The pharmaceutical industry is currently facing various challenges, including concerns about pricing due to the Inflation Reduction Act and increased scrutiny from the Federal Trade Commission on merger deals. This has affected the potential for buyouts that were meant to offset an upcoming patent cliff. Investors are also worried, as shown by the performance of the VanEck Vectors Pharmaceutical ETF and the SPDR S&P Pharmaceuticals ETF. Both have seen only modest increases or remained flat, in contrast to the significant gain in the S&P 500.
Furthermore, a wave of patent expiries is expected between 2025 and 2030, which will allow low-cost biosimilars and generics to enter the U.S. and EU markets. This trend began with Amgen’s launch of a cheaper version of AbbVie’s arthritis therapy Humira in January, which signals the start of many similar products.
The loss of patent exclusivities is considered a major obstacle for the pharmaceutical industry, leading to concerns. It is estimated that big pharma may face a loss of over $200 billion from 2022 to 2030 when some of their top-selling medications lose patent protection. Additionally, the drug pricing reforms implemented by the Biden administration have further added to the industry’s worries, with legal challenges already initiated by the Pharmaceutical Research and Manufacturers of America (PhRMA), Merck (MRK), and Bristol Myers Squibb (BMY).
These concerns about drug pricing and the impending patent cliff have fueled a desire for deals within the biopharma sector. Data indicates that pharma and biotech companies have spent approximately $85 billion on acquisitions in the first five months of the year, significantly surpassing the amounts spent during the same period in 2022 and 2021. This surge in deal-making may lead to substantial acquisitions of smaller biotech firms by big pharma, as evidenced by the outperformance of the SPDR S&P Biotech ETF compared to XPH and PPH.
Insights highlight the profit potential for investors in small and mid-cap firms due to ongoing mergers and acquisitions. However, increased M&A activity has brought about stricter regulatory scrutiny. Amgen’s bid to acquire Horizon Therapeutics is facing opposition from the Federal Trade Commission, and concerns have arisen over Pfizer’s acquisition of Seagen, leading to a decline in Pfizer’s shares. As the upcoming election year brings a more intense political discourse on drug pricing, big pharma may face additional challenges. Historically, healthcare companies tend to underperform during such periods.
