be issued ordinary share capital of Horizon for $95 per Horizon Share in cash (the “October 19 Proposal”) and requested access to due diligence.

On October 21, 2022, the Horizon Board, together with Horizon’s senior management, Cooley and Matheson, met to discuss further fiduciary duty considerations relating to evaluation of the October 19 Proposal, including Horizon’s strategic alternative of remaining an independent public company and executing on its long range strategy.

On October 26, 2022, the Horizon Board held a regular board meeting in Dublin, Ireland. During the board meeting, the Horizon Board, together with Horizon’s senior management, and with the assistance of its outside financial and legal advisors, Morgan Stanley, J.P. Morgan, Cooley and Matheson, reviewed the October 19 Proposal. Senior management presented updates to Horizon’s risk-adjusted long range plan to reflect developments since July 2022, as well as key clinical data readouts expected in 2023 and potential near term performance opportunities and risks. Representatives of Morgan Stanley reviewed a preliminary financial analysis for Horizon based on Horizon’s updated risk-adjusted long range plan and key sensitivities in the valuation model. Representatives of Morgan Stanley and J.P. Morgan then discussed potential responses to Sanofi, including potential price guidance, and discussed conducting a market check, including the potential strategic parties with the capability of acquiring Horizon for cash, and the possible timing of any market check given the constraints of the Irish Takeover Rules. The Horizon Board discussed the risks of a market check given the risk of leaks and the disclosure obligations under the Irish Takeover Rules and agreed that conducting a market check at this time would be premature. After the financial advisors left the meeting, the Horizon Board reviewed Horizon’s strategic alternatives and determined that the October 19 Proposal significantly undervalued Horizon and did not justify allowing Sanofi access to any due diligence and rejected the proposal. The Horizon Board further determined to convey to Sanofi that the Horizon Board was not prepared to authorize a transaction at a double digit discount to Horizon’s 52-week high, which at that time was $120.54 per Horizon Share. Following the meeting, the proposal rejection and price guidance were provided to Sanofi.

On November 2, 2022, Horizon reported its third quarter 2022 financial results, increased its full-year 2022 net sales and adjusted EBITDA guidance and increased its TEPEZZA® and KRYSTEXXA® peak annual net sales expectations.

The closing price of a Horizon Share was $72.93 on the Nasdaq Global Select Market on November 3, 2022.

On November 12, 2022, Sanofi submitted a revised unsolicited non-binding proposal to acquire the entire issued and to be issued ordinary share capital of Horizon for $105 per Horizon Share in cash (the “November 12 Proposal”). The November 12 Proposal indicated that Sanofi would not submit any further offers unless it received access to non-public information providing insight into potential incremental value.

On November 13, 2022, the Horizon Board, together with Horizon’s senior management, and with the assistance of its outside financial and legal advisors, Morgan Stanley, J.P. Morgan, Cooley and Matheson, met to discuss the November 12 Proposal. Horizon’s financial advisors reviewed the November 12 Proposal and the preliminary financial analyses of Horizon based on the risk-adjusted long-range plan. The Horizon Board determined to respond to Sanofi that although the November 12 Proposal did not meet Horizon’s guidance related to the 52-week high, Horizon was willing to provide limited due diligence on non-public, value-related items to enable Sanofi to submit a further enhanced offer. Horizon’s financial advisors and senior management further recommended that Horizon seek approval from the Irish Takeover Panel to reach out to Amgen, Janssen Global Services, LLC (“JNJ”) and one other global pharmaceutical company, such company being referred to herein as Company A, to determine whether they would be interested in receiving a confidential management presentation and considering an all cash acquisition of Horizon on an expedited timetable. The companies recommended for outreach were believed to have interest in a potential acquisition of Horizon and would have the financial means to complete an all cash acquisition of this size. The Horizon Board discussed the risks associated with the proposed market check and determined that the best way to maximize shareholder value would be to approach the specified other potential bidders and authorized Horizon’s senior management and its financial advisors to contact Amgen, JNJ and Company A, subject to obtaining the relevant consents from the Irish Takeover Panel. After the financial advisors left the meeting, the Horizon Board also discussed the proposed fee structure for Morgan Stanley and J.P. Morgan as financial advisors and reviewed the preliminary conflicts disclosure that each of the financial advisors submitted. Following the review, the Horizon Board authorized retaining Morgan Stanley as its financial advisor for purposes of Rule 3 of the Irish Takeover Rules and rendering a fairness opinion to the Horizon Board, and J.P. Morgan as a financial advisor and approved the proposed fees for both advisors.

