The Biotech Buying Bonanza: Why the FTC’s Amgen battle won’t chill the spree
PA Consulting life sciences expert Stephen Morehouse discusses the M&A spree for biotech companies.
Big Pharma has a problem, and a plan to solve it. The problem? A looming drug patent cliff that will unleash generic competition on some of the industry's biggest moneymakers. The solution? A breakneck M&A spree for biotech stocks, funded by a massive war chest built on drug companies' success in bringing new medical treatments to market.
But U.S. regulators could throw a wrench into this biotech M&A game plan. The Federal Trade Commission filed a lawsuit May 16 to block Amgen's $27.8 billion takeover of Horizon Therapeutics (HZNP). The challenge raised new arguments against such mergers, which the FTC routinely cleared in the past when the companies had no rival drugs on the market.
Analysts expect Amgen (AMGN) will eventually close the Horizon buyout, but it may face an uphill court battle to get there. At risk are drug companies' plans to head off revenue hits as important patents expire and a government drug-price squeeze looms.
The stakes also are high for biotech stocks and investors who own them. Many companies never turn a profit and lack the business wherewithal to market their products. They capitalize on their R&D successes by selling out to bigger companies.
As of mid-April, pharma companies had announced $64 billion in biotech mergers and acquisitions this year, with big names like Pfizer (PFE) and Merck (MRK) on the list of shoppers. That put biotech on a "blistering" M&A pace in 2023, according to investment bank Torreya, now a Stifel unit.
The Amgen-Horizon roadblock from President Biden's FTC reverberated across the industry, as biotech stocks pulled back from a recent run. Shares of takeover targets Seagen (SGEN) and Prometheus Biosciences (RXDX) fell 6% and 1%, respectively, the day of the FTC action. As of Thursday though, biotech stocks ranked a lofty 11th in six-month price performance among 197 industry groups tracked by Investor's Business Daily.
Despite regulators' chilly tone, some experts don't expect a pause in the M&A pace for biotech stocks.
The macroeconomic environment, politics, drug prices, patent cliffs and regulatory concerns are in constant flux. What doesn't change? Biotech and pharma need each other.
Biotech companies are often at the bleeding edge of innovation. But they lack the commercial power that pharmaceutical companies can bring to the table.
Stephen said: “It doesn't really change the game of where pharma is going to acquire. They need to. It’s part of how the industry works. There’s innovation going on, and they’re going to acquire that innovation or seek other opportunities to continue to grow and find new treatments.”
Several factors are driving the biotech M&A spree, experts say, and much of the frenzy dates back to early days of the pandemic.
Biotech stocks took off in 2020 as the world looked to companies like Pfizer and Moderna (MRNA) for new vaccine technology to save the world. Then, Covid-19 cases began to ease. And society peeled back many of the measures meant to keep the virus at bay.
Big Pharma may have been waiting for promising clinical news before jumping on the M&A bandwagon.
Meanwhile, Big Pharma's M&A coffers continue to grow. Pharma companies have between $1.4 trillion and $1.5 trillion in cash, experts say.
AbbVie's blockbuster Humira drug faces competition from generic biosimilars for the first time in the U.S.
And pharmaceutical companies have to buy. Many, including Merck, Bristol Myers Squibb (BMY) and AbbVie (ABBV), are facing current or looming competition for their biggest blockbuster drugs as patents expire.
The patent expirations will allow generics or biosimilars to take a foothold. For example, AbbVie's Humira is facing biosimilars in the U.S. for the first time. In the first quarter, U.S. Humira sales tumbled 26%. AbbVie says the drop was expected and maintains that it's managing the erosion well.
Severine Piot-Deval, a health care fellow at research firm Hedder, says more than 40% of sales at the top 10 pharmaceutical companies are at risk of generic competition between now and 2030. Pfizer, for one, expects to lose $17 billion in revenue to generics from 2025 to 2030, she said in an email.
Generics could eat up $200 billion to $250 billion in pharma industry revenue by 2030, multiple experts say.
Stephen adds that “big Pharma is sitting on a lot of cash, and there are some really neat opportunities on the market for them to strengthen their portfolio with the valuations under some pressure with the market.”
The most expensive drug for Medicare Part D patients, Pfizer's Eliquis, could be subject to price negotiations in coming years.
The same companies facing patent cliffs also are likely to face pricing pressure from the Centers for Medicare and Medicaid Services. Under a 2022 law, Medicare officials will soon begin negotiating the prices of the top 10 most expensive drugs. The new prices will launch in 2026.