Health Sciences Regulatory Moves in Q3 - Reigning in the FTC But HSR Program Lingers
The S&P Select Biotech Index made a new annual low to end the third quarter as treasury yields on the 10-year reached the highest levels seen since 2007.
Pharmaceutical innovators made some progress reigning in an activist Federal Trade Commission (FTC) with a victory in the legal fight over Amgen’s (AMGN) proposed acquisition of Horizon Therapeutics (HZNP). FTC agreed to a settlement with AMGN that will allow the $28 billion dollar transaction proceed on the original financial terms. The settlement came after the initial briefing documents were released. Legal experts reviewed the documents and strongly suggested FTC was about to be handed its fifth straight court defeat.
As part of the settlement, AMGN re-affirmed the public commitment not to bundle HZNP’s medical benefit orphan drugs with AMGN’s pharmacy benefit drugs. Given this practice would not make sense financially or logically, it is hard to consider this much of a concession. HZNP’s main orphan drugs are reimbursed under medical benefits while AMGN’s mainstays are reimbursed under pharmacy benefit.
Medical and pharmacy benefits are disparate with distinct economics, fees, administration and logistics and so called “cross-benefit” bundling is simply not done by anyone. Further, physicians are reimbursed for administrating medical benefit drugs based on a ~6% markup over the average selling price (ASP). Offering bundled rebates or discounts on a medical benefit drug would lower the reimbursement rate for physicians, disincentivizing them from prescribing the medication relative to a competitor who was not rebating.
Likewise, the additional requirements to limit the future acquisition of potential competitors to HZNP’s orphan products appears well within expectations and established precedent. HZNP shares rallied to within <1% of the deal price with closure expected in October. Seagen (SGEN) shares rallied in sympathy, closing the arbitrage spread to <10% of Pfizer’s (PFE) proposed acquisition price, from nearly double that the week earlier.
Litigation aimed at blunting the impact of the drug price controls embedded within the Inflation Reduction Act (IRA) increased to eight separate cases. The preliminary injunction filed by the Chamber of Commerce which aimed to block the price setting related to the IRA before October 1st was denied, but the ruling does not impact the substance of the cases that are underway. Legal experts expect the cases may ultimately be adjudicated by the Supreme Court, perhaps within three years.
We continue to expect additional M&A activity into the end of the year. Corporate year end performance reviews often motivate action on large cap growth initiatives via goals set for the executive teams. The U.S. Federal Trade Commission’s (FTC) recent proposal to overhaul the merger review process further incentivizes big pharma and biotech to pursue M&A deals near term.
The proposed changes to the Hart-Scott-Rodino (HSR) premerger notification program would dramatically increase disclosure requirements, adding time, cost and risk to the process. HSR has been in place since 1978 and the new changes may be implemented by early 2024. Legal experts estimate the filing burden may increase by 400-500% providing plenty of incentive for deals to get done before implementation.