After obtaining the consents from the Irish Takeover Panel, on November 14 and November 15, Horizon’s financial advisors contacted Amgen, JNJ and Company A, and conveyed that Horizon had received an unsolicited proposal to be acquired on an expeditious timetable and that Horizon was willing to allow initial diligence via a confidential management presentation. The financial advisors further communicated the guidance that the Horizon Board would not support a transaction at a double digit discount to Horizon’s previous 52-week high. All three parties expressed an interest in receiving a management presentation and engaging in due diligence to determine whether they would submit a proposal.

Horizon entered into confidentiality agreements with all four parties, each of which contained a standstill provision that permitted confidential discussions with Horizon and an automatic termination of the standstill if Horizon entered into an agreement to be acquired by a third party. Horizon and Amgen entered into the confidentiality agreement on November 18, 2022.

On November 17, 2022, Horizon gave management presentations to each of Sanofi and Company A and on November 18, 2022, Horizon gave management presentations to each of JNJ and Amgen. Following the management presentations, Horizon held due diligence calls with Sanofi, JNJ and Amgen to respond to specific value-related inquiries.

On November 19, 2022, Sanofi submitted a revised non-binding proposal at $106 per Horizon Share in cash and requested that full diligence commence by November 21st and that a transaction be announced by December 5, 2022. Later in the day, the financial advisors informed each of Amgen, JNJ and Company A that Horizon had received a higher proposal from the initial bidder and that Horizon needed to receive an indication of value by November 25, 2022. Company A indicated that it had decided not to continue in the process. JNJ indicated its interest in continuing in the process but that it would not be able to meet the November 25th timing and Amgen indicated that it had a strong interest in engaging and would be able to meet the timing for submitting a proposal.

On November 25, 2022, Robert A. Bradway, Chairman and Chief Executive Officer of Amgen, called Tim Walbert, Chairman, President and Chief Executive Officer of Horizon, to discuss Amgen’s interest in acquiring Horizon, the criticality of key Horizon management in a go-forward combined company and plans to submit an initial non-binding proposal to Horizon via its financial advisor, PJT Partners LP (“PJT Partners”). Following the call, Amgen submitted in writing, to Horizon’s financial advisors, a non-binding proposal at $105 per Horizon Share (the “Initial Amgen Proposal”).

On November 25, 2022, Sanofi reiterated its non-binding proposal at $106 per Horizon Share in cash as a best and final non-binding proposal and indicated that the proposal, if not accepted by November 26, 2022, should be considered withdrawn and discussions terminated (the “November 25 Proposal”).

On November 26, 2022, the Horizon Board, together with Horizon’s senior management, and with the assistance of its outside financial and legal advisors, Morgan Stanley, J.P. Morgan, Cooley and Matheson, met to discuss the November 25 Proposal and the Initial Amgen Proposal. The financial advisors reviewed the process status, potential next steps and expected timing. The financial advisors also explained that an announcement in mid-December would be advantageous from an acquirer financing perspective as it would provide any bridge financing sources with time before year-end to syndicate loans. Following discussion, the Horizon Board authorized Horizon’s senior management and advisors to allow Sanofi and Amgen to access a data room for confirmatory due diligence, share a draft transaction agreement and draft announcement under Rule 2.7 of the Irish Takeover Rules (a “Rule 2.7 Announcement”) with Sanofi and Amgen, share the targeted transaction announcement date of December 12, 2022 with both parties, and inform Sanofi of the receipt of a competitive bid from another party. The Horizon Board further authorized allowing JNJ to continue to engage in limited due diligence relating to sources of value but informing JNJ that two other parties were being given data room access and that they were falling behind. After the financial advisors left the meeting, the Horizon Board also reviewed updated conflict disclosures from J.P. Morgan relating to Amgen and JNJ.

