Chris DeMuth's State of the Markets August 2023

Episode Summary

Executive Summary: The episode centers on three market/legal themes: the FTC’s weakening antitrust push after repeated court losses, the unusual Horizon/Amgen settlement process and what it signals for agency credibility, and the rising use of contingent value rights (CVRs) in biotech M&A. The hosts also revisit Microsoft-Activision, arguing it is likely to close soon and that regulators are increasingly boxed in by precedent and practical constraints.

Main Topics: FTC antitrust losses and agency retrenchment (Priority: 5/5): The hosts argue the FTC has pursued aggressive, novel antitrust theories and is now being forced to retreat after a string of judicial defeats, with courts pushing back on weak facts and expansive legal theories. Horizon Therapeutics / Amgen settlement dynamics (Priority: 5/5): They examine the staff recommendation to settle Horizon rather than continue litigation, the uncertainty around whether the commission will accept the deal, and the broader implications for FTC morale and future settlement credibility. Judicial quality, process, and administrative-state limits (Priority: 4/5): A long discussion focuses on federal judges as serious, highly vetted decision-makers who are increasingly skeptical of agencies that appear to overreach or misunderstand industry facts. CVRs in biotech M&A (Priority: 5/5): The hosts explain why CVRs are increasingly common in small biotech acquisitions: they bridge valuation gaps, create accounting/tax flexibility, and allow buyers to preserve downside protection while signaling upside optionality. CVR risks, incentives, and investability (Priority: 4/5): They stress that CVRs are inherently speculative, often suffer from agency problems, and can be difficult for funds to own due to position limits, administrative burden, and long-dated payout uncertainty. Microsoft-Activision close watch (Priority: 4/5): The conversation ends with a prediction that Microsoft’s Activision deal will close by late September or at least before the October 15 long-stop date, with both hosts believing regulators have little practical room left to delay.

Key Arguments: The FTC’s recent strategy is producing repeated losses because it relies on novel, aggressive theories rather than established antitrust precedent. Courts across political backgrounds are rejecting government arguments when the underlying facts do not support the theory, suggesting the issue is legal weakness rather than judge ideology. The Horizon settlement is strategically important because it involves an untested theory, a favorable court setting, and a company willing to settle, making continued litigation look weak. If the FTC commission rejects staff’s settlement recommendation publicly, it could damage staff morale, future negotiation credibility, and the agency’s ability to settle cases efficiently. CVRs are useful in biotech because they separate obvious cash value from highly uncertain drug-development value. Buyers like CVRs because they can structure deals to avoid overpaying upfront while retaining upside only if milestones are met. For investors, CVRs can look mispriced because many funds cannot or will not hold them due to sizing, accounting, and operational constraints. Microsoft-Activision is viewed as effectively done; the remaining delay risk is procedural rather than substantive. Regulators increasingly face a credibility problem: once they repeatedly lose and then settle, they signal weakness and invite more resistance from companies and courts.

Data Points: Expert transcript library size: Over 26,000 transcripts - Mentioned in the sponsor ad for Stream. Discount vs traditional expert network: 40% less - Stream claims its model costs 40% less than a traditional expert network for 20 calls. Horizon deal price: $116.50 per share - Referenced as the takeover price if the deal closes. Horizon trading price: $112.50 per share - Current market price mentioned during the discussion. Implied deal spread: About 4% - Difference between Horizon price and deal price when discussed. Market-implied closing probability: ~75% - Andrew suggests the market is pricing roughly a 75% chance of closure in the next month to six weeks. FTC/Horizon settlement status: Unprecedented / no known prior example - Hosts say they have not seen a case where staff pulled a trial and sought commission approval of a settlement at this stage. Activision long-stop date: October 15 - Referenced as the deadline by which the deal should close if delayed. Potential timing window: Third week of September - Andrew predicts the deal may close during the week of September 18-22. Sigilon cash consideration: $15 per share - Example of a biotech M&A deal with a large CVR component. Sigilon pre-deal stock price: Around $5 per share - Used to illustrate the magnitude of the premium in the Sigilon/Lilly transaction. Sigilon CVR upside: Up to $115 per share - Chris cites the maximum CVR value if milestones were met. Biotech cash-premium example: 300% premium - Referenced from a Reuters article on a biotech deal's cash portion.

Pivotal Quotes: "Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are." — Sponsor / Stream: Opening sponsor message introducing Stream’s research platform. "They've just been getting struck down by a wide, wide array of judges on basically every new point they're trying to make." — Chris the Muth: On the FTC’s repeated antitrust losses and legal overreach. "I think this is closing the third week of September." — Andrew Walker: Final prediction on the Microsoft-Activision transaction timing.

Implications: The episode suggests regulators are becoming more cautious after courtroom losses, making settlements and deal certainty more likely. For investors, biotech CVRs may offer opportunity but require strong process discipline and realistic expectations about liquidity, agency risk, and long-dated payout uncertainty.