Chris DeMuth's State of the Markets May 2023

Episode Summary

Executive Summary: The episode centers on two major investing themes: the DOJ’s novel antitrust challenge to Amgen’s acquisition of Horizon Therapeutics and the evolving banking panic after First Republic’s failure. Chris Demuth argues the Horizon case is legally unprecedented and likely weak, but politically motivated and potentially transformative for pharma M&A. On banks, he sees distress as creating opportunities for buyers and believes fears around regional banks and commercial real estate are overstated relative to actual balance-sheet risk.

Main Topics: Amgen–Horizon antitrust lawsuit (Priority: 5/5): The hosts dissect the DOJ’s attempt to block Amgen’s acquisition of Horizon, focusing on the government’s novel theory that Amgen could use bundling/market power to raise prices in rare-disease drugs despite no direct product overlap. Vertical vs. horizontal antitrust theory (Priority: 5/5): Chris explains why conventional antitrust cases involve horizontal or vertical foreclosure, and why this case is unusual because it appears to stretch antitrust into speculative tying/bundling concerns rather than direct competition overlap. Judicial posture and antitrust precedent (Priority: 4/5): The discussion emphasizes that judges in antitrust often rely heavily on precedent and fact pattern comparisons, making novel, politically charged theories harder to sustain and more likely to be rejected or narrowed. Implications for pharma M&A and drug discovery (Priority: 4/5): They argue that if the government prevails, it could chill pharma acquisitions, reduce exits for small biotech firms, and ultimately discourage investment in rare-disease research and drug discovery. Banking stress, First Republic, and regional bank opportunity (Priority: 5/5): The conversation turns to the banking crisis, with Demuth arguing that bail-in/bailout buyers have won favorable terms, while regional bank selloffs and CRE fears may be overblown relative to real underwriting and reserve positions. Market inference from deal probabilities (Priority: 3/5): They discuss using option prices to infer the market’s implied probability that Amgen closes Horizon, concluding the market’s ~80% estimate seems roughly fair given the uncertainty and downside complexity.

Key Arguments: The Horizon-Amgen case is not a standard antitrust matter because there is no direct product overlap; the DOJ is trying to extend antitrust into a novel theory about future bundling and pricing behavior. Vertical integration cases are often economically weak in modern markets because companies can contract for services instead of owning suppliers, and market dynamism makes foreclosure claims hard to prove. Recent antitrust cases against major transactions (e.g., AT&T-Time Warner, Spectrum Brands) suggest courts often reject overly speculative government theories. If courts accept this new theory, it could effectively create a broad regulatory limit on pharma dealmaking and reduce incentives for small biotech firms that rely on acquisition exits. The government’s behavior appears more political than deal-specific, using high-profile cases to signal toughness rather than solve the alleged competitive issue. In banking, the asset sellers/buyers and government have largely controlled the process, and the rushed nature of failures like Silicon Valley Bank favored institutions able to respond instantly. Regional bank panic may be overdone because many institutions have already reserved for downturns, shifted to conservative underwriting, and have limited direct exposure to the most stressed office assets. Buying banks near tangible book value can be attractive if they can still earn above cost of capital, which Demuth believes remains true for many names. The market’s implied odds on Horizon closing by December, around 80%, seem reasonable rather than extreme. The episode’s tone suggests a broader thesis: regulatory and crisis headlines often create mispricings, and patient buyers can benefit when consensus becomes too fearful.

Data Points: Stream transcript library size: 26,000+ expert transcripts - Promotional segment for the sponsor Stream Discount vs traditional expert network: 40% less - Stream claims its service costs 40% less than buying 20 calls in a traditional expert network model Horizon-Amgen implied probability: Just under 80% - Andrew estimates the market implies roughly an 80% chance the deal closes by December based on option pricing Amgen/Horizon option example: December $100 calls last traded around $13 - Used to back into the implied closing probability Deal payoff if closed: $16.50 - Hypothetical value of the December call if the Horizon deal closes Regional bank ETF drawdown: About 40% over the past six months - Illustrates the severity of the banking selloff discussed by Andrew Global financial crisis comparison: Regional bank ETF down about 50% vs market down 40% - Used as a rough historical benchmark for stress levels in banks First Citizens stock reaction: Up 100% on the Silicon Valley Bank deal announcement - Example of how a winning bank acquirer was rewarded by the market Zuckerberg Murph time: 39:58 weighted - Side discussion about Mark Zuckerberg’s reported CrossFit Murph time Murph workout components: 100 pull-ups, 200 push-ups, 300 air squats, 2 miles run - Used to explain why a sub-40-minute time is remarkable

Pivotal Quotes: "If this theory gets endorsed by judges, it would make it almost impossible to do M&A in this whole sector." — Chris Demuth: On the DOJ’s novel antitrust theory in the Horizon-Amgen case "You want to get kind of, you don't want to get an F on it, but you want to get like a D minus on being accused of having pricing power." — Chris Demuth: Explaining that firms should not look obviously monopolistic, but normal business integration should not be treated as illegal "It's been a spectacular opportunity for the bailers." — Chris Demuth: On distressed bank resolution and favorable terms for acquirers of failed banks

Implications: The episode suggests antitrust risk in pharma may be entering a more activist, less predictable phase, while bank selloffs may have created selective value despite headline fear. Investors should focus on legal precedent, balance sheets, and actual cash-flow risk rather than narrative-driven panic.