Following the Horizon Board meeting, on November 26, 2022, Horizon’s financial advisors reached out to Amgen, Sanofi and JNJ to convey the messages authorized by the Horizon Board. On the same day, Cooley sent a draft transaction agreement to Amgen’s outside counsel, Sullivan & Cromwell LLP, and to Sanofi’s outside counsel. Further, on November 27, 2022, Horizon provided access to the electronic data room to both Amgen and Sanofi and their respective advisors.

Throughout the period from November 27, 2022 until December 9, 2022, Horizon responded to due diligence requests from both Amgen and Sanofi, providing access to requested information and documents in the electronic data room accessible to both parties or through clean teams pursuant to separate clean team agreements for certain competitively sensitive information, and held due diligence calls with each of Amgen and Sanofi as requested, covering various areas including corporate organization and structure, tax matters, commercial operations, litigation and legal compliance, executive compensation and employee benefits, intellectual property matters, regulatory matters, cybersecurity and data privacy and general corporate matters.

On November 29, 2022, in response to a report that the Wall Street Journal was about to publish an article that Horizon was in discussions to be sold, Horizon released an announcement of a possible offer under Rule 2.4 of the Irish Takeover Rules, confirming that it was in highly preliminary discussions with Amgen, Sanofi and JNJ. Following the Rule 2.4 announcement, Horizon did not receive any acquisition proposals from any third parties who were not part of the process.

On November 30, 2022, Cooley sent Sullivan & Cromwell and William Fry LLP, Amgen’s Irish counsel, and Sanofi’s counsel a draft Rule 2.7 Announcement.

On December 2, 2022, Sanofi and Amgen each released a statement as required by Rule 2.12 of the Irish Takeover Rules confirming that any offer, if made, would be in cash.

On December 2, 2022, Sanofi’s counsel submitted a draft mark-up of the transaction agreement and the draft Rule 2.7 Announcement. Later in the day on December 2, 2022, Sullivan & Cromwell submitted a draft mark-up of the transaction agreement.

During the period from December 2, 2022 until December 9, 2022, Amgen’s and Sanofi’s counsel each negotiated a transaction agreement, disclosure schedules and Rule 2.7 Announcement, with Cooley and Matheson. The negotiations on the transaction agreement focused primarily on the structure of the scheme of arrangement, conditions to the acquisition, including the required antitrust and foreign investment clearances and related antitrust efforts covenants, remedy requirements and termination fees, and the operating covenants imposed on Horizon during the period prior to closing.

During this period, Amgen and Sanofi also provided copies of bridge credit agreements being negotiated by each party and Cooley and Matheson provided comments on the respective bridge credit agreements to Amgen and Sanofi’s counsel.

On December 3, 2022, the Horizon Board, together with Horizon’s senior management, and with the assistance of its outside advisors, Morgan Stanley, J.P. Morgan, Cooley and Matheson, met to discuss the status of the process and Horizon’s risk-adjusted long range plan. Senior management reviewed the key assumptions in Horizon’s risk adjusted long range plan and the material changes to the plan since the July board meeting. Following discussion, the Horizon Board approved the use of the risk-adjusted long range plan projections by Morgan Stanley in connection with providing financial analyses and a fairness opinion. The Horizon Board also reviewed the updated conflict disclosure of Morgan Stanley relating to Amgen and JNJ.

Subsequently, JNJ conveyed to Horizon’s financial advisors that it had decided not to submit a proposal and issued a statement on December 3, 2022 under Rule 2.8 of the Irish Takeover Rules that it did not intend to make an offer for Horizon.

