Big Pharma Has a Case of Merger Mania

0:02Tyler Crowe:Big Pharma is in a buying mood today on Motley Fool Hidden Gems Investing.

0:13Tyler Crowe: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 Matt 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.

0:49Tyler Crowe: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 or 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?

1:24Lou Whiteman: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.

1:58Lou Whiteman: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 you have, if you cast your net wide enough, if you get good candidates, you might have the next big thing.

2:34Lou Whiteman:Add-in factors like regulatory pricing pressure, some interesting breakthroughs in areas like oncology and cardiology. 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.

3:10And 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 sheet. So I mean, one interesting observation is, as we mentioned, these are kind of not giant acquisitions.

3:46There'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 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.

4:12Tyler Crowe: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 immunology company for about 10 billion. GlaxoSmithKline was doing a$10 billion acquisition. And then Roche was even like licensing drugs from other people. Mentioning Eli Lilly and Merck as well. It just 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.

4:48Tyler Crowe: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. And we could get the long part, but the short version of it is that under the former FDA vaccine and biotech drug division leader, his name was Vinny Prasad, basically these drug candidates were rejected because the clinical study did not include comparisons to a placebo. Now, placebo studies, they're kind of not nearly as common and almost pretty much unheard of in the rare disease area because one, like the populations of these are so small and two, you know, there's often life-threatening diseases.

5:26Tyler Crowe:So there's like this, a very challenging, almost ethical thing to saying like, well, we're going to put you on placebo. Look, I don't think it's a coincidence that we're seeing this rush to acquire clinical stage treatments, especially in oncology, rare diseases, a lot of those things that sometimes have a hard time getting through the FDA at the exact same time that the FDA has signaled it's being more amenable to working with the industry lately. You're right. The placebo study method is not very practical or ethically defensible for rare diseases. And after Prasad's departure, the FDA made it clear that they agree with that.

6:03Earlier this year, they issued some very significant policy updates, including a framework for sponsors of ultra-rare disease therapeutics to use alternative methods to build their approval cases as opposed to the placebo method. So for a while, the regulatory environment essentially froze the market for these clinical stage companies that were developing these rare disease treatments. It was perceived as if their development suddenly faced a moving target. But with the FDA's recent reversals that you mentioned, those types of drug programs become immediately more valuable. And some are still kind of marked down from what you would normally see them sell for.

6:39And you're seeing that help fuel the buying frenzy also.

6:42Tyler Crowe:Yeah, we were discussing this, I think, like, maybe it was in the back in January, maybe February, where there was this quote from the CEO of Moderna because they were trying to get a new combination COVID flu vaccine through. And basically the CEO kind of came out rather bluntly and was like, I don't even know if it's worth it to do clinical trials on vaccines right now because of the regulatory burden. Because, you know, Lou, one thing that companies hate more than regulations is constantly moving and changing regulations.

7:11Lou Whiteman:Right. Especially in a business like this, where you're spending so much on these trials and again, so much time and development for what is already a kind of low success rate. If you start changing the targets and changing the game mid-game in a business where you already have huge failure rates, it's just going to create chaos. I love kind of what we're doing here, but as an investor, I think it's worth noting that there's a needle mover problem. By their nature, orphan drugs don't have a huge audience. And even at high prices, they're not massive revenue generators. I mean, it's more than just the common good.

7:46Lou Whiteman:I'm definitely glad they're working on them. But the reason why they chase the blockbusters is at the end of the day, it's the blockbusters that's solving these huge problems, whether it's cancer, whether it's heart disease. That's where you really move the needle.

8:01Tyler Crowe:Coming up after the break, we're going to kind of take a look at the big pharma, what's doing well, what's not, and maybe uncover some of the hidden gems, perhaps, in the pharmaceutical industry.

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8:41Tyler Crowe:Guys, one of the perceptions of the pharmaceutical industry or big pharma by its big scary name is that it's a relatively safe industry that's going to probably churn out cash for years on end. And many of the largest pharma companies are even known as like large dividend payers that have been doing it for a long time. But I was doing a little bit of like testing that theory this morning. And over the past 10 years, the results have not been as great as the industry's reputation. I think of like the dozen largest pharma companies worldwide, only three have actually beaten the S &P 500 over the past decade.

9:16Tyler Crowe: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 is 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.

10:02Yeah.

10:03Lou Whiteman: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 drowning a lot of consolidation. I don't think there's a better run of big farmer right now. And I love that they are investing in their future, investing even beyond GLP ones. 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.

10:48Lou Whiteman:So I love Lily is looking kind of past today. Uh, Lily's boring though. If, um, if you want to kind of dig down deeper, I want to give some love to United Therapeutics, ticker UTHR. This This is a wreck of hidden gems in a number of services that has easily beaten the market in the last few years. Great story here. Founded by Martine Rothbott, 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.

11:29Lou Whiteman:a 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 Estrozepatide, which is its version of GLP-1. Those are the Manjaro and Zepound 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.

12:06So hopefully in 10 years when the patent does expire, they're not just kind of scrambling to do something. And speaking of scrambling to do something, I mentioned Merck earlier, and that's the one that I'm less certain about. So the company has been extremely active in M &A. I mentioned three big deals in the last 10 months, but Keytruda makes up more than half of its revenue, and that patent goes away in 2028. So the aggressive deal-making could work out, but that tight timeline, it really leaves little room for error.

