Big Pharma is on the hunt for biotech companies, but it's being more cautious with its deals. Instead of massive acquisitions, the industry is seeing a record number of smaller, midsize deals. This shift is great news for biotech, as more companies get a shot at being acquired and a more diverse group of shareholders cash out earlier.
The SPDR S&P Biotech ETF is up about 6% this year, while the S&P 500 is slightly negative. Biotech stocks have been outperforming the broader market, and there's good reason to think this trend can continue. Pharma companies are looking to replenish their pipelines, and biotech valuations are reasonable.
Merck, for example, has been on a buying spree, acquiring several smaller biotech companies. The company's stock is up 41% in the past six months. Other companies, like Gilead Sciences and Eli Lilly, are also making smaller deals, freeing them to think longer term.
Two forces suggest the dealmaking has further to run. Pharma needs to keep buying to replace revenue that will face patent expiration by 2031. The industry also has more than $650 billion in M&A firepower, representing the debt capacity available while keeping balance sheets on solid footing.