On December 5, 2022, at the direction of the Horizon Board, representatives of Morgan Stanley and J.P. Morgan sent Amgen and Sanofi a process letter, requesting that final, fully-financed, irrevocable and binding written offers, with fully negotiated transaction agreements, be submitted by December 9, 2022. The process letter also indicated that the final written offer should confirm completion of due diligence.    

On December 6, 2022, Mr. Bradway called Mr. Walbert to convey Amgen’s vision for Horizon if Amgen were the winning bidder and to reiterate Amgen’s interest in retaining key employee talent at Horizon. The parties did not discuss any transaction terms and Mr. Bradway did not identify specific employees for retention or discuss any retention terms.

On December 9, 2022, Sanofi’s counsel submitted a draft transaction agreement and Rule 2.7 Announcement to Cooley. Sanofi later submitted a revised proposal of $109 per Horizon Share in cash.

Later in the day on December 9, 2022, Sullivan & Cromwell submitted a draft transaction agreement on behalf of Amgen to Cooley. At the direction of Amgen, PJT Partners subsequently sent to Morgan Stanley and J.P. Morgan Amgen’s revised proposal of $112.75 per Horizon Share in cash, plus potential cash dividends of $2.75 per share to be paid by Horizon to its shareholders of record on June 30, 2023 (assuming that the transaction had not closed before the dividend date) and $2.75 per share to be paid by Horizon to its shareholders of record on September 30, 2023 (assuming that the transaction had not closed before the dividend date).

On December 9 and December 10, 2022, representatives of Morgan Stanley and J.P Morgan discussed the bid submissions with Horizon’s senior management and legal advisors and then, at the direction of and on behalf of Horizon, provided to each of Amgen and Sanofi feedback on their respective bid submissions. Following the feedback, on December 10, Sanofi submitted a revised proposal of $110.50 per Horizon Share in cash and Amgen submitted a revised proposal of $115.50 per Horizon Share in cash plus the two potential dividends of $2.75 per share to be paid by Horizon if the transaction had not closed prior to the dividend dates.

Following receipt of the December 10 bid submissions, representatives of Morgan Stanley and J.P. Morgan discussed the bid submissions with Horizon’s senior management and legal advisors and then, at the direction of and on behalf of Horizon, provided to each of Amgen and Sanofi feedback on their respective bid submission and requested each of Amgen and Sanofi to submit best and final proposals later in the day and before the Horizon Board meeting. With respect to Amgen’s bid, based on a belief that neither dividend was likely to become payable because the transaction was likely to be closed prior to June 30, 2023 (and a belief that the dividend feature would add unnecessary deal complexity), Mr. Walbert directed Morgan Stanley and J.P. Morgan, on behalf of Horizon, to communicate to Amgen a preference for a higher upfront cash offer without the dividends.

Later in the day on December 10, 2022, representatives of Sanofi contacted representatives of Morgan Stanley and J.P. Morgan to confirm that Sanofi’s December 10 proposal of $110.50 per Horizon Share in cash was Sanofi’s best and final proposal. Also later in the day on December 10, 2022, at the direction of Amgen, representatives of PJT Partners contacted representatives of Morgan Stanley and J.P. Morgan to communicate a willingness to consider a higher upfront cash offer without the dividends, and Mr. Walbert directed Morgan Stanley and J.P. Morgan, on behalf of Horizon, to propose to Amgen a transaction price of $118.25 per Horizon Share without the proposed dividends. Horizon’s proposal was later confirmed by Mr. Walbert in a telephone call with Mr. Bradway. Amgen subsequently proposed $116 per Horizon Share without the proposed dividends. Mr. Walbert, then directed Morgan Stanley and J.P. Morgan, on behalf of Horizon, to counter with a final price of $116.50 per Horizon Share, which Amgen subsequently agreed to pay.