12:35Tyler Crowe:I want to interject, you know, and myself here as well, because, you know, it's the World Cup, and I feel like this is, this actually kind of ties into a fun World Cup story that maybe not everyone knows about, but everyone's heard the name Lionel Messi, right? Probably one of the greatest soccer players, footballers of all time. As a kid, he actually had a rare disease is basically where, you know, the glands that produce human growth hormones were not proficient. And he had to go on human growth hormones for much of his young life. And it's part of the reason he played for Barcelona is because they were willing to pay for this very expensive treatment.

13:08Tyler Crowe:It was a daily, you know, injection of synthetic growth hormone. It's an extremely burdensome thing for people who have this like rare disease and other diseases associated with like endocrinology problems that you know they have to do these daily injections because things like synthetic growth hormone lives for a very short amount of time in your body and i want to bring up the company here is ascendus pharma uh the ticker is asnd and this is a company that's been building what are called transcon or there's some very technical terms here i'm trying to keep it as like layman as possible I apologize for you much, much more scientifically inclined people listening to this, but, you know, trying to do this for the layman's terms.

13:49Tyler Crowe:It's called transient conjugation. And look, to give the best assimilations I can, it's basically like a time release capsule in your blood. The idea is you would do an injection of something like a synthetic growth hormone with what is basically like these inert proteins that will decompose on set times and basically act as a time release capsule. so you could take something that has been like a very burdensome daily injection of human growth hormone and stretch it out to maybe even a weekly or once every two weeks sort of thing. It's getting a lot of traction for a lot of these types of specific drugs that have very short time in the bloodstream or can be processed out of the body in any particular way.

14:34Tyler Crowe:And it's very interesting. It's doing a lot of stuff, like I said, with endocrinology, and it's also starting to develop an oncology platform as well. Again, we've been talking about a lot of M &A. This really feels like one of those companies where it's not just the drug itself, but also some of the technology behind it that you could easily see one of the big pharma companies jumping in and grabbing it. Coming up after the break, maybe one of the companies that might want to grab it as we get into one of the giant pharmas in particular.

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17:53Tyler Crowe:know, and say, hey, you guys shouldn't be doing that. So today's question comes from, I hope I say this right, Rhino Kotser. I'm from Namibia, a small country in Southern Africa. You should totally come and visit and I can confirm this is me speaking. My wife and I did an incredible trip there several years ago. Etosha and Sousa's Fly, everything that they say that it is. Beautiful place. Now here's back to Rhino's question. I want to know what is your view of Pfizer for the long term with a price that it has, and it's been a pretty significant price drop. Thanks, Rhino. So we talked about this earlier.

18:29Tyler Crowe:A lot of these companies, patent cliffs, paying dividends. If you look at Pfizer right now, it's one of the highest dividend payers in the industry. But at the same time, a lot of patent cliff problems.

18:40Lou Whiteman:Yeah. Yeah. They are kind of poster boy for this. By the way, my wife did that trip with Albie and had all of the same great thoughts. So I'm jealous that I've never been, but I hope to get there eventually. But yeah. As for Pfizer, yeah, they have Prevnar, a vaccine against pneumonia is coming off this year. Two big cancer drugs are going to follow in 2027, and they don't have a clear next big thing on the horizon. They've kind of run into some troubles with what they hoped would be the next big thing. The good news here is they do have a massive pipeline, especially in oncology. I think that they will be fine, but it's going to take some time to pay off.

19:15Lou Whiteman:If you are a patient investor, Pfizer could be a winner here because you do get that dividend yield and you have a single digit forward price to earnings ratio. That's that's pretty affordable. But with the patent cliffs coming, this could get worse before it gets better. I get the intrigue, but I'm in no rush to jump in here. I think you have plenty of time to wait this one out. So Lou just made a very gentle bear case, but I'm going to take the other side of it. So just to add a little bit of context here, just because I mentioned Mark earlier. So Pfizer's near-term patent expirations, they're expected to cost a total, all the ones that Lou mentioned, a total of about$17 to$18 billion in annual revenue out of more than$63 billion.

19:55So it's not like they're losing half of their revenue right away. What they are gonna keep, it will be more than enough to continue to pay their dividend. It'll keep the company profitable. Management has specifically already called out the bumpy years ahead. These are priced into the stock at this point, in my opinion. And Lou's correct. The oncology pipeline could be a big future growth driver. They're getting into the GLP-1 space. They made a$10 billion acquisition of MetSara. So that could be a big driver of future growth. But even under an optimistic scenario, Pfizer's own guidance says it's going to be at least 2029 before we see a return to growth due to that pipeline.

20:32So, I mean, the company's current portfolio, it creates a nice revenue floor. It's got a nearly 7 % dividend yield, which can really reward you for your patients because that's a really nice yield on cost. So I would take the other side and say that I'd be a buyer of Pfizer as we approach what I would call their in-between time, but really only because I have a five-year time horizon. So there's my gentle bull case and Lou gave his gentle bear case. So we're more aligned than it might sound.

20:57Tyler Crowe:I think we just came up with the next great name for a Motley Fool podcast, the Gentle Bear podcast featuring Lou Whiteman. I love it. We could discuss, you know, we could get into the details of it, but that is all the time we have for today. So Matt, Lou, thanks for sharing your thoughts. I'll hit the disclosure and we'll get out of here. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers.