One of the long-running catalysts for small- and mid-sized biotechnology companies is the possibility that they’ll eventually be acquired by large-cap brethren or blue-chip pharmaceutical firms.
While the biotech industry’s history of mergers and acquisitions is extensive, deal-making in the space has been sluggish over the past couple of years, frustrating investors in the process. There’s been no shortage of claims that consolidation would bounce back, but that’s yet to materialize. Good news: 2023 could be the year that finally changes.
If that proves accurate, the ALPS Medical Breakthroughs ETF (SBIO) is among the exchange traded funds that could benefit. SBIO could also be an example of a biotech ETF that’s at the right place at the right time, due to the patent cliff scenario in the pharmaceutical industry.
“A significant number of blockbuster drugs are losing their exclusivity in the next five years, and we expect that generic and biosimilar competition will be particularly fierce and intense due to cost-containment pressures,” according to Fitch Solutions. “We expect rates of M&A and market consolidation to increase in the short-to-medium-term as pharmaceutical companies turn to acquisitions to maintain a constant revenue stream and protect against the upcoming patent cliff.”
SBIO, which follows the S-Network Medical Breakthroughs Index (PMBI), could be one of the ideal biotech ETFs for a resurgence in mergers and acquisitions activity, because that index mandates that member firms have at least one drug or therapy in the Food & Drug Administration’s (FDA) Phase II or Phase III trials.
That could imply that SBIO holdings are less speculative than other small biotech firms, and potentially more attractive to suitors. Those are relevant traits at time when traditional pharma companies need to be thinking of replenishing pipelines due to looming patent cliffs.
“Pharmaceutical companies often turn to M&As when they are faced with patent cliffs, and this is something we have seen previously in earlier patent cliffs, such as the one from 2011 to 2015. A number of published academic papers have demonstrated a link with patent cliffs and M&A activity, and we have already begun to see this happening with certain companies,” added Fitch Solutions.
Specific to SBIO, the old financial market saying about history not always repeating but often rhyming is worth remembering because the fund, which turned eight years old last December, has seen scores of its holdings acquired in its time on the market. That’s one of the potential perks of limiting holdings to market values of $5 billion upon inclusion.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.