Welcome to Thursday. Today's newsletter is 954 words or a 3.5-minute read.

State Medicaid funding could be on the chopping block this year, forcing politically difficult decisions about a safety net program that serves nearly 73 million Americans.

Why it matters: Republicans already are targeting hundreds of billions of dollars in federal health spending, meaning states likely will have to bear a bigger share of Medicaid costs and face the prospect of coverage and benefit losses as they work through fiscal challenges.

The big picture: The states are settling into a "new fiscal normal" with tax revenue falling, growing fixed costs and federal pandemic aid a distant memory, said Justin Theal, a senior officer at the Pew Charitable Trusts who researches state fiscal trends.

• Medicaid already is one of the largest costs in most states. While enrollment has dropped over the past two years, it's still higher than before the pandemic, and a costlier, aging population is stressing budgets, according to a Pew analysis.

Case in point: State lawmakers in Indiana last week unveiled a plan to contain Medicaid expenses, which are the fastest-growing piece of the state budget, Axios Indianapolis reported.

• The proposal would add work requirements and cap the number of enrollees in the state's Medicaid expansion program at 500,000. The program currently covers more than 700,000 people.
• Some Idaho lawmakers want to repeal the state's Medicaid expansion or add restrictions like lifetime limits on how long a person can enroll in Medicaid. They say it's costing the state too much, though health advocates say Medicaid expansion has saved money in other areas, the Idaho Capital Sun reported last month.

Medicaid directors have been bracing for austerity moves.

• Rolling back optional benefits that state Medicaid programs can cover, like adult dental services, is one potential strategy. They also likely won't expand or initiate Medicaid coverage of GLP-1 drugs to treat obesity.

More here

After several years in the doldrums, pharmaceutical companies and biotechs expect an uptick in dealmaking in 2025, with some positive vibes emanating from the giant J.P. Morgan Healthcare Conference this week in San Francisco.

Why it matters: The mood has been decidedly gloomy the past few years as inflation, high borrowing costs, antitrust oversight and election uncertainty all created doubts about biopharma while AI sucked up all the oxygen.

Driving the news: One big sign of a possible rebound this week was Johnson & Johnson's $14.6 billion cash deal for neurological drugmaker Intra-Cellular.

• "The J&J deal should catalyz[e] more interest in the broader sector," RBC Capital Markets analyst Brian Abrahams wrote, per BioPharma Dive.
• Other deals included Eli Lilly's $2.5 billion agreement to buy Scorpion Therapeutics' breast cancer drug, while GlaxoSmithKline announced a $1 billion-plus deal for IDRx and its GI cancer drug candidate.
• "I would expect this year to be a little bit of a more active year," Vamil Divan, an analyst at Guggenheim Securities, told Axios.

Between the lines: The deals could provide a jolt to the long-term outlook of companies with looming drug patent cliffs.

• Anti-obesity medication, in particular, could help further juice the market, although cancer drugs, immunology and rare disease treatments are also expected to get more attention, Divan said.

Read more

Food manufacturers will soon be banned from using the common food additive Red Dye No. 3 under an FDA rule released on Wednesday.

Why it matters: The move comes two years after a petition from consumer advocates including the Center for Science in the Public Interest pointed to studies showing a connection between the dye and increased risk for cancer in rats.

• The FDA banned Red Dye No. 3 in cosmetics 35 years ago. The new rule would take effect in 2027.

The big picture: The move by the Biden administration comes at a time of increasing bipartisan interest in the safety of the U.S. food supply.

• Red Dye No. 3 is used in sodas, juices, candies and frosting. Some companies including Mars Wrigley have already removed it from products like Skittles.

Between the lines: The FDA concluded the rat studies are of "limited relevance" when it comes to determining increased cancer risk posed to humans by the dye.

• However, the agency concluded that a section of the Food, Drug and Cosmetic Act called the Delaney Clause — which requires an additive to be "deemed unsafe" if it's found to induce cancer when ingested by man or animal — applies.

Share this

Unlock the current state of the health care industry, and the forces shaping deals and policies in the public and private sectors.

Download for free.

Colossal Biosciences, the "de-extinction" company known for its work to revive species like the woolly mammoth and dodo, raised $200 million in new funding from Mark Walters' TWG Global at a $10.2 billion valuation.

Why it matters: It gives the company more runway to sign contracts with governments that are seeking to protect or replenish their biodiversity, while also letting it expand its de-extinction efforts into more species.

• It also will continue to scale up its genome engineering tools and conservation efforts.

State of play: Colossal co-founder and CEO Ben Lamm said that the company's artificial womb efforts should allow it to gestate a small mammal ex-utero within the next two years, likely something small like a mouse.

• He adds that his dream animal to de-extinct would the Steller's sea cow, which once swam in the kelp forests of the North Pacific and Bering Sea, but acknowledges that it's not atop the current whiteboard.