Later in the day, the Horizon Board met in Dublin, Ireland, with Horizon’s senior management and financial and legal advisors, Morgan Stanley, J.P. Morgan, Cooley and Matheson, to consider the proposed terms of the best and final proposals from each of Amgen and Sanofi. Matheson reviewed the Horizon Board’s fiduciary duties under Irish law in the context of considering the proposals and the director responsibilities for information contained in the Rule 2.7 Announcement under the Irish Takeover Rules. Cooley and Sean Clayton, Horizon’s executive vice president and general counsel, reviewed the key legal terms of the respective transaction agreements negotiated with Amgen and Sanofi. Following discussions, the Horizon Board determined that the final proposal from Amgen was superior to the proposal from Sanofi and the near final drafts of the transaction agreements submitted by each party were substantially comparable. Morgan Stanley then rendered its oral opinion, subsequently confirmed in writing, that, as of December 10, 2022, and based upon and subject to the assumptions made, procedures followed, matters considered and qualifications and limitations on the scope of review undertaken by Morgan Stanley as set forth in the written opinion, the $116.50 per Horizon Share in cash to be received by holders of the Horizon Shares was fair from a financial point of view to such holders of Horizon Shares. Following discussions, the Horizon Board unanimously determined to accept the terms of the offer received from Amgen of $116.50 per Horizon Share, resolving that such offer was in the best interests of Horizon and Horizon Shareholders, and thereby approved the transaction and the execution and delivery of the Transaction Agreement and resolved to recommend to Horizon Shareholders that they approve the transaction.

On December 11, 2022, Sanofi issued a statement under Rule 2.8 of the Irish Takeover Rules stating that Sanofi no longer intended to make an offer for Horizon because the transaction price expectations did not meet its value criteria.

Following the meeting of the Horizon Board, Amgen and Horizon finalized the transaction agreement, the disclosure schedules to the transaction agreement and the terms of the Rule 2.7 Announcement. Amgen also finalized the terms of its bridge financing documents with its lenders. The Transaction Agreement was executed on December 11, 2022 and the Bridge Financing documents were executed on December 12, 2022.

Price in event of full deal break

Before the leak that Horizon was in merger negotiations, its share price was $78.76/share. 

The termination fee of $974mm taxed at HZNP’s 13% tax rate would equate to $847mm of additional cash on HZNP’s balance sheet or ~$3.72/share using 228mm share count. HZNP will also generate around $1.05 billion of FCF this year or ~$4.60/share. Simplistically if you add the cash from the termination fee and 1 year of FCF to the pre-leak share price that would imply a deal break share price of ~$87/share. This would equate to roughly 13x 2023 EBITDA. 

2023 EBITDA is estimated to be ~$1.4 billion. 

Over the last 5 years, HZNP has traded between 10 and 20x forward 12 month EBITDA with an average over the last 3 years around 14x EBITDA.

This matrix represents the implied share price post a deal break based on 2023 EBITDA and EBITDA Multiple. If our EBITDA estimate of $1.4 billion is correct, HZNP shares should trade in the mid 80s to low 90s per share assuming a return to its average multiple in the years before the deal was announced. 

If we assume the market believes that HZNP would fall to $85 in the event the FTC prevails, then the market is currently implying only a 46% probability to the merger succeeding at HZNP’s current share price. 

FTC case

On May 16th, the FTC filed for a preliminary injunction against the merger in the U.S. District Court for the Northern District of Illinois (HZNP U.S. operations are headquartered in suburban Chicago.)

Here is the FTC’s complaint:

Amgen/Horizon: Complaint for Temporary Restraining Order and Preliminary Injunction (ftc.gov)

The most interesting part of the complaint is what is not in the complaint. Most FTC and DOJ merger challenges start with where the respective companies overlap where here that is not the focus at all as the company have essentially no product or pipeline overlap. 

The FTC’s case rests on a novel antitrust theory that the FTC has the power to block a deal because of the potential for the acquirer in the future to bundle its existing products to entrench the existing monopolies of the target’s products. This is the first time the FTC has tried to block a pharmaceutical merger due to rebate bundling. Note: the FTC did look at rebating strategy when it evaluated the Allergan Abbvie merger which it ultimately approved. 

