Roche-Spark Deal's Mystery Delay Makes Investors Jittery

(Bloomberg) -- Delays from the Federal Trade Commission and concerns about the timing of Roche Holding AG's planned $4.8 billion deal to buy small-cap drug developer Spark Therapeutics Inc. are stoking concerns across Wall Street as investors question what the agency is hung-up on.

Some in the investment community argue that thanks to a more nit-picky FTC, a deal that should have been cleared with flying colors continues to be clouded with questions. Many on the Street guess that the holdup is tied to competitive concerns for Roche's blockbuster Hemlibra, a medicine for the clotting disorder hemophilia, and a gene therapy for the disease in development from Spark.

However, the FTC's closed-door meetings and the secrecy about its reasoning have left investors in the dark. That's prompted jitters among investors, from those that specialize in risk arbitrage to the sell-side analysts that closely follow the space.

“Those of us in the public markets don't have much of a clear view” on why the deal is held up, “and that creates a lot of potential execution risk for anyone else looking to make a move and vertically consolidate with a gene therapy or gene editing player to add their own disruptor,” SVB Leerink analyst Mani Foroohar said in an interview.

Betsy Lordan, a spokeswoman for the FTC, said the agency can't confirm or comment on potential investigations. Roche has repeatedly declined to comment on the source of the holdup. Chief Executive Officer Severin Schwan wouldn't elaborate either at a meeting last week, but said he's “very confident” that the transaction will close by the end of the year. Swiss financial markets were closed on Thursday, and the company again declined to comment ahead of an FTC meeting in Washington.

Bolt-on bottle-neck?

A slowdown in smaller deals or the FTC halting the Spark-Roche tie-up would whipsaw some biopharma high-fliers that many on the Street see as logical bolt-ons for larger companies looking to replenish their pipelines. A number of the year's top performing biotechnology companies, such as gene therapy-focused drugmaker uniQure NV, have seen shares appreciate on drug expectations paired with speculation that they may be the next shoe to drop in the sector's spending spree.

Deals are seen as the lifeblood of biotech and drug development, with smaller companies that lack the infrastructure to bring drugs to market frequently opting to sell to those who can.

Some on Wall Street have questioned how deals for a company like uniQure would be affected by the FTC's more hands-on approach, which may have implications for companies looking to double down in a specific disease area.

“For anyone trying to make that deal there's a paralyzing effect,” Foroohar said. “What would've been seen as a low execution risk, low regulatory risk, straightforward deal is suddenly something caught up for a year and a half, and you have to look at divesting” the drug which drove the deal in the first place, he said.

Increased scrutiny

Six of the nine deal specialists Bloomberg News surveyed said they are concerned the FTC has shifted its approach, as evidenced by the Roche delays. The same proportion agreed that the stumbles for Roche and Spark may have a chilling effect on innovative deals within the space until more is understood.

The majority of concerned investors said an earlier-stage deal like Roche's planned purchase of Spark should not warrant the level of scrutiny it's facing. Some analysts forecast sales of Roche's Hemlibra may near $4.9 billion annually by 2028, more than the current offer for the entirety of Spark.

“When one of the largest companies in the world is buying a minnow” and it's being held back, “that's very concerning,” Brad Loncar, chief executive officer of Loncar Investments, said in a phone interview. “You have to start wondering if this scrutiny will slow down or prohibit these kinds of deals, which would be a huge deal for the sector.”

While Roche's planned purchase of Spark has garnered the majority of headlines triggering nervousness for those betting on deals, it isn't a one-off. Bristol-Myers Squibb Co. has agreed to divest one of Celgene Corp.'s best selling drugs to placate regulators in hope of closing their planned $74 billion deal.

Bristol-Myers's plans to sell off the psoriasis pill, Otezla, “was a very big surprise,” according to SVB Leerink analyst Geoffrey Porges. He called the FTC actions “very strange,” adding that investors in AbbVie Inc. and Allergan Plc are now focused on the future of AbbVie's psoriasis treatment, Skyrizi.

Biopharma mergers aren't the only deals within health care that have drawn regulatory concern. Illumina Inc.'s proposed purchase of Pacific Biosciences of California Inc. has been held up by both U.S. and U.K. agencies, while the deal's spread remained near its widest since the announcement.

The next event on the FTC's calendar is an Aug. 1 meeting in Washington. The group voted 5-0 to keep the meeting closed, further adding mystery to who will be in attendance and what the topic will be.

To contact the reporters on this story: Bailey Lipschultz in New York at blipschultz@bloomberg.net;Joshua Fineman in New York at jfineman@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Morwenna Coniam, Jim Silver