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Chapter 1: What is the main topic discussed in this episode?
Big Pharma is in a buying mood today on Motley Fool Hidden Gems Investing. Welcome to Motley Fool Hidden Gems Investing. I'm your host, Tyler Crowe, and today I'm joined by longtime Fool contributors, Lou Whiteman and Meg Frankel. Now, it's Tuesday. I know the markets. It's down quite a bit. I think the Nasdaq's down about 2% as we are taping. But hey, you know what? Volatile times.
Markets are going to market. Today, we're going to dive into the pharmaceutical industry and specifically the seemingly large wave of M&A that we've seen in recent months. We're also going to hit some mailbag questions specific to the pharmaceutical industry and kind of look at some of the companies in this industry that we think are doing incredibly well.
Now, at first I thought this was some weird coincidence of seeing several deal announcements in the deal section of the Wall Street Journal recently, but so far, 2026 has been a banner year for M&A in the pharmaceutical industry. Here's a fascinating stat, guys, on this wave. So far this year, there have been more deals of $1 billion and more than all of 2025.
Now, I'm sure there's lots of reasons. We could go into a lot of them. But for each of you guys, what are some of the things that you're seeing that's driving this seemingly massive wave of consolidation, Lou?
Yeah, so there's always a lot of reasons, as you say, but I do think there are a lot of trends just that are converging right now to fuel this consolidation. First, we have a looming patent cliff kind of all over the industry.
Pharmaceutical patents last 20 years, but because most of that time, usually more than half of that time, is pre-revenue, the drug development stage, there's only really a short window for these companies to profit off of their creations. And as soon as it goes off patent, which means people can compete with you on this drug, you tend to see the revenue just drop, you know, orders of magnitude.
There's an estimated $300 billion in annual revenue coming off patent in the next few years. That's prompting a lot of companies to either find bigger partners or if you're big enough, find new revenue streams, hence the M&A. I just, I mean, look at Eli Lilly. They're a GLP-1 leader. They have a great portfolio.
They are throwing all of the cash they're making into GLP-1s into a ton of deals, just trying to diversify their portfolio. Nature of biotech and pharmaceuticals is a lot of these won't work out, but if you cast your net wide enough, if you get good candidates, you might have the next big thing.
Add in factors like regulatory pricing pressure, some interesting breakthroughs in areas like oncology and cardiology.
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Chapter 2: What is driving the current M&A frenzy in Big Pharma?
This is an attractive market for both buyers and sellers, and I think we're seeing it play out.
Yeah, you're right, Tyler. It has been a very active year for consolidation. Just to add a little bit of context to that, we've already seen 32 separate deals worth a billion dollars or more for a total deal value of $123 billion. And that's significant because if this continues, it would be the strongest year for M&A in the space since 2019, which was the strongest year ever.
So we're on pace for not quite a record year, but we're getting there. And Lou mentioned patent expiration is a big part of this. Almost 70 drugs that each generate over a billion dollars of revenue have their patents expiring within the next couple of years.
So if you're not familiar, when their exclusivity period ends, it's not just that the revenue falls off a cliff, it really falls off a cliff. It could drop 80 to 90% overnight. Many companies are scrambling not only to replace the revenue, but the profits these are generating because generally the patent-protected drugs are the highest margin part of these companies' balance sheets.
So, I mean, one interesting observation is, as we mentioned, these are kind of not giant acquisitions. There's been a shift to bolt-on acquisitions from large mergers, focusing on assets that are, say, in late-stage trials that could be integrated quickly into an established platform. That's one of the Eli Lilly acquisitions we just saw. Merck is another example.
It's losing its patent protection for Keytruda. the cancer, blockbuster cancer drug, and it's made three major acquisitions in the last 10 months alone. So you're seeing a lot of this from certain companies.
Yeah, and it's not just them. I mean, part of the reason I specifically saw this, it was in a matter of a couple of weeks, I saw like AbbVie buying an immunology company for about $10 billion. GlaxoSmithKline was doing a $10 billion acquisition, and then Roche was even licensing drugs from other people.
Mentioning Eli Lilly and Merck as well, it seems like everyone is incredibly active at this time, especially in the portfolio of developing drugs. And that's what I want to dig into a little bit deeper here. And it's the regulatory part, because it does look like there has been some significant changes, at least in attitude in the FDA in like recent months.
You know, earlier, I think in the past couple of months or so, they've basically reversed three decisions that were related to the treatments for rare and orphan diseases.
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Chapter 3: How are patent cliffs affecting pharmaceutical companies?
Granted, we have had a fantastic past decade for the S&P 500, so it's a pretty high hurdle. But like even Novo Nordisk, which at the time, for a short period there, had basically the monopoly on the GLP-1 drug market with Ozempic and some of its other treatments.
But that's basically, it's now significantly trailed the market over the past 10 years as competition come in, like Eli Lilly, as you mentioned. But, you know, what's that old adage? Past performance doesn't necessarily guarantee future results.
I want you guys to kind of think about, if we're looking at the pharmaceutical industry right now, who do you see as doing great and doing some work that really is needle moving? To your point, Lou, about some things doing well, some things actually, as an investor, moving the needle, and some you're not necessarily certain about.
Yeah. And let's be honest, this is a terribly brutal industry. I would hate to buy an ETF for this industry and just track it. You really have to find individual winners who are in the right space here because with the costs, with the regulatory burden, it is hard for this industry to really deliver as a group over time. As far as who those gems might be.
As I mentioned, Eli Lilly is driving a lot of consolidation. I don't think there's a better run big pharma right now. And I love that they are investing in their future, investing even beyond GLP-1s. I remember when statins were the miracle drug and look, that really, I mean, it was a great, great benefit to humanity and it was a moneymaker for a while, but even statins didn't last forever.
So I love Lilly is looking kind of past today. Lily's boring though. If you want to kind of dig down deeper, I want to give some love to United Therapeutics, ticker UTHR. This is a wrecking hidden gems in a number of services that has easily beaten the market in the last few years. Great story here. Founded by Martine Rothbart, who also founded SiriusXM. Real entrepreneur.
Her daughter was diagnosed with a lung disease. Her frustration of kind of treatments and seeing, I guess, a market opportunity there. She's built this out. They have six FDA approved treatments, a robust pipeline, just a great business run by an entrepreneur with a real cause driving her. Really interesting company.
Yeah, I would second Eli Lilly as the one that's doing great. I can't think of one that I would rather mention. It does depend on its true appetite, which is its version of GLP-1. Those are the Manjaro and Zetbound brand names for more than half of its revenue. These are patented through 2036. And so Lilly has one of the most favorable patent cliff exposures in the space.
Even its next generation GLP candidates are making excellent progress through the pipeline. And as Lou mentioned, the company is wisely using its cashflow to make bolt-on acquisitions and gradually diversify away. So hopefully in 10 years when the patent does expire, they're not just kind of scrambling to do something.
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