Source: FTC Complaint

There is well established case law on how antitrust law is applied in evaluating mergers involving pharmaceutical companies. The historical precedent is to look at the overlap in existing and pipeline drugs between the 2 companies. In its complaint, the FTC admits that the 2 companies don’t have any drugs that compete against each other. Amgen’s portfolio consists of general medicine (bone, kidney, cardiovascular), inflammation, and hematology and oncology drugs. The only rare disease product Amgen has is Tavneos which it recently acquired when it acquired ChemoCentryx last year. On the other hand Horizon is primarily focused on rare, autoimmune, and severe inflammatory disease. 

If the FTC were to prevail in this case, the logic underlying the case could be applied to any company with significant market influence. This would be a very broad expansion of the FTC’s power and would represent an almost existential risk to the way the pharmaceutical industry is currently structured. Most pharmaceutical companies are experts at dealing with regulators and in sales and marketing and in effect outsource their research and development activities to smaller biotech companies which the pharmaceutical companies then acquire when the research has progressed far along enough that the probability of clinical success is high. In essence purchasing third party biotech companies instead of spending heavily on internal r&d helps smooth out pharmaceutical companies income statements by capitalizing r&d expenses. All the major pharmaceutical companies engage in this strategy. 

We believe the FTC chose to bring this case as an attempt to broaden the scope of antitrust law through judicial fiat instead of through an act of Congress. For the FTC challenging this merger is a good test case for evaluating the courts’ receptivity to arguments about the potential loss of r&d investment post merger, additional bundling leverage, and punishing companies with a history of prior bad acts. It is worth noting that there currently no Republican Commissioners on the FTC and therefore no checks on the whims of FTC Chairwoman Lina Khan.

The FTC’s strongest argument is that Amgen is a “bad actor.” Amgen has been accused in a lawsuit brought by Regeneron of bundling Enbrel in order to gain market share for its other drugs. Amgen does offer significant rebates on Enbrel and Oterzla to secure favorable positioning with PBMs for Repatha though whether this is anticompetitive is an issue for the courts to decide. The FTC’s complaint appears to take many of Regeneron’s complaints about Amgen’s past behavior to form the crux of its arguments against this deal. Of course, there is no legal definition of  a “bad actor” that would make a company unable to do acquisitions and blocking a merger due to unrelated behavior would require setting a new precedent. It’s also not clear to what extent Amgen is bundling Enbrel; it probably is worth noting that Enbrel revenues have been declining year over year so it’s not clear how much market power Amgen has with that drug. 

Source: FTC Complaint

All that said, in a press release responding to the FTC’s action Amgen stated that it offered the FTC a commitment that it would not bundle the Horizon products with its existing products. This behavioral remedy would seem to satisfy the FTC’s concerns – though the FTC is biased against behavioral remedies since they are generally near impossible for the FTC to enforce. Courts have historically been less skeptical of behavioral remedies and it wouldn’t be shocking to see the courts rule in favor of the deal conditional on a behavioral remedy. . 

“The medicines offered by Amgen and Horizon generally treat different diseases and patient populations, and there are no overlaps of competitive concern. The FTC's claim that Amgen might "bundle" these medicines (offer a multi-product discount) at some point in the future is entirely speculative and does not reflect the real world competitive dynamics behind providing rare-disease medicines to patients. And we committed that we would not bundle the Horizon products raised as issues; however, the Commission still decided to pursue this path. Furthermore, we are unaware of any prior acquisition that has been blocked under a bundling theory.”

AMGEN RESPONDS TO FTC ACTION RE: PROPOSED ACQUISITION OF HORIZON THERAPEUTICS | Amgen Inc.

The FTC’s other arguments are exceptionally weak. The FTC seems to believe that the vertical integration of payors/PBMs could enable cross-market bundling in this instance even though AMGN’s drugs fall under the pharmacy benefit (ie sold under agreements negotiated by PBMs) while HZNP’s drugs fall under the medical benefits (ie sold under agreements negotiated with insurance companies.) Even if the judge agreed that bundling is an appropriate reason to block the merger, the FTC would need to prove that bundling mechanisms can be formed and used to block competition. This seems difficult in a world where there is a highly fragmented insurance market and a super consolidated PBM industry. Bundled drug discounts offered by Amgen to the PBMs would require changes to medical benefit coverage for HZNP’s drugs across various PBM’s entire health/ plan/employer client base – a very difficult task. The FTC argues that vertical integration of insurers and PBMs could potentially enable this bundling strategy; this strikes me as incredibly speculative on the FTC’s part and in all likelihood not realistic.

Source: FTC Complaint

For the FTC to win, they would need to prove that there is an over 50% likelihood that Amgen would have the incentives to engage in this bundling behavior, would choose to engage in this behavior, and that this bundling behavior is anticompetitive. So far the FTC has presented no evidence that support any of these contentions.

The simple facts in this case are straightforward and indisputable. There is no product overlap between AMGN and HZNP’s portfolio. This point is conceded by the FTC in its complaint. Also, the government grants monopolies for orphan drugs as an attempt to encourage research in diseases that would otherwise not be economic to work on. Under the 1983 Orphan Drug Act a drug approved to treat rare diseases can get 7 years of market exclusivity beginning from the time the NDA or BLA is approved. Tepezza has orphan exclusivity in TED until Jan 21, 2027. 

Even if you accept the premise of the FTC’s case that AMGN will use the market power of its other drugs like Enbrel to cut out routes to market for (currently nonexistent) competitive drugs for Tepezza and Krystexxa, it’s not clear that new competitors would drive prices down. In several rare disease markets like MS there are multiple examples where prices increase even as more agents enter the market. 

Source: Jefferies

Judge Kness

Presiding over the August preliminary injunction trial will be judge Kness. Judge Kness has never tried an antitrust case before as his background has been almost entirely in criminal law. That said, Judge Kness was nominated to the bench by President Trump after being a longtime member of the NRA and the Federalist Society. Judge Kness received his judicial commission on February 18, 2020. Given his right wing political leanings it seems likely that Judge Kness will be more deferential to historical precedent than a more progressive judge would have been.

More on Judge Kness’s background can be found here.

https://vettingroom.org/2019/07/24/john-kness/ 

Judge Kness has set a trial date in August and has said he will need 4 weeks once all findings and reply findings are submitted to make a decision. This implies that he will decide the trial on the merits and not kick the trial to the FTC’s Administrative Law courts. If Judge Kness was predisposed to accepting the FTC’s theory of the case he would be much more likely to punt the trial to the FTC’s Administrative Law Judges. 

The Trial

There are 3 main parts of the court process. The documents, witness testimony, and expert testimony. The witness testimony is likely to include commentary from payers and PBMs that say the bundling described in the FTC’s complaint is plausible.

The trial is scheduled to start in August and last about a week. Judge Kness is expected to rule by mid September. Settlement seems unlikely as the FTC was unwilling to accept AMGN and HZNP’s behavioural remedy of agreeing not to bundle their drugs. If Judge Kness grants the preliminary injunction it is likely that Amgen and Horizon would abandon their merger agreement. If they choose to fight the case would go to the FTC administrative law courts where there would likely be another trial in November. This would be followed by the FTC’s review and then an appeal to the appellate courts. This process could drag out for another 12 to 18 months.

Financial projections

Included in the merger proxy are HZNP’s projections for sales of its core drugs as well as its free cash flow. It is worth pointing out that HZNP year to date is underperforming the projections for Tepezza. The company blames the disruption to its sales force caused by the merger for the weak year to date Tepezza sales. Alexion’s Soliris had a similar hiccup in sales while Alexion was being acquired by Astrazeneca. 

Source: Merger Proxy

What’s next:

Written response from Amgen and Horizon

The preliminary injunction hearing in August

The judge's ruling on the preliminary injunction – 4 weeks after the trial ends

Amgen and Horizon have agreed not to close until September 15 or 2 days after the court rules on the preliminary injunction whichever comes first. 

Catalyst

August trial

September Judge Kness verdict

If Judge Kness blocks the preliminary injunction the deal can close 2 days later